Activist investor Bill Ackman continues to try to convince investors and regulators that Herbalife Ltd. (NYSE:HLF) is a pyramid scheme. In a few minutes, he will begin a new presentation which he claims proves that the company is operating outside the law in China. He reviewed documents which he said he received from a former employee of the company, and he will be going through those documents in a the live presentation.
We will be live blogging the entire thing right here, so check back for more updates. The presentation starts at 2 p.m. Eastern, so updates will be flowing quickly after that time.
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As of right now, shares of Herbalife Ltd. (NYSE:HLF) are down 2% ahead of the beginning of Ackman’s presentation.
All times given are in Eastern.
2:03 p.m. – Bill Ackman is addressing this week’s article about Herbalife Ltd (NYSE:HLF) in The New York Times. He’s providing a history lesson about the controversy regarding Herbalife so far. The news article had accused Ackman of trying to be manipulative on this topic.
The Times focused on Sen. Markey’s letter, which included questions which are similar to the allegations made by Ackman’s firm. Ackman provided some details regarding his support of political campaigns. He has not contributed directly to Sen. Markey’s campaign. Although he has given to politicians on both sides of the aisle who he “believes are good for America.” He learned from The Times article that his sister gave $500 to Sen. Markey last year but he didn’t know that she gave to his campaigns.
2:09 p.m – Ackman is now addressing recent articles regarding the amount of money he and Herbalife Ltd (NYSE:HLF) have spent on lobbying. The Times article said his statements are “provably false,” but he said none of his firm’s statements about Herbalife have been proven false.
Now he is running through the claims he has made about the company over the last year. He mentions Herbalife and the Latino community and says distributors make claims about making a lot of money.
2:12 p.m. – Herbalife Ltd (NYSE:HLF) still hasn’t responded to any of the questions posed by Bill Ackman some time ago. He is now turning to their focus on Herbalife’s China operations.
2:14 p.m. – Ackman is now turning to some statistics about Herbalife Ltd. (NYSE:HLF) in China. Net sales there were 10% of worldwide, net sales grew 69%. Management said China is “the most regulated market in which they operate” and that they have a “different model there from the rest of the world.”
Management also said they wouldn’t disclose their compensation program “other than to say that we are abiding by all local regulations.” Ackman wants to know why this compensation plan is a secret and notes that the company has said that it is transparent, but it is secretive about its China operations.
2:16 p.m. – Ackman is running through Chinese laws regarding direct selling and pyramid schemes. They hired OTG Research to meet with Herbalife distributors in China and reviewed the company’s SEC filings and internal financial documents. He said this shows the compensation plan is essential the same as in other places of the world.
Their research tells them that Herbalife violates China’s dlaws. Pays multi-level royalties on unlimited downline levels, pays royalties and commissions over 30% of sales volume. Herbalife incentivizes distributors to recruit potentially infinite downline.
He says SEC filings misleading regarding China sales.
2:19 p.m. – Pershing Square handed it over to OTG Research Group, who explained what they did. They spoke with staff and distributors at stores and attended Herbalife seminars and met with distributors offsite outside of stores.
OTG found three categories in Herbalife’s marketing plan: preferred customer, representative, distributor. Preferred customer buy 100 RMB Herbalife data set, fill out paperwork. They can product from retail stores but stil must pay full retail prices when buying products. Must have Herbalife ID to buy from retail store. Only reason to enroll is to begin process of enrolling.
Business Representative must accumulate 100 volume points by ordering enough products or building downline of other participants who buy $200 worth of product. Selling to someone outside company doesn’t earn points. Business reps make money through retroactive credits, one for product personally buy. Other for product bought by someone you have recruited.
2:24 p.m. – Distributors consider the retroactive credits as revenue, credits are taxable and Herbalife withholds tax. Distributors receive credits from selling to people they have
Business representative entitled to 15 to 25%.
Up to distributor, must accumulate 5,000 volume points by buying product or recruiting others. Spending $3,200 a month to do this and you don’t make direct profit on what you buy.
