Bill Ackman’s Q2 letter is out. Ackman has been in the news lately regarding J.C. Penney’s recent woes and fights with the activist investor, as well as the surging price of Herbalife Ltd. (NYSE:HLF), which Ackman has a massive short position in. However, Bill Ackman has some new details on Herbalife and is on the offensive in his new letter to shareholders. Below is a brief excerpt from Bill Ackman on Herbalife, followed by the full shareholder letter in scribd.

Bill Ackman

Ackman’s Q2 Letter

We do not know whether or not the Federal Trade Commission, the nation’s principal consumer protection regulator, has initiated an investigation of the Company. There have been a number of positive developments that should increase the probability of an FTC investigation including members of Congress and other members of state and local government and consumer advocates publicly urging the FTC to investigate Herbalife through the public release of letters to the FTC Chairwoman as well as private meetings with the FTC’s staff that have been reported in the press.

Recent Herbalife Rule Changes Since our December 20th presentation and the ensuing scrutiny of the Company, Herbalife has made modifications to its business methods. In addition to rule changes that were implemented by the Company earlier this year (e.g., the new distributor earnings disclosure, the elimination of Herbalife’s 10% restocking fee on product returns in the U.S., and the introduction of a product return policy in Mexico), the Company has recently introduced two additional rules that should raise red flags for policymakers:

o Prohibition of Lead Generation (announced in April, effective July 1st) “Prohibition on Lead Generation: Rule 1-O states…Distributors may not purchase (whether from other Distributors or third party lead providers) business opportunity leads or product leads, leads-related advertising, advertising slots, or decision packs for their own use or the use of others.”

o New Rules Discouraging the Use of Loans “1-C Incurring Debt, Obtaining a Loan, or Borrowing Money: Herbalife strongly discourages incurring debt to pursue the Herbalife business opportunity, or conduct the Herbalife business. Distributors may not encourage Distributors (or prospective Distributors) to obtain a loan or to borrow money for use in connection with their Herbalife business…Further, Distributors may not use in connection with their Herbalife activities money loaned or granted to them for educational or other specific purposes not related to the establishment of a business.”

These rules are designed to address or to create the appearance that Herbalife is addressing some of the abusive practices surrounding its business, including consumer losses due to purchases of leads and distributors being encouraged to use student loans, credit cards, scholarship grants, and other forms of debt to pursue the Herbalife „business opportunity.? The decentralized nature of Herbalife’s distributorships calls into question the extent to which these rules will be enforced. If the rules are not enforced, any continuation of lead generation or debt encouragement tactics should draw the attention of consumer protection policymakers and advocates. On the other hand, if the rules are enforced, senior distributors will have a tougher time recruiting new distributors.

We view the Company’s rule changes as a tacit admission that past practices have been improper. The Company itself has advised its distributors that lead generation can lead to misrepresentations and other abuses, and we cannot see how using student loans or grants to fund an Herbalife distributorship can ever have been proper.

Full letter from Bill Ackman embedded below

H/T Michelle Celarier 

Pershing Square Second Quarter Investor Letter Bill Ackman by ValueWalk.com