Herbalife is "pyramid scheme": Pershing Square's Ackman

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By Svea Herbst-Bayliss and Sam Forgione | December 21, 2012 4:14 AM EST

Hedge fund manager Bill Ackman, best known for taking big positions in stocks in hopes of pushing for management changes, is taking on weight management Herbalife Ltd as his big end-of-the-year short.

A day after confirming that his $11 billion Pershing Square Capital Management is betting against the company, the manager outlined his case for shorting Herbalife shares in a presentation entitled, 'How to be a millionaire.'

During a talk on Thursday before an audience of 500 at an event sponsored by a charitable group, Ackman said Herbalife is a "pyramid scheme" that has "grown remarkably rapidly" without demonstrating "much substance" to justify the growth.

He criticized the company for inflating the suggested retail price of its products and overstating its retail sales in public filings.

Shares of Herbalife, which tumbled 12 percent Wednesday after Ackman confirmed his hedge fund was shorting the stock, fell another 6.4 percent to $34.94 on Thursday morning on the New York Stock Exchange.

On Wednesday, Herbalife Chief Executive Michael Johnson said Ackman's charge about being a pyramid scheme was "bogus," and he criticized Ackman for using a public attack on his company to benefit his "business model."

Ackman said he has been building his short position in the company's stock for several months, adding that his fund is only short the company's shares and not engaged in any options trading, such as buying put options on Herbalife.

A put option permits a trader to buy a stock at a specific price. It is typically used by short seller to buy a stock after it has fallen in price.

To date, Ackman is the first high-profile hedge fund manager to say he is shorting shares of Herbalife and has problems with its business model.

The company relies on sales of its weight management and nutrition supplements through a distribution channel involving 2.7 million sponsors in 81 countries.

The distributors make money based not only on their own product sales to consumers but on the sales of those they sponsor and bring into the business.

Earlier this year, it was believed that David Einhorn, another noted hedge fund manager, was shorting shares of Herbalife after he went on a company conference call and asked about the percentage of sales to consumers who are not official distributors.

Einhorn declined to comment on Wednesday about his position.

Another well known investor believed to be shorting Herbalife is Jim Chanos, president and founder of Kynikos Associates, according to a person familiar with the hedge fund manager.

A person familiar with the thinking of some short sellers said multilevel marketing companies begin operating like a pyramid scheme when most of their sales are to other distributors of the product, as opposed to people who have no connection to the company.

(Reporting by Svea Herbst-Bayliss and Sam Forgione; Additional reporting by Emily Flitter and Jennifer Ablan; Writing by Matthew Goldstein; Editing by James Dalgleish and Jeffrey Benkoe)

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