Bill Ackman, head of Pershing Square Capital Management, said he spent… (Stephen Lovekin, Rubenstein…)
Herbalife Ltd. is girding for a fight against a Wall Street money man who's betting $1 billion that the company is nothing more than what he called a "pyramid scheme."
The Los Angeles maker of nutritional products rushed to defend itself Thursday against a hedge fund manager's accusation.
Hedge fund titan Bill Ackman accused Herbalife of paying its sales staff far more money to recruit new distributors than to actually sell its products.
That results in the roughly 2.6 million distributors at the bottom of the sales pyramid making little or no income, while a handful at the top hauls in millions, he said.
"This is the best-managed pyramid scheme in the history of the world," Ackman said.
The company denied the allegation and accused Ackman of trying to manipulate the stock. Herbalife shares slumped 10% on Thursday and are off 21% in the two days since Ackman announced that the company is in his sights.
"Today's presentation was a malicious attack on our business model based largely on outdated, distorted and inaccurate information," Herbalife said in a statement. "We are not an illegal pyramid scheme."
Herbalife, which bills itself as a so-called multilevel marketer, has beaten back similar accusations in the past. But the company has rarely faced a nemesis such as Ackman.
The 46-year-old billionaire has fashioned a career on high-stakes gambits in controversial companies. His fund firm, Pershing Square Capital Management, manages $12 billion.
Showdowns between companies and skeptical investors historically play out behind closed doors, especially in the normally sleepy pre-holiday period.
But in a measure of the aggressive tactics favored by an emerging breed of activist investors, Ackman launched a public blitzkrieg Thursday. He gave a flashy multimedia presentation to a packed conference room in New York that was streamed live on the Internet.
"I've never seen anything quite like it," said Timothy Ramey, an analyst at D.A. Davidson & Co. "I've never seen an investor spend 31/2 hours of time at a major venue being webcast and then make TV appearances to make his point. It's the largest orchestrated bull or bear case that I've ever seen."
The brawl has potential repercussions for both sides.
Ackman claimed to have spent one year doing intensive research on Herbalife's operations, an unusually extended period given Wall Street's thirst for immediate results.
Earlier this year, Ackman began betting that Herbalife's stock would fall sharply.
His fund is "shorting" more than 20 million shares of the company. In a short sale, an investor borrows stock and sells it immediately, hoping to later buy the shares at a reduced price and return them to their actual owner.
Ackman promised to donate all profit from his Herbalife bet to charity, and portrayed his public diatribe as intended for the public good.
"I'm very fortunate to have the means to pursue this," he said. "I am independently wealthy. When I believe in something, I can say what I want and do what is right."
For Herbalife, the fight threatens to damage its credibility among investors who have always been sensitive to claims that its business is illegitimate.
Herbalife, which was founded in 1980, sells a line of diet powders, bars, drinks and vitamins through a network of independent distributors in more than 80 countries. The company reported sales of $3.5 billion in 2011.
Its chief executive, Michael O. Johnson, was the highest paid executive in the United States last year, hauling in more than $89 million in salary, exercised stock options and other compensation, according to GMI Ratings, a corporate governance firm.
The company has fought criticism of its business model throughout its existence.
In 2008, for example, self-proclaimed fraud buster Barry Minkow shorted Herbalife's stock and then accused the company of a host of misdeeds. The company survived those accusations and Minkow ultimately went to prison on unrelated charges.
This was the second time this year that investors punished Herbalife because of questions about its business practices. Herbalife shares fell 20% in May after hedge fund operator David Einhorn asked pointed questions during an earnings call.
"We operate at the highest ethical and quality standards, and our management and our board are constantly reviewing our business practices and products," Herbalife said. "We also hire independent, outside experts to ensure our operations are in full compliance with laws and regulations."
Ackman and Herbalife engaged in a bitter and bizarre war of words, with Johnson saying the United States will "be better when Bill Ackman is gone."
Ackman interpreted the statement as a threat and said he has hired a security firm to protect him.