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Ackman calls Herbalife a 'pyramid scheme'

December 20, 2012: 12:52 PM ET

Hedge fund manager Bill Ackman outlined why he and his team of analysts have dubbed the nutritional supplement company Herbalife (HLF) as a "pyramid scheme" at a conference in New  York Thursday morning.

Herbalife's stock dropped nearly 4% Thursday, its second straight day of sharp drops. The vitamin maker's stock dropped more than 12% Wednesday, after CNBC reported that Ackman had been betting against the stock for most of 2012. Roughly 20 million shares of the company changed hands Wednesday, compared to typical volume of 3 million.

Later Wednesday, Herbalife's CEO and chairman Michael Johnson pushed back in a press release. "The allegation that Herbalife is a pyramid scheme is bogus. Make no mistake: Today's announcement isn't about Herbalife's business model. It's about Bill Ackman's business model."

Herbalife's rebuttals didn't do much to assuage the concerns of StockTwits traders though.

CapitalObserver
It's generally not a good sign when management fights with short sellers. Run the business. The stock will take care of itself $HLF

TXplunger  
$HLF like Jeff Skilling said, Wall Street doesn't understand our black box

Ouch. Enron comparisons are never good for a stock.

In a presentation that ran for more than three hours, Ackman said that the sellers or distributors of Herbalife's products generate the majority of their income by recruiting new salespeople not by selling products, i.e. a pyramid scheme. Ackman will donate profits from his short position to charity. The first $25 million will go to the Ira Sohn Foundation, a non-profit dedicated to pediatric cancer research and treatment. Anything above that will go to Ackman's personal foundation, the Pershing Square Foundation, dedicated to fighting poverty.

It's not the first time that Herbalife's business model has been questioned. Famed short-seller David Einhorn of Greenlight Capital popped up on a Herbalife conference call earlier this year, and asked about the company's accounting practices. Investors were quickly spooked. Einhorn has not publicly spoken about the stock since then.

One StockTwits trader noted that Einhorn has had a more significant effect on the stock without even talking about it.

KidDynamiteBlog 
$HLF Einhorn asks a question, stock drops 35%. Ackman outright calls it a pyramid scheme, stock drops 13%. u, sir, are no Einhorn.

  LukeKramer
Sad thing is $HLF probly isnt runnin a ponzi but guys like Ackman/Einhorn can suggest it & thats all it takes. Perception is reality in mkt.

Perception isn't everything though. Ackman is typically more focused on calling for corporate boards to shake up management or to sell a company. Ackman pushed the board of JC Penney (JCP) to hire Apple's (AAPL) former retail chief Ron Johnson to lead a turnaround there. Ackman hasn't convinced investors that the turnaround is working. JC Penney's stock is still down 45% this year.

So if Herbalife's business model is legit, the market could eventually believe it. Ackman is not perfect.

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Maureen Farrell
Maureen Farrell
Staff writer, CNNMoney

Maureen Farrell is a staff writer at CNNMoney and covers Wall Street, banking, mergers and the stock and bond markets. Prior to joining CNNMoney, she covered venture capital and entrepreneurs for Forbes, and mergers and bankruptcy for Mergermarket and Debtwire, both divisions of the Financial Times.

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