Herbalife CFO John DeSimone said they may sue hedge fund manager Bill Ackman who has been on a crusade against the company for 18 months.
“We may. That’s on the table. It’s an option. I think our case gets stronger every day,” DeSimone told Bloomberg TV’s Stephanie Ruhle.
Earlier today, Ackman presented a 250-plus slide presentation that he had billed as a “death blow” to Herbalife.
However, shares of Herbalife’s stock surged ending the day up 25%.
During his multi-hour long presentation, Ackman called the company a “pyramid scheme” and said its “criminal.” He also said its CEO Michael Johnson is a “predator.”
One reporter in the audience asked Ackman if he was worried he might get sued for his accusations against the company and its executives.
“Bring it on,” Ackman responded.
Ackman has been publicly and very loudly short Herbalife — a multi-marketer that sells nutrition shakes — since December 2012. Ackman believes the company operates as a “pyramid scheme” that targets poor people. It’s Ackman’s contention that regulators, specifically the Federal Trade Commission, will shut the company down.
Back in March, the FTC opened an investigation into the company.
Here’s a transcript from Bloomberg TV:
STEPHANIE RUHLE: What a day you’ve just had. Last night when you found out your earlier interview today was going to be aired at Bill Ackman’s presentation, a guy who has been on a crusade against you for two years, how did you feel?
JOHN DESIMONE: When he moved it up?
DESIMONE: I felt it was a sign of weakness. It actually made me feel better that he was a little bit worried. I didn’t think he had anything anyway and I said that this morning. It’s been a little bit of the same MO now for 18 months. A lot of talk. Big — big bark, small bite. But at the same time, he comes across so certain that you’ve got to wonder where he’s going. So I got a little bit more comfortable when he (inaudible)
RUHLE: Well as you said, management in the company has been divided into teams, and a lion’s share of your time is spent dealing with, defending against Bill’s accusations. This isn’t what you signed on to do when you joined Herbalife. What do you think of what your job is?
DESIMONE: It’s fascinating and it’s frustrating. I — so I know the issues, so I think I am the right — right individual, along with a couple other people, to help fight back and get the truth out. It’s been fascinating because I’ve got some of the smartest people on Wall Street who now invest in the company. And that’s been a tremendous benefit for Herbalife and for me, and I’m a better CFO today because of it.
At the same time, it’s frustrating because I think the rules of transparency that we operate under is not the same set of rules that Bill Ackman operates under and it’s a little bit frustrating. He’s spent $US50 million. By the way, two months — three months ago it was $US20 million. So I don’t know if the $US20 million was wrong or the $US50 million was wrong. But what I do know is the $US50 million that he spent both in today’s presentation and in prior presentations actually proves our thesis and disproves his thesis
RUHLE: Then why not sue him? He has been on a crusade, some say a slanderous crusade against you. Why won’t you sue him?
DESIMONE: We may. That’s on the table. It’s an option. I think our case gets stronger every day.
RUHLE: So what stopped you between when this started 18 months ago to today? With everything that he says, why not slap him with a lawsuit?
DESIMONE: Well, we may. I think to date the stock’s performed well. The company’s performed well. But it’s something that we talk about frequently and I’ll leave it to the lawyers, but it’s a possibility.
RUHLE: Well you feel and many feel, the stock market feels like Bill didn’t come up with anything big enough. If you watch those videos, they are heartbreaking. There are some bad things happening at those distribution centres. Do you have an obligation?
DESIMONE: First of all, I don’t believe that to be true, ok? So there’s a lot of misrepresentation. Club CN (ph), which he presented today, actually has a lot of good fundamental business practices. It’s — Club CN means Club 100. The 100 means get 100 people to consume the product, so it trains people to get customers and run a business and learn how to manage finances before they actually open up a club.
RUHLE: How does making 100 shakes, how does taking two scoops into a cup — how is that a needed practice except for just churning selling your products?
DESIMONE: No, no. It’s not making the shakes. It’s running a business. It’s finding customers. You want people to know how to get customers, how to maintain those customers, how to treat those customers before they go open up a fixed location. So it’s actually very beneficial to the model to have that training. So what we did as a company is we incorporated the strength of Club 100 into the Herbalife program, which is why it’s not called Club 100.
RUHLE: So you do control Club 100 though?
