Ackman Issues Broadside Against Herbalife

Feb 8 2013 | 4:32am ET

Three hours was not enough for William Ackman to make his case against nutritional supplements company Herbalife. The Pershing Square Capital Management founder needed 40 pages, as well.

The activist hedge fund manager, who in December shook Herbalife with a long presentation concluding that the company is a pyramid scheme, yesterday further questioned Herbalife's business model.

The document, posted on the Internet, followed Herbalife's effort to blunt Ackman's criticism with new disclosures.

Ackman, who has a $1 billion short bet against Herbalife, was not impressed, questioning the firm's "commitment to total transparency" and saying the new disclosure "confirms the material inadequacy of previous" reports on compensation. He also ridiculed CEO Michael Johnson's comparison of Herbalife to the sale of Girl Scout cookies.

"When Girl Scouts sell cookies, do 11 levels of 'upline' Girl Scouts receive sales commissions? Do the top 1% of Girl Scouts receive 88% of the award badges? How many former Girl Scouts have sued the Girl Scouts' organization and accused it of running a pyramid scheme?"

"What proof can the company provide that bona fide retail sales (defined as sales to non-distributors) at sufficient points occur such that Herbalife's distributors obtain their monetary benefits primarily from sales to independent, third-party retail customers rather than from recruiting rewards?" Pershing Square continued.

"Herbalife is a financially strong and successful global nutrition company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of consumers since our founding in 1980," a spokeswoman for Herbalife said. "Pershing Square's latest tome is motivated by a reckless $1 billion short bet."

According to one of Ackman's fellow hedge fund managers, the markets are siding with Herbalife.

"The market has voted with an excess of buy orders as to the invalidity of Ackman's inquiries," Chapman Capital founder Robert Chapman said. "Like with a virus, Herbalife Stock is becoming immune to Ackman's bad medicine."

Chapman isn’t the only hedge fund manager with a long position in Herbalife: Third Point has taken an 8% stake in the company, and Carl Icahn has publicly questioned Ackman's methods.

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