Investor Calls Herbalife "Pyramid Scheme," Shares Plunge

LOS ANGELES A hedge fund manager on Thursday reportedly claimed global nutritional products distributor Herbalife Ltd. is a "pyramid scheme" that cannot be sustained, sending the company's shares downward for the second day in a row.

William Ackman of Pershing Square Capital Management told a crowd of more than 500 at an event sponsored by a charitable group that he believes Herbalife's stock price will eventually plunge to zero, Reuters has reported.

The investor previously confirmed he is shorting shares in Herbalife in a bet against the company. Short sales are transactions in which a broker lends a stock to an investor who is counting on shares falling in value.

Herbalife's stock plunged to its lowest level in more than seven months, Bloomberg News reported, declining 12 percent yesterday to $37.34 at the closing of the markets.

As of 2:44 p.m. ET Thursday, the stock price was down 9.75 percent to $33.70, less than half its one-year high of $73.00 on April 23, 2012.

Michael Johnson, CEO of Herbalife, yesterday fought back against Ackman's claims.

"The allegation that Herbalife is a pyramid scheme is bogus," he said in a statement released Wednesday. "Make no mistake: Today's announcement isn't about Herbalife's business model. It's about Bill Ackman's business model."

Herbalife said it learned Ackman has shorted its stock for the past seven to nine months and that an "extraordinary number of puts on our stock are due to expire this Friday." A put option, Investopedia explains, allows a stock owner to sell a specified amount of a security at a particular price within a specific time.

Herbalife has asked the Securities and Exchange Commission to investigate Ackman in what the company contends is "yet another attempt to illegally manipulate the market by overzealous short-sellers."

Los Angeles-based Herbalife is a 32-year-old company that sells products in the categories of weight management, nutritional supplements, energy, sports and fitness, and personal care.

As of Sept. 30, Herbalife sold its products through 3.1 million independent distributors in 84 countries. Those activities yielded a third-quarter profit of $117.8 million on $1 billion in sales. And in the nine-month period ending Sept. 30, net sales rose 17.2 percent, or $443 million.

But at least some investors appear to believe its percentage of direct sales to consumers is dinky and that its opportunities in markets are drying up. Ackman believes sales to the public are exaggerated, and with sales eventually tapering out, Herbalife is moving into countries with lousy incomes, The Wall Street Journal reported.

"I don't think many retail sales are happening at all," Ackman was quoted by Reuters as saying.

In a regulatory filing, Herbalife disclosed that most sales come from distributor purchases. But Johnson said yesterday that 90 percent of the company's products are eventually sold outside its network of sellers, according to the Journal.

"The majority of our distributors have not sponsored another distributor and do not earn compensation relating to products sales made by or to other distributors," the company noted in a 10-K filing. "We believe these distributors have joined the network for reasons other than participating in our multi-level compensation plan such as personal consumption and reselling products to others."