Popular weight management company Herbalife has come under fire for being what Pershing Square CEO Bill Ackman calls ‘a pyramid scheme’.
Ackman, who runs the $11 billion hedge fund Pershing Square, has called Herbalife a pyramid scheme and publicly said that he’s betting $1 billion that its stock will fall to zero.
If Ackman is right, Herbalife, a company that reports roughly $4 billion in annual sales and a network of 3.2 million salespeople in 87 countries, could be shut down by the Federal Trade Commission. The Federal Trade Commission calls pyramid schemes illegal and says they prey on consumers. With more than $1 billion on the line, Ackman stands to make billions in profits too.
If he’s wrong, Ackman will not only lose money. An erroneous short call could tarnish his credibility as an activist investor. He’s already proven that he can force corporate boards — including those at the railroad company Canadian Pacific (CP) and retailer J C Penney Company Inc (JCP) — to make the changes he seeks. But the FTC and other federal agencies may not be as willing to listen.
Ackman says Herbalife is an “inherently fraudulent company.”
Why is Ackman attacking Herbalife?
“We don’t believe there is any demand for the product by true retail consumers at the suggested retail price,” Ackman told CNNMoney in an interview Monday.
“Herbalife sells products,” Ackman said. “But what they really sell and what their distributors make money from is by selling a business opportunity, and the business opportunity is to sell the business opportunity to your friends, who in turn sell it to their friends.”
Ackman first outlined his case against Herbalife during a three and a half hour presentation to investors last month. He says the company’s stock will “go to zero.” Ackman has also promised to donate all of his personal profits from shorting the stock to charity.
It’ll be really interesting to see how this all plays out with so many people attributing Herbalife to helping change their lifestyles. To read the full report, head on over to Yahoo! Finance.