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Herbalife executives counter hedge fund's 'pyramid' allegation

January 10, 2013|Alana Semuels
  • "Theres been a tremendous amount of misinformation about Herbalife," company CEO Michael Johnson, shown in a file photo, told investors Thursday.
"Theres been a tremendous amount of misinformation about Herbalife,"… (Irfan Khan / Los Angeles…)

NEW YORK -- The investor presentation featured protein shakes and granola bars, entreaties for more hugs in the world, and accusations of lies and snobbery, all to counter a $1-billion bet that Herbalife, the Southern California company, will soon go down the tubes.

Who says Wall Street is more boring these days?

The presentation was the latest move in a battle between Herbalife, which sells nutrition powders, bars and vitamins through a network of individual distributors, and Bill Ackman, founder and chief of Pershing Square Capital Management. During a Dec. 20 presentation about Herbalife, Ackman called Herbalife a “sophisticated pyramid scheme,” sending its share price plunging 36%. He has said he expects Herbalife stock eventually to fall to zero, and has sold short more than 20 million shares of the stock.

During Thursday’s presentation, held in a room at the Four Seasons hotel in Manhattan where analysts and investors were given Herbalife protein shakes and granola bars, Herbalife executives took on Ackman’s presentation slide by slide, accusing him of “false statements,” “distortions,” and “misrepresentations.”

Quiz: How well do you remember 2012?

“In recent weeks, there's been a tremendous amount of misinformation about Herbalife,” said company Chief Executive Michael Johnson. “This misinformation has found its way into the marketplace. Therefore we are sitting with you to correct some of this today.”

While the presentation featured videos from distributors, statistics about research and development and the cost of Herbalife products compared with competing products, the most germane point to Ackman’s presentation focused on the company’s distributors. Ackman argued that distributors make money not when they sell products, but when they recruit other distributors, meaning that only the people at the top of the company make money.

To debunk that claim, Herbalife hired Lieberman Worldwide Research to find out who was buying the product and why distributors joined the company.  Research presented by Kim Rory of Lieberman indicated people joined the company to get a discount on the products, that few hoped to make more than $6,000, and that two-thirds of former distributors would recommend the company to a friend.

“Shane, you’ve got it wrong,” said Herbalife President Des Walsh, referring to Shane Dineen, a Pershing analyst. “How you can get such basic facts wrong is really a mystery to us.”

Walsh also accused Pershing of “snobbery” in its portrayal of Herbalife’s nutrition clubs, scattered across the county, which Pershing said were mostly empty. He showed a video of Herbalife clubs, reminding the buttoned-up audience that aside from shakes and tea at nutrition clubs, people also get hugs.

“The world needs more hugs,” said Walsh, who was channeling Rob Lowe’s character Chris Traeger from the NBC comedy "Park and Recreation," by repeatedly using the world “literally.”

The audience at the meeting seemed generally supportive of Herbalife, but many said they would have liked more information including clarification of the company’s fourth-quarter results.

After the meeting, Ackman responded with a statement saying, "Herbalife promised to provide a detailed refutation of each of the facts that we enumerated. ... Instead, the company distorted, mischaracterized, and outright ignored large portions of our presentation."

The battle is likely to last for some time. On Wednesday, hedge fund firm Third Point said it was taking an 8.2% stake in Herbalife, betting that the company would survive Ackman's assault, and the SEC said it had opened an investigation into the company.

Herbalife has hired a battalion of crisis PR firms, research companies and advertising agencies to prove that it has a legitimate and stable business model despite the claims of Ackman, who has spent a year and lots of money trying to take the firm down.

If investors in the old Wall Street could be accused of making big bets on things they didn’t fully understand, the Herbalife battle could be seen as the opposite – millions of dollars of resources dedicated to researching the structure of a company that many analysts haven’t thought twice about.

“Just the very nature of the ‘battle’ has never been seen in the history of the earth,” said Tim Ramey, an analyst with D.A. Davidson and Co. “This was a very, very orchestrated attack.”

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