Ackman Outlines Bet Against Herbalife

From the perspective of Herbalife‘s executives, the company is built on a sound model that benefits its participants.

From the perspective of the hedge fund manager William A. Ackman, Herbalife is a pyramid scheme - and an attractive short-selling opportunity.

Mr. Ackman, of Pershing Square Capital Management, announced on Thursday that his firm had an “enormous” short position in Herbalife stock. At a gathering sponsored by the Sohn Conference Foundation in Manhattan, Mr. Ackman kicked off a three-hour presentation, called “Who Wants to Be a Millionaire?,” arguing that Herbalife's retail sales were far less than it claimed.

The company's shares fell more than 10 percent by Thursday afternoon, at one point trading as low as $33.05. The stock had fallen 12 percent on Wednesday after reports that M r. Ackman was planning on announcing his short position.

“This is the best-managed pyramid scheme in the history of the world,” Mr. Ackman said on Thursday.

Herbalife, which is based in the Cayman Islands, sells nutritional supplements and personal care products using a network of independent distributors who are encouraged to recruit others. In addition to profit from their own sales, the distributors receive commissions when people they have recruited sell products. They also receive bonuses tied to how many people they recruit.

But Mr. Ackman argued that the participants in this structure make more money from recruitment than from sales. That qualifies the business as a pyramid scheme according to the Federal Trade Commission's definition, Mr. Ackman said.

“I don't think very many retail sales are actually happening at all,” he said.

Barbara Henderson, a spokeswoman for Herbalife, said in an e-mail that Mr. Ackman had “pointedly ref used” to allow the company to “participate in today's conference.”

“Now we know why,” she continued. “Had our executives been there, they would have been able to tear Mr. Ackman's premises and interpretation of our business model apart. His misstatements and mistakes are too numerous to address immediately.”

Herbalife investors were spooked earlier this year when another hedge fund manager, David Einhorn, asked pointed questions on a conference call with the company's management. That was enough to send shares down more than 20 percent, even though Mr. Einhorn never disclosed any short position.

On Thursday, the Pershing Square team left little doubt about their investment position.

An analyst at the firm, Shane Dinneen, took the audience through the details, showing charts of the company's sales structure. Levels in the structure have names like “millionaire team” and “founder's circle.”

Mr. Dinneen zeroed in on the way He rbalife reports sales. The suggested retail price that the company uses is not the price at which products are actually sold, Mr. Dinneen said. That suggested price is an “artificial, inflated number,” Mr. Dinneen said, while the actual price can be significantly lower.

The presentation included some humorous jabs. At one point, Mr. Ackman showed a video produced by Herbalife featuring a distributor who listed the rewards of his job. He took viewers on a tour of his house and referred to driving around town in a Ferrari or Bentley.

“Episodes of ‘MTV Cribs'?” Mr. Ackman asked, to chuckles from the audience. “No. These are Herbalife productions.”

Pershing has prepared a Web site with the full details of the presentation, a “very fascinating place to spend your time,” Mr. Ackman said. The presentation was also streamed online.

Herbalife products - Formula 1 drink mix, aloe water and herbal tea - were being offered on a table outside the auditorium where the presentation was held.

At various points during the presentation, Mr. Ackman and his team cited questions that Mr. Einhorn had asked of the Herbalife executives. They were later asked whether Pershing had consulted with Mr. Einhorn on the short-selling thesis. The answer was a firm no.