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Herbalife (HLF) Targeted Again by Ackman's Pershing Square

Zacks Equity Research

It seems that activist investor Bill Ackman, hedge fund manager of Pershing Square Capital Management,  is not willing to let go of his claims of Herbalife Ltd. HLF  being a pyramid scheme business model.

Per media reports, Ackman has recently issued a press release stating that there are structural similarities between Herbalife and privately-owned Vemma Nutrition Company, which has been shut down by the Federal Trade Commission in late-August. Vemme is a multi-level marketing company that sells energy drinks, nutritional beverages and other weight management products and was accused of operating as an illegal pyramid scheme. As a result, the Federal Trade Commission had a federal court halt and freeze Arizona-based Vemma's assets.

Ackman claimed and notified in a press release that Herbalife misrepresents the potential income for its members and puts more emphasis on recruiting new members rather than retail sales, similar to Vemma. Ackman stated that the payment of compensation in case of both the companies is unrelated to retail sales or market demand.

Ackman also pointed out that Herbalife tracks retail sales outside of the network akin to Vemma. Also, he said that the distributors likely earn a substantial retail profit on any sales they make, per the media reports.

However, it seems that such accusations do not bother Herbalife now, as the company knows that such allegations are Ackman’s tactics to drive down its share price.

Herbalife has been the target of Ackman since Dec 2012 when he launched his $1 billion short position in Herbalife shares. Since then Ackman has been trying every means to prove that the company was running a pyramid scheme business model, in which the company profits are largely derived from recruiting new distributors and not from selling products.

He also went public with his attacks on business television, in public settings and on his own website. Ackman also called on regulators to shut down the company. Various regulatory agencies have started probes into his allegations.

Herbalife, on its part, has been denying the charges since 2012 and has full confidence in its business model. Later, luck also favored Herbalife as U.S. District Judge Dale Fischer in Los Angeles dismissed the lawsuit case in March citing insufficient proof to show that Herbalife conducted fraudulent activities. Then, federal prosecutors and the FBI also started questioning affiliates of Ackman, and requested documents from people who were reportedly hired by him to campaign against Herbalife.

In the recent months, Herbalife has strengthened its own public campaign against Ackman, prodding regulators to investigate Ackman’s business practices. The company has launched its own anti-Ackman website and released two videos, accusing the hedge fund billionaire of enriching himself through activist campaigns that led to massive layoffs at his targeted companies.

Herbalife holds a Zacks Rank #1 (Strong Buy). Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc. NUS, USANA Health Sciences Inc. USNA and Avon Products Inc. AVP also follow the same model.

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HERBALIFE LTD (HLF): Free Stock Analysis Report
AVON PRODS INC (AVP): Free Stock Analysis Report
NU SKIN ENTERP (NUS): Free Stock Analysis Report
USANA HLTH SCI (USNA): Free Stock Analysis Report
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