Billionaire Bill Ackman’s Pershing Square Capital Management, L.P. on Friday pressed Herbalife Ltd. CEO Michael Johnson to release a 71-minute video from a decade ago in which Johnson reportedly characterized success in the company as a “lottery ticket" with few climbing to the top.
Pershing Square, a hedge fund management company, fired off the letter after the New York Post reported that it had obtained a copy of a video in which Johnson made some potentially embarrassing—and damning—admissions during a 2005 speech.
Johnson, a former Walt Disney Corp. executive who is a fitness buff, was named CEO of Herbalife two years earlier. Under his leadership, Herbalife’s sales have soared from US$1.1 billion in 2003 to $5 billion last year.
“We urge that you release the 71-minute video and any similar materials in your possession or control, and we encourage Herbalife employees, distributors and others with similar materials to come forward," Pershing Square’s David Klafter wrote in the letter to Johnson.
The Post quoted Johnson as admitting in the speech that distributors had sometimes made “false promises, claims, in hopes for product, for money, for recruiting, for customers, for pyramiding."
Johnson also said sales tactics that leading Herbalife distributors used had occasionally led people “down a false road" where $4,000 could snatch up an “instant distributorship," according to the newspaper.
“When the credit card bill comes, the spouse says, ‘How are we going to pay this? You didn’t sell this stuff. It’s in the garage. It’s in the pantry. What are we going to do?’" Johnson reportedly said.
For more than two years, Ackman has accused the multi-level marketer (MLM) Herbalife of exploiting its immense base of distributors—many of whom are minorities in the United States—and operating an unlawful pyramid scheme.
“Since the time when you stated that Herbalife is a ‘lottery ticket,’ how many people have won the Herbalife ‘lottery’ compared to the number of people who have joined," Klafter asked Johnson.
INSIDER hasn’t seen the video, and it remains to be seen whether Johnson’s comments quoted in the Post could be interpreted as being taken out of context.
In December, Pershing Square released a 10-year-old video that allegedly shed negative light on Herbalife distributor Stephan Gratziani, which the hedge fund said demonstrated Herbalife was a pyramid scheme.
“We sell people on a dream business, that they can make it. Yet deep down inside, what do we really know? Yeah. We know that the reality is that most of them aren’t going to make it,” Gratziani says at one point during the 2005 Herbalife-sponsored event, USA Today reported in a Dec. 17, 2014 article.
Pershing Square also quoted a number of other snippets from the video that supported its thesis that Herbalife is a pyramid scheme.
But in an interview earlier this year with Ackman, a Bloomberg Television reporter, Erik Schatzker, said his colleagues who reviewed the video formed “a different impression than you.”
“They say, and I am paraphrasing here, that the video goes into some of the kinds of practices that Herbalife may have once upon a time engaged in, but ultimately amounts to an exhortation not to engage in such practices,” Schatzker said. “In other words, people employed by directly or indirectly by Herbalife are saying there are some bad practices. We may have done them at one point in time, but we shouldn’t be doing them.”
Pyramid Schemes: FTC Definition
While pyramid schemes take many forms, the Federal Trade Commission’s former general counsel Debra Valentine described the classic characteristic of a pyramid scheme in a 1998 speech: promising “consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public."
“There are two tell-tale signs that a product is simply being used to disguise a pyramid scheme: inventory loading and a lack of retail sales," Valentine explained.
Herbalife has referenced surveys showing that its products are used by millions of consumers and that most of its members join Herbalife for non-business reasons: namely to use the products themselves. The company also discloses annual figures on the average compensation of distributors, bolstering Herbalife’s argument that it’s transparent with its prospective members about the business opportunities and risks. Herbalife also said it has policies that discourage loading of inventory.
Finally, Herbalife has questioned Ackman’s motives and credibility since the hedge fund guru has bet billions against Herbalife, which means Pershing Square stands to profit if Herbalife’s stock price plummets.
Still, a number of state and federal agencies are investigating Herbalife, including the FTC, U.S. Justice Department and Securities and Exchange Commission. Complaints also have been lodged with attorneys general, some of whom are formally investigating Herbalife or have at least examined the grievances. Regulators have said virtually nothing about the investigations, other than a few agencies confirming their existence.
The FTC and Herbalife declined to comment on the Post’s report.
Although Herbalife’s business model faces scrutiny in the United States, most of its sales come from its international business. As of March 31, 2015, Herbalife sold products in 91 countries through 4.1 million members. Roughly 82 percent of sales last year originated outside the United States.
In late 2013, an appeals court in Belgium ruled that Herbalife was not a pyramid scheme.
That was the same year Herbalife released the results of a survey that the company said indicated it served 7.9 million customers. Determining the actual size of Herbalife’s customer base is challenging because the company doesn’t directly track sales to end-users or what one might consider the typical "retail customer", and Herbalife has no retail stores. Also, a portion of Herbalife’s distributors may seek out Herbalife for two reasons: for the MLM business opportunity and to use the products themselves.