Whitney Tilson – How Has Herbalife Ltd. (HLF) Been Going So Long? – ValueWalk Premium
Herbalife Ltd. HLF

Whitney Tilson – How Has Herbalife Ltd. (HLF) Been Going So Long?

Bill Ackman is not the only investor shorting Herbalife Ltd. (NYSE:HLF), who has been having a busy week… Whitney Tilson has been pounding the hammer against Herbalife all week. First on Sunday night Tilson predicted Tuesday would be a gamechanger for the stock, then after the Ackman presentation, Tilson said that he was 76% sure that his Herbalife thesis was correct, then Tilson sent a follow up, and now Tilson has penned another piece about Herbalife – below is the latest from an email which Whitney Tilson sent to investors.


Whitney Tilson – How Has Herbalife Ltd. (NYSE:HLF) Kept the Game Going For So Long?


I had the pleasure of meeting the guy who writes under the handle Quoth the Raven last week when he came to New York City to see Ackman’s presentation in person (I had no idea who he was prior to that – I just liked reading his stuff). He’s a very smart investor with a good nose for fraud and deception (not just with Herbalife – see the other stuff he’s written on Seeking Alpha) and he’s really done his work on Herbalife – more than anyone I’ve seen outside of Pershing Sq. He published his magnum opus today entitled 24 Ways Herbalife Is Mocking The Regulators (see http://seekingalpha.com/article/2342775-24-ways-herbalife-is-mocking-the-regulators), which does an excellent job of summarizing all of the immoral and illegal things he thinks the company is doing. Here’s the beginning:


Herbalife LTd. HLF

Herbalife LTd. HLF


  • As I wrote yesterday, sentiment among a lot of Herbalife bulls is that they concede the company is deceptive, but invest because they think regulators are spineless.
  • So, Herbalife continues business as usual, inclusive of these 24 ways that it's mocking regulators on a daily basis.
  • Per its own internal strategy documents, Herbalife targets those that live in extreme poverty and who may not have the education necessary to understand they're being defrauded.
  • This is more than an investment thesis, these are ethical and moral wrongdoings that need the full on attention of those smart enough to discern it.
  • From a personal standpoint, allowing this company to operate does a huge disservice to the country that I have also been a major beneficiary of my whole life.


I think by now it's obvious that the market seemed to shrug off Mr. Ackman's Manhattan presentation on Herbalife's (NYSE:HLF) Nutrition Clubs given earlier this week. I continue to contend that the information delivered in the presentation was rock-solid evidence of a massive business model flaw that's hiding under the Nutrition Clubs that are producing as much as 40% of the company's revenue.


In other words, Mr. Ackman's claims are extremely material to the company, its investors, and regulators. Simply put, if Mr. Ackman is proven right and Nutrition Clubs have to be shut down or modified in the way they operate, it's going to cripple Herbalife's growth – quickly.


As I read this, it reminded me of one part of Ackman’s presentation (posted here:www.herbalifepyramidscheme.com/webcast) that I wasn’t quite satisfied with in which he addressed one of the most common arguments made by Herbalife and its supporters: if the company is such a fraud, how come it's gone on for so long and gotten to be so big without it being shut down? Ackman’s answer, the “Big Lie” phenomenon, is incomplete I think. In my mind, there are four answers (in descending order of importance):


1) The fact that Quoth the Raven came up with 24 (!) items to highlight underscores how complex Herbalife is. Even after more than two years of focused effort by untold numbers of people and the expenditure of $50 million, Ackman and his team are still coming up with new information and insights. This complexity makes it really hard for investors and regulators to get their heads around what’s going on – and, as we saw on Tuesday, really hard for Ackman (or, in fairness, anyone else) to make a simple, clear, succinct case against the company. There’s always a “But wait, what about this…” argument and/or data point the company or its supporters make.


2) Even after one has done the exhaustive fact finding and analysis to understand all of the bad things Herbalife is doing, the laws and regulations governing this industry are unclear. There are few bright lines and most multi-level marketers (MLMs) are clever enough to operate in the vast gray areas. The devil is in the details to determine if something is a legitimate MLM (e.g., Pampered Chef, which is owned by Berkshire Hathaway) or an illegal one (e.g.,BurnLounge).


