Bill Ackman’s Herbalife battle goes underground

Last fall Pershing Square Capital CEO Bill Ackman converted his beleaguered Herbalife short into put options, capping his potential losses as the company’s shares rose amid a stock buyback that sent them surging 60 percent — before losing a third of that gain by yearend.

At that time, Ackman said that he would no longer speak publicly about the company he has spent five years battling — losing hundreds of millions of dollars along the way. His losses have continued even after the Federal Trade Commission agreed with many of his allegations in 2016 and banned what appeared to be numerous pyramid-like practices at Herbalife in a $200 million settlement with the company.IMG_1916

But while Ackman may be going silent, his main researcher on his Herbalife short bet, Orion Research President Christine Richard, is still digging for incriminating information on the multilevel marketing company, as I wrote in my latest article on Institutional Investor’s Alpha.

Last week, Richard tweeted a link to the 40 memos she has sent to the FTC outlining ways in which Herbalife appears to not be in compliance with the order.

“Distributors are not ‘living under the new rules,’ but, in fact, have found ways to ignore or evade them,” she wrote in a letter to Herbalife’s board of directors, dated December 28.

The detailed memos, which date as far back as August 2016, were also sent to the federal monitor overseeing Herbalife to make sure it follows the terms of the FTC settlement, which forced the company to radically change its practices. Affiliated Monitors’ first report was filed with the FTC in November, but requests to obtain the results via Freedom of Information Act requests have been denied, according to letters received by Richard and others, including consumer group Truth in Advertising.

“There are still problems with nearly every aspect of Herbalife’s business under the FTC order,” Richard wrote in the letter, which was published on Orion Research’s website and which provides links to the memos.

For example, the FTC settlement bans Herbalife from forcing its distributors to make minimum product purchases. That’s to avoid what’s known as “inventory loading,” a hallmark of a pyramid scheme.

But, Richard wrote, “distributors are bombarded with these requirements. They are asked to make minimum purchases to participate in weight loss transformations, such as those organized by ‘Team Beauty,’ an Herbalife distributor group that has recruited thousands of members in the U.S. The popular ‘Quick Start Program’ has also been used as a way to impose minimum product purchases –  a violation of the Order.”

“Even CEO Rich Goudis pushes qualification buying,” Richard points out in one of her memos. “You’ll need 3000 volume points [roughly equivalent to dollars] in December to get on a call with Goudis on Jan. 5 during which he’ll talk about ‘sustainable success,’ something that eludes the vast majority of distributors.”

The FTC found that Herbalife’s deceptive practices included suggestions by distributors that those who signed on will become wealthy, given that only a tiny percentage of participants make any money. Its settlement terms specifically forbade descriptions of opulent lifestyles. But such promises are still being made, according to Orion Research.

“The business is routinely described as leading to financial freedom by distributors posting pictures and videos from penthouses overlooking Miami Beach,” Richard claimed in the letter. “At every training and recruitment event, attendees are subjected to income testimonials that distort the income potential of the business by omitting the experience of 96% of all distributors. Part-time Herbalife positions are daily advertised with income ranges that have no basis in reality.”

While declining to release the monitor’s report, the FTC is offering a heavily-redacted version of Herbalife’s own report on how it is meeting the settlement’s terms. The company claims it is in compliance.

But even if its distributors are flouting the rules, as Richard alleges, the U.S. business has been deteriorating since the settlement’s terms went into full effect during the second quarter of 2017. In the second and third quarters, Herbalife’s North American net sales fell 18 percent and 17 percent, respectively.

Earnings have also been in decline. Although Herbalife has repurchased about a third of its outstanding shares since Pershing Square started shorting the stock in May of 2012, Ackman pointed out in his third-quarter letter to investors in Pershing Square that “GAAP and Adjusted EPS are down ~19% and ~16%, respectively, based on management’s guidance for 2017 as compared to Herbalife’s reported 2013 earnings.”

Herbalife and the FTC did not return requests for comment. Ackman declined to comment on Richard’s report. He said she is continuing to work for Pershing Square in 2018.

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