ACKMAN: 'Herbalife has actually been shut down by the FTC, they just haven't realized it yet'

Billionaire activist investor Bill Ackman, the CEO of $12 billion hedge fund Pershing Square Capital, is not giving up his battle against Herbalife (HLF) — a multi-level marketing company that sells nutritional shakes and supplements.

He’s still short the stock. He’s still giving presentations. And he still thinks the company will go out of business.

“We’re short the stock, not for emotion, not for anything else other than we believe this is a massively overvalued company. We believe a fraudulent business will not survive,” Ackman concluded in a phone call with investors in his fund.

An Herbalife rep wasn’t immediately available for comment.

On Friday July 15, Herbalife agreed to pay a $200 million settlement with the Federal Trade Commission and “fundamentally restructure” its business.

The FTC alleged in its complaint that most distributors make little to no money and a substantial percentage lose money. The “small minority” of distributors who receive “substantial income” do so through recruiting participants, not actual retail sales. The complaint said the company does “not offer a viable retail-based business opportunity.”

On his call, Ackman said he found the facts in the complaint against Herbalife “sufficiently damning.”

As part of the settlement agreement, Herbalife will have to change its compensation plan and track retail sales to ensure that those sales are real. They will also change the incentives that they reward people for recruiting a downline. They’ll also be prohibited from marketing tactics such as showing off a lavish lifestyle, suggesting people could attain the same if they become distributors.

On that Friday morning of the settlement, at around 7 a.m., Ackman got a phone call from a reporter at the Wall Street Journal. Ackman said that this reporter had learned that the government had settled a $200 million fine, and the FTC determined Herbalife to not be a pyramid scheme. Ackman suggested he “double check his facts.”

Immediately after the settlement was announced, Herbalife’s CEO Michael Johnson said in a statement it’s “an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms.”

Also, Carl Icahn, Herbalife’s largest shareholder and former rival of Ackman, put out a statement at around 8:30 a.m. that the board has decided to increase his ownership limit from 25% to 34.99%. He also noted that the investigation “concluded that Herbalife is not a pyramid scheme.”

(Credit: Pershing Square)
(Credit: Pershing Square)

The stock surged on all this news.

On his investor call, Ackman contended this was an attempt by Herbalife to “manipulate the stock price higher.”

He played a video showing FTC chair Edith Ramirez side by side CEO Johnson’s video. Ramirez said during the press conference she does “not endorse” the statement that Herbalife was “not determined to be a pyramid scheme.”

Ackman posed his own theory as to why “pyramid scheme” wording doesn’t appear in the FTC’s complaint.

“Let me just briefly comment on Michael Johnson’s comment that they would never agree to a settlement that would destroy their business, of course it’s good for business. The answer is they had a gun to their head,” Ackman said.

Ackman contended that the company knew it would be shut down if the FTC sued them for being a “pyramid scheme.” Instead, he believes the company chose to negotiate a settlement with the harshest findings without using the pyramid scheme language. He then added the company designed a marketing campaign with ‘an intent to mislead distributors and the market.”

“We think it’s a nice try. Herbalife has actually been shut down by the FTC, they just haven’t realized it.”

For more than three years, Ackman, the founder of $12 billion Pershing Square Capital Management, has been crusading against Herbalife.

In late December 2012, Ackman, who first shorted the stock in the mid-$40 range, publicly declared that he was short $1 billion worth of Herbalife and that the stock would go to $0. His thesis centered around his belief that the company is operating as a “pyramid scheme” that targets poor people, particularly from minority populations. He said that regulators, specifically the FTC, would shut the company down. He’s given numerous public presentations and released videos slamming the company.

Herbalife has always denied Ackman’s allegations.

The FTC began investigating the company in March 2014.

Pershing Square found that the SEC’s complaint confirms their “long held allegation that Herbalife operates as a pyramid scheme.” The fund believes that the implementation of the settlement agreement “will cause the pyramid to collapse.”

“In conclusion, we were a short seller and therefore no one took us seriously because we had a billion-dollar short position. The good news here is the FTC is not short the stock. They had access to inside information via subpoena power. They came to the same conclusions we did. The FTC did a remarkable job,” Ackman said on the call.

Pershing Square International is down about 14% year-to-date and Pershing Square Holdings, the fund’s publicly-traded vehicle, is down about 18%, Ackman said on the call, noting those numbers will be finalized at the end of the day.


Julia La Roche is a finance reporter at Yahoo Finance.

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