Even when people agree on the facts, there can be big differences of opinion as to whether Herbalife is legal – for example, a prominent bull publicly called HLF “scumbags”, but still being very long the stock. Because of the ambiguity in the laws and regulations, countless MLMs (mostly private companies) are doing sleazy things – and only the most extreme violators are being shut down.


Incidentally, I think China has it right: just ban all MLMs (in the sense that it would be illegal to pay people for building a downline; I have no problem with a company recruiting people to sell its products to their family and friends and making a commission on it (like Pampered Chef) – it's anything related to the “business opportunity” where most of the abuses occur). Sure, that would hurt some legitimate businesses, but I think the whole sector is so poisoned by bad actors that drastic action is necessary.


3) As much as I don’t like to admit it, there are elements of Herbalife’s business that are legitimate – there is a veneer of legitimacy, however thin – that makes it a tough nut to crack (as Ackman and other shorts like me are learning the hard way). Ackman claims that Herbalife is exactly like BurnLounge, but I don’t think it is. While they are very similar, it’s not the same open-and-shut case. Herbalife has some sales outside of the network – just not very much. It has some profitable, happy distributors – just not very many.


On the spectrum of MLMs, with Pampered Chef at one end and BurnLounge on the other, I’d say Herbalife is 80-90% of the way toward the latter – but not 100%, which makes the company that much harder to bring down. As Charlie Munger once said, “If you mix raisins and turds, they're still turds.” Herbalife has enough raisins floating around to convince a lot of people to ignore the turds – especially if it’s in their self interest to do so (e.g., Herbalife is a good client of Wall Street so analysts aren’t going to say a critical word; it pays prominent people a lot of money to endorse it; it spends tens of millions of dollars annually on public relations and lobbyists, etc.).


Ackman and his team have done yeoman’s work collecting extraordinary amounts of information and using it to make a compelling argument that Herbalife, at its core, is a predatory, illegal business – but this is a judgment call that investors and regulators (and, I suspect, eventually, courts) have to make.


4) Lastly, Michael Johnson and his team at Herbalife are really clever. There’s a reason this company has become the largest and most profitable MLM (and it’s not because the powder it’s selling has magical properties, contrary to widespread claims by many Herbalife boosters). I think Ackman was right when he said on Tuesday that Johnson will go into the fraudster Hall of Fame alongside Bernie Madoff. The parallels are striking: both of them operate/operated in loosely regulated industries with lots of gray areas; both were charismatic, smooth, polished – and exceptional liars; both were very clever in building and maintaining a veneer of legitimacy; both cleverly parried the occasional inquiry from regulators and the media; and both attracted the attention of dogged whistleblowers.


The only question now is whether Ackman will prove to be more successful than Harry Markopolos in catalyzing regulators to take action. I’m betting that the answer is yes for two reasons: a) Ackman has the deep pockets to match the company’s; and b) I’ve known Ackman for nearly 30 years and I’ve never encountered anyone who’s more driven and persistent when he’s convinced he’s right.

Comments (13)

  • tellthetruth

    why isn’t valuewalk in the hall of shame for your clear intention to be Ackman’s waterboy

    no one should believe anything from valuewalk as it is valueless, we see through your clearly biased reporting

    July 27, 2014 at 10:53 am
  • Brian

    Honestly, this whole article is baloney. Herbalife is a great company, far from a fraud or scam. People who claim to have “lost” thousands of dollars, when it only costs $57 to start an international company, are simply people who fail to take personal responsibility for their own acts and their own spending decisions (once again, it only costs $57 to get in – the rest of any money spent 100% their own choosing, NOT HLF’s). Is there any wonder that these people come from lower socioeconomic classes?

    Keep betting against the company and losing money, b/c the stock will only get higher and higher.

    July 27, 2014 at 4:45 pm
    • tex2

      You need to educate yourself before making erroneous comments.

      July 27, 2014 at 11:49 pm
      • Brian

        I am quite educated, both formal and self-education. Been educating myself on business structures, and the working of HLF for 3 years now. Perhaps you need to really get unbiased facts through personal experience, rather than 3rd-party internet articles?

        November 19, 2014 at 10:38 pm
        • tex2

          Perhaps you need to click on my name, which will lead you to my website, where you will find more facts and insight about MLM scams based on extensive experience and corroborating sources than any other website on the planet.

