Billionaire hedge fund manager Bill Ackman just wrapped up his latest Herbalife presentation.
Ackman, who runs Pershing Square Capital, gave what he called “the most important presentation” of his career.
There were hundreds of folks gathered at the AXA Equitable Building in Midtown Manhattan. Even Ackman’s father was in attendance. Thousands of people tuned in via a webcast.
For more than a year, Ackman has been loudly short Herbalife — a maker of nutrition shakes. He believes the company is a “pyramid scheme.” His presentation today focused on the company’s so-called nutrition clubs.
Earlier this morning, Herbalife ‘s CFO John DeSimone told CNBC that Ackman’s “bark is worse than his bite.”
And indeed he may have been right. During Ackman’s presentation, Herbalife’s stock surged 15%.
There wasn’t a major bombshell in Ackman’s presentation. The 250-plus slide deck was very detailed. The biggest thing was that Ackman believes the company is skirting labour laws with its nutrition clubs.
In sum, though, Ackman alleges that Herbalife has “fictitious customers” and a “fictitious business opportunity.” He called Herbalife “a fraud perpetrated by Herbalife’s senior management and members of its Founder’s Circles, Chairman’s Club and President’s Team conceived, designed and executed to exploit the poor.”
Ackman began the presentation by going over the backstory about Herbalife’s founding. He then moved to his Herbalife “pyramid scheme” thesis.
Ackman claims that Herbalife “targets the poorest of the poor.” He then shared some slides based on a document he obtained from a whistleblower.
Ackman claims that Herbalife “seeks to exploit the extremely poor in new and existing markets.”
He said that Herbalife denies that it targets ethnic groups.
Ackman claims one way they do this is through the nutrition clubs.
According to Ackman, Herbalife’s nutrition clubs are critical to the company’s growth.
Ackman said that Pershing Square spent $US50 million on investigating.
“I’m not proud of that number.”
He also said they investigated over 240 nutrition clubs.
“We had investigators go in and become part of that program.”
First, he went over the rules of the nutrition clubs. For example, the clubs aren’t allowed to attract customers — no advertisements or promotions allowed. They also can’t have signage or and open/closed sign.
Ackman said that his team went over the economics of ten nutrition clubs in Queens, New York. He concluded that they’re a money losing business. On average, he said, these clubs lose $US12,000 per year before paying the owner.
“This doesn’t seem to be a particularly good business model.”
Ackman said the real purpose of the nutrition club is recruiting members.
He said these clubs “grow like a virus” through duplication. He also showed a slide comparing the number McDonalds and Herbalife nutrition clubs in Queens. He pointed out that while the McDonalds are spread out, the nutrition clubs are on top of each other.
Ackman then invited Christine Richard, a former Bloomberg News reporter-turned-researcher who gave him the Herbalife idea, on stage. His firm’s attorney David Klafter also joined him on stage.
They started going over how you get certified to run a nutrition club.
In short, Ackman believes the nutrition clubs are a big fraud.
“If you look at the greatest frauds,” Ackman said using Enron’s phantom trading floor as an example, “What Herbalife has is they have phantom or fictitious customers.”
He said the people running the clubs aren’t bad people.
“It’s a tragedy because they don’t know they’re being defrauded.”
Ackman also alleged that the clubs are violating labour laws.
“Everyone’s working without being paid, which is a violation of the labour laws.”
It got emotional at the end when Ackman talked about the “American Dream” his father and grandfather were fortunate to obtain when they came to the U.S.
“I’m a huge beneficiary of this country. Michael Johnson is a predator…It’s criminal. It’s time to shut [Herbalife] down,” Ackman said choking up.
“The American dream has been tarnished in a lot of different ways…but when you have a New York Stock Exchange company specifically targeting people and using the American Dream principles….they sell the American dream. It’s criminal. Unfortunately, it’s taking the regulators too long.”
The Ackman/Herbalife saga has been ongoing for more than a year-and-a-half.
In late December 2012, Ackman publicly declared via a 342-slide presentation that he was short Herbalife — a multi level marketing company that sells nutritional supplements and weight loss shakes.
Ackman believes the company operates as a “pyramid scheme” that targets lower income individuals. It’s Ackman’s contention that regulators, specifically the Federal Trade Commission, will be persuaded to shut the company down.
Shortly after, a number of fund managers, most notably Carl Icahn, piled on by going long the stock shortly after Ackman revealed his short bet.
Back in March, the FTC opened an investigation into the company.
So far, Ackman has racked up millions in paper losses on his bet. He has yet to break-even on his short. He’s said that he will take this short to “the end of the earth.”
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