DESIMONE: We don’t — Club 100 was not an Herbalife-identified strategy. Our members are independent. And the best ideas –
RUHLE: Right there, doesn’t it seem kind of cockamamie to you? This is an identified strategy. Wal-Mart has a store. There’s the salespeople. They sell the product. All this noise, this confusion is what makes people uncomfortable. An identified strategy. I don’t even know what that means.
DESIMONE: Well, company has a strategy. We have — we sell through independent distributors, no different than Avon, no different than Tupperware, Pampered Chef. Within those independent sales forces, people go to market differently and they find the best way to bring the product to their community. And when those ideas are grounded in fundamentally solid business practices, we try to adopt them. And that’s what Club CN was. It had some really good fundamental business practices and we adopted some of those.
RUHLE: And what percentage of those sales are to ultimate end users? I mean customers that are not in turn salespeople themselves.
DESIMONE: End users are people that buy the product because they want the product, right? And they fall into three classifications, ok? Some of them outside the network. Some of them are inside the network. We just released a report this morning. I’m sure you’ve seen it. It was done by a former FTC economist, Dr. Vandale (ph). He determined through his analysis of our records and of research, research that had been done by third parties and research that he contributed to, that 97 per cent of our sales end up in the hands of ultimate end users.
RUHLE: Why not break your sales numbers down then? Why can’t we see them?
DESIMONE: Well we did. We broke it down today. If you read the report, it’s broken down into its categories. Ninety-seven per cent of the sales go to end users, 80 per cent of the sales go to end users that are outside the network or that primarily join because they just want the product.
RUHLE: But if you can’t control how the distribution centres are working, if you can’t control those policies, what’s going to be the result from you? Since we got the burn (ph) verdict, it seems that everyone needs to tighten up their game. How are you going to tighten up your game if you can’t control those distributors?
DESIMONE: Actually I think we do a great job controlling the distributors It’s a four-pronged approach. It starts with education and training. We have 3.5 million people around the world that are members. The vast majority want to behave appropriately, ethically within our rules, but they have to know the rules. So the first thing we have to do is train them, educate them so they know how to behave. For the small minority that want to kind of cut some corners and maybe violate our rules, we have to have systems in place to detect and deter behaviour.
RUHLE: Actually what is that practice? In the securities industry there’s KYC, know your customer. Before you do business with someone, you need to know that they fully understand it. So some of the “victims” have claimed, “I became a distributor. I spent the money. I didn’t know what I was doing.” What practices do you have in place so you know that those distributors actually know what they’re getting into? Because many of them do come from low-income communities.
DESIMONE: So I didn’t finish the four, but it’s really important because they work in an integrated fashion. So educate and train, deter — detect and deter. Then I think one of the most important ones is we communicate with every new member. So regardless of what’s said in the world — and we do our best to train, we do our best to detect. We’ve got great technology, lots of field salespeople to monitor behaviour people in the field. When somebody joins Herbalife, they have to hear from us the facts before they join, all right?
And after they join, they’re protected. So if they buy a kit to join, it’s $US60 or $US90 depending on how much product they want. Within 90 days if they say it’s not for them, they get a 100 per cent money back guarantee. We pay for the return shipping. I see you got a smile, but this is huge. It’s — it’s probably the best consumer product protection in the industry. Because beyond the kit, if you buy any product from Herbalife and for whatever reason you want to leave, any product that you had purchased in the prior 12 months, it’s a 12 month guarantee, we will pay 100 per cent of your purchase price and return shipping.
You have no economic risk. So ultimately educate and train, deter and detect, make sure we communicate so no matter what’s said in the field they hear the truth. And then still if their expectations aren’t met, we give them their money back.
RUHLE: The hundreds of hours that Bill has put together from 240 nutrition clubs, do you think all of that is from paid people by Bill? Do you believe any of it?
DESIMONE: I think Bill’s — Bill’s research actually proves our strength in compliance and disproves his thesis.
RUHLE: How? There is clearly victims.
DESIMONE: So there’s — there’s been a $US50 million campaign. We now know it’s $US50 million, right? We thought it was $US20 million. Now it’s $US50 million. He’s found a number of complainants. They go back to actually ’02, ’03 kind of timeframe, but the majority are ’08, ’09, 2010, some in ’11, I think one in ’12. So since 2008 to now, we have had 1.6 million members in the US join, 1.6 million. So with a $US50 million campaign, he’s advertising trying to find people to complain. He’s got feet on the street in multiple states, high-paid consultants.
RUHLE: And you think they’re all faking it?
