After more than three years of challenging nutritional product distributor Herbalife (HLF), Bill Ackman may soon be regretting his attacks.
According to reports first made by the Wall Street Journal, federal probes into whether the Los Angeles-based distribution network of about 6,000 employees constitutes a so-called pyramid scheme have come up with inconclusive evidence. (The investigations also could not determine if Ackman illegally tried to manipulate share prices with inaccurate information.)
Ackman, the billionaire activist and CEO of hedge fund Pershing Square, had bet roughly $1 billion against Herbalife -- a bet he likely wants back after the shares tripled within a year of his announcing his short position.
While his doom-and-gloom summary of what he views as the inevitable demise of Herbalife drew the shares down about 40% after his December 2012 forecast that dubious business practices would be knocked over by federal regulators, the company has proven resilient against both Ackman and, apparently, independent auditors.
Herbalife was quick to deride Ackman and his hedge fund after the accusations, calling him "a Wall Street gambler who placed a reckless $1 billion short bet," but it lacks the legal support to debunk claiims that have gone viral and resonated with many.
Whether the reported failure of federal probes to prove fraud or wrongdoing at Herbalife opens any door for retaliation against what could be viewed as a damaged reputation and manipulated stock price, these are the top 10 Ackman complaints that Herbalife has disputed.
The first, which was announced in January 2013 at a special meeting to confront the allegations of Pershing Square, is that Herbalife pays off esteemed research professionals to sign off on the quality of its nutrition products.
Management countered by directing critics to Louis Ignarro, a Nobel laureate in the physiology and medicine category, who sits on Herbalife's advisory board.
Next is that despite touting its weight-loss and nutritious products, Herbalife pays next to nothing in research-and-development expenses.
While Herbalife noted its annual R&D spending was "immaterial," the company subsequently said the figure was about $1 million and that it was not booked as such because it follows "the U.S. GAAP strict definition of R&D," referring to the standard bookkeeping guidelines.
No. 3 is that all Herbalife products are shipped through merely three central distribution locations. (Herbalife was quick to point to 300 global distribution points in 88 countries.)
The fourth is that Herbalife's retail prices are inflated. (Herbalife maintains Ackman made his price comparisons on a 200-calorie basis, not prices per unit.)
The fifth argument is that Herbalife only sells its products within its distribution network. "For those of our distributors who sell to other customers, we have less visibility," President Des Walsh said at the 2013 investor conference. "But if you think about it, that is no different from Costco (COST). Costco is a business-to-business operator."
The sixth argument Ackman made was that Herbalife's so-called distributors are merely victims who have been duped to sign on to an insecure pipe dream of building their own customer bases. (Herbalife countered that the bulk of its distributors were only seeking supplementary income, and 25% expected to make less than $6,000.)
No. 7 is that Herbalife is not compliant with accounting regulations; however, Herbalife argued it hired PricewaterhouseCoopers as an independent bookkeeper to quell fears in 2013, "despite significant interference from Bill Ackman," CEO Michael Johnson said on a 2014 earnings call.
Ackman's next point underlies the crux of the "pyramid scheme" argument, which is that new employees are not given a fair opportunity to earn at the level of distributors one rank up. But as Walsh said in the 2013 investor conference, 80% of 2011's top 100 distributors earned more than their sponsors, highlighting a payroll based on "meritocracy."
No. 9 is that Herbalife is aware it is duping distributors and customers, who typically shop within its own network, so networks roam throughout the country as a "pop and drop" scheme. (Herbalife countered in 2013 that 92% of its growth comes from markets at least a decade old.)
Ackman's final point of contention is that Herbalife is under constant litigation from dissatisfied clients, and has a business model that is essentially counter to statutes protecting customers and employees.
While frequent, Herbalife is likely to turn to a number of cases where such complaints were thrown out "with prejudice" by federal courts, meaning there's no chance of them resurfacing, such as a November decision by a federal court in Los Angeles, in which complainants could not prove Herbalife defrauded customers by rewarding them with an adequate proportion of sales.
The bottom line is that, so far, Ackman's short position in Herbalife, as well as his accusations, have not been yielding the results he's been hoping for.