Herbalife shares down on pyramid scheme allegation

Published on NewsOK Modified: December 20, 2012 at 5:20 pm •  Published: December 20, 2012

PORTLAND, Ore. (AP) — Herbalife Ltd.'s shares fell sharply for the second day on hedge fund manager William Ackman's allegations that the nutritional supplements company is a pyramid scheme.

The founder and CEO of Pershing Square Capital Management L.P. said Wednesday that he has been shorting the company's stock for several months. Short sellers earn money when a stock declines. Ackman detailed his allegations in a presentation Thursday at the Sohn Conference Foundation meeting in New York and confirmed that he has an "enormous" short position.

According to numerous reports, Ackman claimed in his presentation that Herbalife is misrepresenting some of its financial information to disguise the nature of its business. He alleged that distributors make more money from recruitment than from sales, which he says would define it as a pyramid scheme.

Herbalife, which signs up independent distributors to sell supplements and weight loss products, vehemently denies the claims.

The company's chairman and CEO Michael Johnson said Wednesday that the allegation that Herbalife is a pyramid scheme is "bogus". The company said Thursday that the presentation was a "malicious attack on Herbalife's business model based largely on outdated, distorted and inaccurate information".

"Herbalife is not an illegal pyramid scheme," the company said in a statement.

The company found that a large number of put options on its stock are due to expire Friday and suggested that the timing of the presentation is suspect. A put option is the opportunity to sell a certain number of shares at a certain price and date in exchange for an upfront fee. Ackman denied on CNBC that he has any put options on the stock. He also said he intends to donate his profits from his position on the company to charity.

Herbalife said it asked Ackman to allow Herbalife to participate in his presentation but Ackman declined.

"Now we know why," the company said in a statement Thursday. "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."

The company, which is incorporated in the Cayman Islands and has its principal operating subsidiary in Los Angeles, sells in 88 countries. It said the U.S. is its largest and fastest-growing market.

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