DESIMONE: No, no, no. I’m not saying they’re faking it. I’m saying if one out of every 1,000 that joined had a complaint, that would be 1,600 complaints. He had founded a fraction of 1,600 complaints. I’m not saying those complaints — I don’t know if the complaints are real or not real. I don’t know enough about them. We haven’t been able to see a lot of them. But what I do know is the incident rate is extremely low despite the campaign to find it. That speaks to the strength of the program we have in place. It disproves his thesis that this is (inaudible).
RUHLE: Well do you have an obligation to fix these bad apples there are? If you look at one of these blocks that we’ve see through Bill in Queens where there’s six nutrition clubs on a block, do you have an obligation to clean this up?
DESIMONE: So I got to change the characterization a little. We have an obligation to protect to the consumer, protect the new entrant, ok? Having six clubs in a block isn’t necessarily a problem, right? The — a club — a club is really misunderstood. A club is nothing more than a living room get together, no different than Tupperware, no different than Avon, but it’s been picked up from the house and it’s been put into a commercial location so that more people can meet together. And why do they want to meet together? Because people lose weight better in a group setting. So it’s really person to person, still that home touch.
RUHLE: And you think all of those clubs look like people’s living rooms and a home touch? Because I’ve seen some videos of some that don’t look like that.
DESIMONE: Well have you seen — you’re talking about a community that these establishments actually fit well into, right? So we shouldn’t judge them from what we know. We should judge them from the communities in which these people live. This model is very adaptable to any community. There’s upscale clubs that have some exercise equipment. They do fitness work. They do — they do works, to down market because it fits those markets. So we want to bring good nutrition to everybody no matter where they’re located.
RUHLE: There’s a number of investors who have said today, listen, Bill didn’t necessarily prove anything that’s going to make regulators get involved, but many have said it’s just a sleazy company. Do you feel any obligation that you should adders that or that’s just silly, people just don’t get it?
DESIMONE: We’re here to address whatever it is that people want — need to know about Herbalife. So the reason I’m here is so that we can communicate facts and not the misrepresentations made by Bill Ackman. And I think today’s report, again, people should download it. It’s the report done by a former FTC economist that actually draws a conclusion that we are a socially beneficial, economically sustainable multi-level marketing company.
RUHLE: When you watch those Founders Circle videos, you don’t find them creepy?
DESIMONE: The Founders Circle have been in the business a long time. They work hard.
RUHLE: Hold on. Do you think they’re creepy?
DESIMONE: No, I don’t — I think there has been times in the past — and a lot of those videos are old, right? They even pre-date me. So I think there’s been a cultural shift over the 35 years of a company as there is over any company as it matures and it gets its message better and it gets its protections better. So I think it needs to be put in the proper context.
RUHLE: Are you breathing a sigh of relief? You’re going to fly back to LA. What are you going to do tomorrow?
DESIMONE: Well, we’re getting ready for an earnings release on Monday, so we have to go through the board process, committee meetings, board meetings. So I’m going to fly back tonight and focus on the business for the next few days.
RUHLE: Then what’s your biggest challenge? Because Bill, he ain’t backing down.
DESIMONE: I’m not either. So — we’re not either.
RUHLE: You’re not either. Do you consider Bill your adversary?
DESIMONE: I — I — I — that’s an interesting question. I think it’s frustrating I think sometimes to see some of the tactics that I think anyway that he employs that I’m not very comfortable with.
RUHLE: Like what? When you say he spends all this money, you guys spend millions of dollars on lobbyists. So he’s not alone.
DESIMONE: We’re not talking about lobbyists, right? So he spent little on lobbyists, a lot on operatives, right, to try to —
RUHLE: What does that mean?
DESIMONE: So a lobbyist is somebody that tries to communicate a message to an elected official, right? And if you look at his lobbyist spending, it hasn’t been that big. But he’s spent $US50 million elsewhere outside of lobbying. That’s hiring consultants to find people who complain, to make videos, things that I think are — lack transparency.
RUHLE: So for you right now, between now and your earnings call next week, what information do you feel people don’t have that they need to have? Because I’m not saying that you needed to respond to Bill in the last 18 months, but we really haven’t heard from you.
DESIMONE: Well I think they need to have the report released today. It’s by an independent third party. Yes, we commissioned it, but we had no relationship with this PhD economist before this commission. We gave him complete access to our database, complete access to our studies, and he actually draw — he drew a conclusion.
RUHLE: All right. Well thank you so much for joining me today.