2:27 p.m. – they showed a diagram drawn by an Herbalife distributor in China. There are five tiers of distributors. Lowest level comes out to $3,200 of product must be bought per month. Middle level, $20,000 a month must be bought three months in a row, by top level, $200,000 three months in a row.
Distributors earn 30% retroactive credits and also hourly consulting pay, made up of commission, management bonus and Mark Hughes dividend. Herbalife wants people to think distributors paid hourly because of this firm. It’s not based on hours. It’s 100% based on commissions from downlines and hitting sales targest.
Distributor status assigned an hourly consulting rate. It based the amount of royalties and recruiting awards and divides the amount by consulting rate to arrive at “fictional number of hours” they have worked.
2:30 p.m. – Distributors hourly consulting pay. Junior see 250 RMB per hour. Herbalife divides total hourly consulting pay by Distributors consulting rate. They found Chinese distributors say hourly consulting fees are “far more lucrative than selling products to retail customers.” Some say it’s not possible to make as much money selling products as through consulting fees.
One distributor told them importance of recruiting people by founding Herbalife clubs. Some might think they are doing pyramid sales, He told a story that when he was introduced to Herbalife he heard similar data, he also thought it was pyramid sales and decided not to do it. On the way home, he said he saw a huge Herbalife billboard, he knew then that it wasn’t pyramid sales because no company would advertise itself so widely if it was a pyramid.
2:35 p.m. – Distributors said Hourly Consulting Pay is passive income and depends on recruiting and unrelated to “any supposed consulting. Several distributors drew sketches to explain how they recruit. Many sketches look like pyramids. It’s hard to explain the compensation plan without drawing a pyramid.
2:37 p.m. – Meeting with one on one distributors only way to learn about compensation plan. They don’t want to talk about it. People aren’t limited to how many downlines they have. So some distributors drew suns with lines emanating 360 degrees from the center.
Now they’re turning to Chinese law.
2:39 p.m. – Legal experts say paying 100 RMB to buy preferred customer seems to violate direct sales and pyramid sales regulations. Participants ordering products to accumulate points also seems to violate these regulations. Recruiting others to order products and advance seem to violate regulation that only company and branches can recruit sales promoters. Herbalife distributors in China are doing recruiting for own benefit. Earning commissions on those recruits and their purchases seems to violate pyramid regulations and criminal law. This defines a puramid scheme as a scheme in which the calculation of remunierations or kickbacks to participantes directly or indirectly dependent on the number of personas recreuidted and the participantes are induced to continue or coerced into continuing recruiting others to participate.
2:42 p.m. – Now they are looking at Herbalife’s SEC filings. Company sets China apart. In China, “sales employees and service fees” included in SG&A expenses. China’s contribution margin looks more than double the rest of the world. But when adjusting for the expense called compensation to China sales employees, pro forma contribution margin mirrors those of rest of the world. So instead Herbalife says China model is different than rest of the world, but it doesn’t look like it is in the SEC filings.
2:46 p.m. – They looked at internal Herbalife documents which show how it calculates hourly consulting pay. This document from 2010 shows 25% rebate, R/O for royalty overrides of 15%, P/B for production bonuses of 7%, MH Bonus of 1% and 1% China bonus.
They found more detailed buildup of China numbers, found a “hidden row” which shows China Royalties in 2009, shows same $79.1 million number, referred to it as China Royalties instead.
2:51 p.m. – Calculating hourly consulting pay, they use same percentages as they do in rest of the world, plus a 1% China bonus, which experts think emphasizes greater emphasis on China recruiting. Pershing’s experts believe these documents show it doesn’t base royalty compensation on hourly consulting fees but on retail sales percentages just like on royalty overrides in rest of the world.
Ackman thinks Herbalife hiding the fact that China royalty expense is same as in rest of the world and that investors would have more accurate picture of what it’s doing in China, but he thinks if did it right, then it would be showing that it is in violation of China law.
2:57 p.m. – They’re summing up everything they already said. Basically, they’re saying that Herbalife is doing same model in China as in rest of world and the model violates China laws about pyramid schemes and even a criminal law. And they say the company’s SEC filings mislead investors regarding its China operations.
Ackman’s experts believe Herbalife is indeed violating Chinese law.