Editor’s note: This article was first published in March 2014 and reports news from 12 March 2014; the trading halt, the 14% share drop and Ackman’s roughly $500 million loss were the figures of that day. In July 2016 Herbalife settled with the US Federal Trade Commission, agreeing to pay 200 million dollars and to restructure its US business; the FTC did not label the company a pyramid scheme.
Bill Ackman, the fund manager who in 2012 bet $1 billion against Herbalife, claiming its share price will go to $0 because, he says, the company’s business model is a pyramid scheme rather than multi-level marketing, has just got his way.
The FTC (the US Federal Trade Commission) has officially opened an investigation to examine the company’s accounts and where its revenue comes from. If it finds that most of that revenue comes from the constant recruitment of new distributors rather than from repeat end customers, the FTC could rule that Herbalife’s business is a pyramid scheme. (See: how it will be decided whether Herbalife is a multi-level marketing company or a pyramid scheme)
Bill Ackman, who runs Pershing Square Capital Management, has given another talk in which he argued that Herbalife presents itself as a legitimate multi-level marketing company but actually aims its marketing at recruiting low-income people and, in the United States specifically, the Hispanic population.
See also: Now we know how much Herbalife distributors earn
Ackman is convinced that as soon as regulators study the company’s balance sheet and where its revenue comes from, they will bring it down, leaving its shares worthless. He also claimed that Herbalife is breaking direct-selling laws in China.
The company, whose shares were halted for a time, resumed trading down 14%, although it is now recovering some ground. In a statement, Herbalife confirmed that it is under investigation and said it will cooperate fully with the authorities to settle the matter, as it considers its business completely legitimate and a way to earn money for the tens of thousands of distributors currently active.
Remember that this company has “been” the ball in a game between several big market players, including George Soros and Carl Icahn. Both investors said Bill Ackman would make the biggest fool of himself in history with his $1 billion short position, a position that at one point cost him more than $500 million in losses and brought handsome gains for Soros and Icahn. With this win for Ackman, however, the situation could reverse, producing handsome returns for Ackman and big losses for the other players.
All that’s left is to wait and see how this fascinating battle of titans ends, over a company that is currently torn between survival and disappearance.
See also: Herbalife and multi-level marketing under scrutiny in the US
Featured image: Harrison Keely, CC BY 4.0, via Wikimedia Commons.
