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Herbalife Has “Substantial Similarities” To FTC-Targeted Vemma: Ackman

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We recently reported that billionaire Bill Ackman of Pershing Square was still confident that his notorious short thesis on Herbalife Ltd. (NYSE:HLF) was correct, and that the company, which he alleges is an illegal pyramid scheme, would fall. On Tuesday, Ackman backed up his continuing resolve by releasing a 29-slide presentation at, which cites “substantial similarities” between Herbalife and another multi-level marketing nutrition company, the FTC-shuttered Vemma Nutrition Company.

Bill Ackman in crowd

First, an introduction as to why we follow hedge fund managers like Bill Ackman. Whether elite hedge funds collectively like a stock or not is an important metric to consider, as these large investors show a great level of skill and expertise when it comes to picking stocks. Over the last few years equity hedge funds have trailed the market by a large margin, but that’s mostly due to their hedging and short positions, which perform poorly in a bull market. Their long positions performed far better, especially their small-cap picks, which have the potential to beat the market by 95 basis points per month on average, as our backtests showed. Our small-cap strategy involves imitating a portfolio of the 15 most popular small-cap picks among hedge funds and it has returned 118% since August 2012, beating the S&P 500 ETF (SPY) by over 60 percentage points (read more details here).

Let’s first start with a little background on Vemma Nutrition Company. The privately-held, Tempe, Arizona-based company was shut down by the FTC at the end of August, with the latter alleging in a press release that the former lured young adults into its fold by promising them lavish lifestyles. Rather than encouraging them to sell the company’s products, Vemma instead pushed and rewarded them for recruiting other people into the company, which required the recruited person to make a $500 or more payment to join. It’s alleged that the company made little effort to teach people how to sell their products, instead focusing on training them to give it away to potential new recruits. The company is also alleged to have falsified data to make it look like it had far more customers than affiliates, when the latter was actually the case.

Moving back to Ackman, his fund’s latest presentation on Herbalife Ltd. (NYSE:HLF) makes detailed comparisons between it and Vemma, beginning with their emphasis on recruitment and rewarding their distributors for their recruitment efforts. In Herbalife’s case, the presentation claims that Herbalife distributors earn ten-times as much in recruiting rewards as they do from selling the company’s products. That certainly appears to be a strong signal that the company is a pyramid scheme that can’t be sustained from top-to-bottom without the continual influx of more distributors, which would not be the case for a legitimate company.

Bill Ackman
Bill Ackman
Pershing Square

From there, the presentation runs through a litany of similarities between the two company’s operations, including the high failure rate of their distributors, the fact they’re both structured with a multi-level hierarchy, that both companies make exaggerated earnings claims that are not supported by the results of the vast majority of their distributors, and as a follow-up to that point, that the distribution of wealth among those distributors is extremely skewed. As the presentation showed, using Herbalife’s own figures from the company’s 2014 Form 10-K, the top 0.6% of sales leaders earned nearly $150,000 on average in 2013, while the bottom 94% earned less than $2,250. In fact, nearly half of Herbalife’s sales leaders didn’t earn a single dollar in 2013. Herbalife’s numbers are actually more skewed across the board than even Vemma’s were, based on the latter company’s 2013 U.S Disclosure Statement.

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