If The Verge is right, then Herbalife shares should be plummeting

Quartz

The Verge’s Matt Stroud and Joseph L. Flatley just published a long, in-depth look at Herbalife, the company that has been at the center of a virulent debate between hedge fund managers for the last few months. And if the story is true, then the company’s stock should be tanking. (It isn’t…yet.)

Bill Ackman, the founder and CEO of Pershing Square Capital Management, has called Herbalife a “pyramid scheme” and shorted the stock, or bet that it will fall. He has battled with another hedge fund manager, Carl Icahn, who owns more than 13% of Herbalife and, naturally, defends the company.The US Securities Exchange Commission  opened up an investigation into Herbalife in January.

Fast-forward to today. In a long exposé, Stroud and Flatley tell the story of Barron Hansen, a “self-employed web developer and researcher.” It recounts his investigation of incomeathome.com, from which he purchased an “Internet Business Starter Pack,” which is described as “a single DVD and a 12 page glossy sales brochure that ‘could’ve been designed by some high school kid.’” Ultimately, Hansen traces the website back to its apparent owner, Herbalife.

Stroud and Flatley’s explanation of how Herbalife, which is known for selling nutritional supplements, actually makes money is damning, indeed. Herbalife is a multi-level marketing company, which makes money by selling product to independent distributors, who sell it to salespeople, who sell it to customers, who are generally friends and family.

Generally, the point is to move up the ladder, from salesperson to distributor, but according to the Verge, the costs of registering for new levels in the “business opportunity” tend to be prohibitive. Instead of generating revenue from supplements, the Verge reports, Herbalife seems to be making more of its money from people trying to move up the ladder of its “business opportunity,” which is essentially what Ackman has alleged.

Go read The Verge’s report.



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