Ackman accuses Herbalife of breaking laws in China

Wed Mar 12, 2014 2:22am EDT
 
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By Svea Herbst-Bayliss

BOSTON (Reuters) - Hedge fund manager William Ackman renewed his attack on Herbalife on Tuesday and said he has evidence the U.S.-based nutrition and weight loss company is breaking direct-selling laws in China, its fastest growing market.

Ackman, who has placed a $1 billion short bet against Herbalife, said the company was making recruits pay an entry fee and letting distributors recruit new members, activities he said were illegal in China. He also said the company is disguising its sales to distributors as hourly consulting fees.

Herbalife said it follows local laws. Chinese regulators have yet to comment on the matter but direct sales models have recently come under fire in China, where authorities launched a probe in January into Herbalife's rival NU Skin Enterprises Inc after state media reported that it brainwashed its members.

In a telephone presentation which lasted more than two hours and drew some 300 listeners, Ackman said the findings were a first step towards bringing his concerns about Herbalife to the attention of Chinese officials.

Ackman, who heads Pershing Square Capital Management, hired research firm OTG to collect the evidence through interviews with Herbalife distributors in China. He was joined on the conference call by one of his lawyers, David Klafter, who said Herbalife is violating Chinese law.

"My understanding of the facts and law in China is yes, they are violating both civil and criminal law," Klafter said on the conference call.

Legal experts in China, however, say laws governing direct selling are unclear and enforcement is often lax, which makes any tough regulatory action against Herbalife unlikely.

Some Chinese laws allow direct selling under limited conditions, while others ban so-called pyramid selling, when members make more money recruiting new members than selling the actual product.   Continued...

 
William Ackman, Chief Executive Officer of Pershing Square Capital Management LP talks to reporters before entering the AGM of Canadian Pacific Railway Ltd. in Calgary May 17, 2012. REUTERS/Jack Cusano