Ackman says he has evidence Herbalife is breaking law in China

PUBLISHED : Wednesday, 12 March, 2014, 11:38am
UPDATED : Thursday, 13 March, 2014, 12:52am

US investor William Ackman has renewed his attack on Herbalife, saying he has evidence showing the nutrition and weight loss company is breaking direct-selling laws in China, its fastest-growing market.

The company said it followed local laws, and Chinese regulators have yet to comment on the matter.

Ackman, who has placed a US$1 billion short bet against Herbalife, said on Tuesday the company was breaking the law by making recruits pay an entry fee and by letting distributors recruit new members.

He also said the company was disguising its sales to distributors as hourly consulting fees.

Ackman made the claim on a conference call that lasted more than two hours and drew about 300 listeners.

He was joined on the call by one of his lawyers, David Klafter; Aaron Smith-Levin, whose OTG research firm conducted interviews with Herbalife distributors in China; and Ben Hakim, one of Ackman's partners.

"My understanding of the facts and law in China is, yes, they are violating both civil and criminal law," said Klafter, a senior counsel at Ackman's hedge fund Pershing Square Capital Management.

Ackman and his team said this presentation was a first step towards bringing Pershing Square's concerns to the attention of Chinese officials.

Herbalife said sales in China rose more than 120 per cent in last year's fourth quarter, the fastest of any region worldwide, contributing about 10 per cent of global sales last year.

The company had 200,000 sales representatives in the country and used a "unique marketing programme" to meet Chinese regulations, it said in its latest annual report.

Herbalife has said it remains confident in its business in China and said it was in compliance with local laws.

Direct sales models have recently come under fire in China. The authorities launched a probe into Herbalife rival NU Skin Enterprises in January after state media published reports that it brainwashed its members.

Shares of NU Skin, Herbalife and rival Usana Health Sciences fell on news of the probe.

Ackman has accused Herbalife of running a pyramid scheme in which members make more money recruiting members than selling the actual product.

He made that claim public in December 2012, when he unveiled a US$1 billion short position in the company's shares. So far he has lost money on the bet, as rivals such as Carl Icahn took the other side. The company says its business is not a pyramid scheme.

Despite the paper losses, Ackman said he had found fresh evidence nearly daily that was convincing him to stick by his original bet. If Herbalife ceased to exist now, he would make a few billion dollars, he said.