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Herbalife denies pyramid scheme accusations

Herbalife denies a hedge fund manager’s claims that

Herbalife denies a hedge fund manager’s claims that its business model is illegal. (Jan. 10, 2013) Photo Credit: Bloomberg

Herbalife came out swinging Thursday against claims made by hedge fund manager William Ackman that the business amounts to a pyramid scheme.

Ackman didn't back down, saying in a statement that Herbalife "distorted, mischaracterized, and outright ignored large portions" of Pershing Square Capital Management's December presentation.

A series of Herbalife's executives looked to refute Ackman's allegations during an analyst and investor meeting earlier in the day, laying out everything from how the business operates to who its customers are.

Critics have questioned the company's business model, which uses a network of distributors to sell its nutritional supplements and weight-loss products in more than 80 countries.

The defense put forth Thursday comes a few weeks after Ackman alleged Herbalife Ltd. was a pyramid scheme and said he was shorting the stock.

Short-sellers make money when the shares they're betting against decline.

Under a pyramid scheme, a company makes most of its money by recruiting new salespeople, rather than on the products that they sell. Aside from Ackman, Greenlight Capital's David Einhorn had also raised concerns about Herbalife's business in May.

Herbalife president Desmond Walsh said Thursday that over its 32-year history, only one court has ruled that the company runs an illegal pyramid scheme. The ruling, which occurred in Belgium, is being appealed.

Walsh said that ruling has not hurt Herbalife's business in the country. He also balked at Ackman's claims that Herbalife uses a "pop-and-drop" approach to the markets it serves -- entering a market, making money as fast as it can and then pulling out and moving on to new markets. Walsh said much of Herbalife's growth is coming from markets it has served for more than 10 years.

The Wall Street Journal reported Wednesday that the Securities and Exchange Commission opened an inquiry into Herbalife, citing an unidentified person familiar with the matter.

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