The company said it follows local laws, and Chinese regulators have
yet to comment on the matter.
Ackman, who has placed a $1 billion short bet against Herbalife,
said the company is breaking the law in China by making recruits pay
an entry fee and by letting distributors recruit new members. He
also said the company is disguising its sales to distributors as
hourly consulting fees.
He made the claim on a conference call that lasted more than two
hours and drew some 300 listeners.
He was joined on the call by one of his lawyers, David Klafter, and
Aaron Smith-Levin, whose OTG research firm conducted interviews with
Herbalife distributors in China, and Ben Hakim, one of his partners.
"My understanding of the facts and law in China is yes, they are
violating both civil and criminal law" in China, Klafter, a senior
counsel at Ackman's hedge fund Pershing Square Capital Management,
said on the conference call.
Ackman and his team said this presentation is a first step toward
bringing Pershing Square's concerns to the attention of Chinese
Herbalife said sales in China rose more than 120 percent in the
fourth quarter of 2013, the fastest of any region worldwide,
contributing about 10 percent to global sales last year. The company
has 200,000 sales representatives in the country and uses a "unique
marketing program" to meet Chinese regulations, it said in its
latest annual report.
Herbalife has said it remains confident in its business in China and
said it is in compliance with local laws.
Direct sales models have recently come under fire in China.
Authorities launched a probe into Herbalife rival NU Skin
Enterprises Inc in January after state media published reports that
it brainwashed its members. Shares of NU Skin, Herbalife and rival
USANA Health Sciences Inc fell on news of the probe.
Ackman has accused Herbalife of running a pyramid scheme in which
members make more money recruiting new members than selling the
actual product. He made that claim public in December 2012 when he
unveiled a $1 billion short position in the company's shares. So far
he has lost money on the bet as rivals such as Carl Icahn took the
The company says its business is not a pyramid scheme.
[to top of second column]
Despite the paper losses, Ackman said he is sticking by his bet,
showing no fatigue on the conference call where he answered wide
ranging questions from listeners. In the 14 months since making his
short bet public, Ackman said he has found fresh evidence nearly
daily that is convincing him to stick by his original bet. If
Herbalife ceased to exist right now he would make a few billion
dollars, he said.
But there is no sign yet that Herbalife is near collapse,
particularly since no regulator has yet commented publicly about its
intentions in spite of heavy lobbying from Ackman.
Ackman also suffered another blow on Tuesday when lawmakers agreed
on a broad outline to replace mortgage lenders Fannie Mae and
Freddie Mac in which Ackman owns common shares and likely suffered
hundreds of millions in losses. Recent sharp gains in those stocks
helped Ackman's fund return roughly 12 percent this year, far better
than the average hedge fund's 1.4 percent gain this year.
On Herbalife, he acknowledged that there is investment risk if
regulators do nothing, a factor that he cannot control.
Many on the conference call asked why there are virtually no public
stories about people who have lost their life savings on investments
Ackman said civil rights groups have identified over 1,000 victims
and that this firm has found roughly 200 victims. But he said many
victims are reluctant to go public because they do not realize they
have been cheated or are embarrassed about it. Also "a lot of Latino
victims are undocumented and the last thing they will do is complain
to the government," Ackman said.
Fresh media attention, including a front page article in the New
York Times on Monday, should help galvanize regulators into
reviewing the matter, he said.
Herbalife's share price closed down 1.16 percent at $65.39.
(Reporting by Svea Herbst-Bayliss;
editing by Richard Valdmanis, David Gregorio and Ken Wills)
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