Ackman goes after Herbalife. AgainMarch 11, 2014: 3:54 PM ET
Is Bill Ackman the boy who cried pyramid scheme?
As expected, Pershing Square, Ackman's $11 billion hedge fund, released a report Tuesday that it says shows nutritional supplement company Herbalife (HLF) is operating in violation of Chinese law.
The report is based on research that Pershing and a third-party in China conducted on Herbalife's complex compensation plans and its recruiting tactics, Ackman said in a conference call. It includes interviews with Herbalife salespeople in China and internal company documents obtained from a former employee.
Ackman said the report provides evidence that Herbalife functions in China as it does in the rest of the world, "as a pyramid scheme."
The report finds that Herbalife violates Chinese law in the way it pays distributors and by encouraging them to recruit new members rather than make retail sales. It also raises questions about how Herbalife accounts for its sales in China in regulatory filings.
But the stock didn't do much following these revelations. Shares were flat. And that's after a more than 2% rise Monday.
The move expands Ackman's campaign to bring down Herbalife, which he has called an "inherently fraudulent company," and win a $1 billion bet the company's stock price would fall.
Herbalife has vigorously defended itself, countering that its business is no different than other "multi-level" marketing companies, such as Avon (AVP) and NU Skin (NUS). It says Ackman's claims are baseless and motivated by his financial interest in seeing the company fail.
Ackman has a very public short position in Herbalife stock that would pay off if the price fell. So far, however, Herbalife stock has mostly gone up. Over the past 12 months, the stock has gained 57%.
But Ackman has no doubt that he will ultimately be vindicated once the authorities move to investigate Herbalife.
"There is no circumstance in which we are wrong in our thesis that Herbalife is a pyramid scheme," he said, adding that there is "investment risk" involved. "We have no control over what the government is going to do, that's the investment risk."
He said his short position is now largely made up of stock options, meaning it could be profitable even if the stock doesn't fall to zero.
"If the company were to disappear overnight, we'd make a couple billion," said Ackman.
Ackman has had some victories. Herbalife shares plunged in January after Senator Ed Markey called on the Securities and Exchange Commission and the Federal Trade Commission to investigate the company after receiving complaints from constituents.
Ackman disputed a report published Monday in the New York Times that suggested he received an advance copy of a letter Markey sent to the regulators and Herbalife CEO Michael Johnson.
He also denied ever donating money to Markey, though he confirmed that his sister did make a $500 donation to the Democratic Senator from Massachusetts.