          November 20, 2014 at 12:40 pm
          • Brian

            If I cared, as in if I had any doubt that Herbalife is a legitimate company and is positively impacting more lives than your site ever would, then I would absolutely head your advice. However, the fact is that you are wasting your time.

            December 9, 2014 at 3:49 pm
          • tex2

            My site probably hasn’t positively impacted as many people as HLF has negatively impacted, but I’m catching up. I think you’ve visited my site, you just don’t want to admit it.

            December 9, 2014 at 5:04 pm
  • TerriK

    Ackman wants Herbalife to close because it’s a nutrition company. A direct conflict of interest to Valeant pharmaceuticals which he wants to take over Allergan. Pharmaceuticals hate nutrition companies. People build their immunity with vitamins and don’t need drugs. Losing weight with HLF will eliminate the need for an expensive weight loss drug. Ackman may want Valeant to take over HLF as well and the shake would then be prescribed by Doctors. More $$$ in Ackmans pocket.. Why the news reporters aren’t picking up on this is beyond me.

    July 27, 2014 at 7:56 pm
    • tex2

      No, that is NOT why Ackman want to shut down HLF. It is a scam, and that’s why he wants it shut down.

      July 27, 2014 at 11:49 pm
  • tex2


    When everything is boiled down to the fundamental issues, there are only 2, perhaps even 1.

    The first is the tool scams, which Herbalife has supposedly ended. This assumes HLF actually enforces the rules, and it is unclear whether they have ended them only in the U.S. or worldwide. However, the previous 30+ years of tool scams should not be dismissed, just like a 30 year bank robber, when caught, and promises to never rob another bank, should not be let go without punishment.

    Unfortunately, the tool profits were not even mentioned in the 1979 Amway case. I don’t know if this was because the FTC was not aware of them or considered them as not being a part of what Amway could be held responsible for, as the tool profits go to the upper level distributors, not Amway. However, more recently the UK and India have clamped down on tool profits, with no tool profits and very limited tool profits allowed, respectively.

    The second, whether there is more than little to no retail sales to external customers. I don’t have an issue with the Nutrition Clubs (NCs) that offer workouts and other social benefits, but I believe most of the NCs have the forced consumption of 100 “practice” shakes to be “qualified” to make them. The FTC and SEC clearly state the “primary” source of profit should be from these retail sales, which implies greater than 50%.

    However, so far the FTC has only pursued court cases that are obviously extremely illegal; companies with little to no retail sales, less than 5%. Therefore, the 50% concept has never been confirmed by the courts. The 1979 Amway case occurred prior to the above FTC/SEC positions, and the FTC erroneously didn’t challenge Amway’s statement that they enforced their retail rules. However, the courts are clear that significant retail sales must occur in order to not be an illegal pyramid, and the 10 customer/month rule was cited by the court in 1979 as a major element in letting Amway stay in business.

    I was specifically taught, along with MANY others, how to manipulate the computer to show self consumed items as retailed items. Other tactics being used include shipping products to a nearby relative/friend, including using their credit card, then picking up the products, personal check in hand, to pay for them.

    Here’s one of the tactics HLF distributors use – do a search for “receipt” seekingalpha.com/article/2345835-will-herbalife-earnings-be-the-final-nail-in-the-coffin-for-short-sellers and you will find these comments, “Jasonm, I work with two former HLF Senior VPs and they have said exactly what you just wrote. In their opinion most retail receipts were date changed photocopies that distributors submitted every month. No audits were conducted by the company and, in their opinion, most of the receipts were for fictitious transactions.”

    Assuming Bill doesn’t already have this information, these people should be contacted and investigated, to see if this is the exception or the rule. From my Amway experience, I suspect it is quite common.

    If total profits, from the products and tools are included, a “unified theory” is reasonable. That is, total product and tool profits must consist of over 50% coming from retail sales to non-distributors. With Herbalife’s zero tool profit rule, this means 50% of profit must come from external customers, which is exactly the FTC/SEC stance.

    July 27, 2014 at 11:47 pm
  • Comte d'herblay

    Amazon makes no money at all, and yet sells for over 320.00. I guess HLF and Amazon are in that lofty, highly desirable pantheon of the gods, TBTF.

    July 28, 2014 at 6:05 pm
    • tex2

      That’s not the point. Amazon doesn’t run an illegal pyramid or RICO fraud.

      November 20, 2014 at 12:36 pm


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