BOSTON (Reuters) - Billionaire investor William Ackman on Monday charged that Herbalife (HLF.N), a seller of nutrition and weight-loss products, found new distributors through a business that had been convicted in Canada of running an illegal pyramid scheme.
Ackman, who runs hedge fund Pershing Square Capital Management, has been betting against Herbalife shares for more than a year, claiming that the company itself is a pyramid scheme.
On a new website, Ackman profiled Shawn Dahl, a former Herbalife distributor, and Dahl’s lead-generation business, Online Business System, charging that Dahl lured people to become Herbalife distributors with false promises of making money fast. (www.herbalifepyramidscheme.com)
“While Herbalife has attempted to distance itself from Dahl recently, the company cannot escape liability for participating in Dahl’s deceptive and destructive conduct for a decade,” analysts at Ackman’s $12 billion hedge fund wrote in the summary of their report on Dahl.
Ackman’s charges raise fresh questions about Herbalife’s recruiting tactics. They came hours after the company gave preliminary results for its 2013 fourth-quarter profit and sales that topped Wall Street views and said it authorized a $1.5 billion buyback of shares, more than initially expected.
Herbalife’s shares rose 4 percent early in the day, but fell nearly 3 percent to $62.56 after Ackman’s report came out.
Ackman has made a $1 billion short bet against Herbalife, predicting the company’s share price, which has risen 80 percent in the last 12 months, will eventually fall to zero.
Herbalife has vehemently denied Ackman’s allegations that its business is a pyramid scheme. Its share price surged 138 percent in 2013. So far this year, the share price has fallen 20 percent.
Dahl, who is featured in online advertisements as a snowmobile-riding, fun-loving father of two who built his opulent lifestyle by selling Herbalife, inherited his lead-generating business from his mother-in-law, Deborah Stoltz.
He was ranked as one of the 50 top distributors of Herbalife. He resigned as a Herbalife Chairman Club distributor last summer.
Ten years ago Stoltz and her sister, Marilyn Thom, pleaded guilty to running a pyramid scheme and promised to say how much money distributors actually earned and not become involved with such businesses again.
However, according to pictures found online, Dahl and the two women have been featured in Herbalife promotions.
Neither Dahl nor Herbalife immediately responded to questions about the charges on Ackman’s new website.
Ackman said that most people who signed up with Dahl’s Online Business Systems failed quickly.
“According to Dahl’s own documents, even among the OBS members who made the investment (often up to $3,000) to qualify as a Supervisor in the Herbalife marketing plan, the turnover rate is 86 percent per year,” Ackman’s report said.
Ackman is relying on regulators, particularly in the United States, to probe the company and feels progress is being made, with rights groups having met with the California attorney general and with U.S. Senator Ed Markey recently asking regulators to look into the company.
Ackman has long been known for his intensive research on companies. The new website will also feature other people it calls “Herbalife wrongdoers.”
Reporting by Svea Herbst-Bayliss; Editing by Leslie Adler