Herbalife touts strong compliance record on product claims despite Ackman's video attack

By Hank Schultz

- Last updated on GMT

Related tags Herbalife Stock market Stock Pyramid scheme

A screenshot of Herbalife distributors taken from Ackman's video.
A screenshot of Herbalife distributors taken from Ackman's video.
Activist investor Bill Ackman has released a new video attack that takes nutritional products network marketing giant Herbalife to task over non-compliant disease treatment claims made for the products on the part of distributors. The company responded that Ackman has cherry picked the few non-compliant statements he could find to give a skewed view of its compliance culture.

Unprecedented attack

Herbalife has been under unremitting pressure from Ackman since the investor through his investment firm Pershing Square Capital Management took a short position in the company’s stock that is value at about $1 billion in 2012. Since then Ackman has embarked on an unprecedented public campaign to discredit the company in an effort to drive down the stock price, claiming that its business model amounts to an illegal pyramid scheme. In July of this year, he produced an almost three-hour long video to make that point, an attack which the markets reacted to with a yawn, sending the price of Herbalife shares up almost 25% after the video’s release.

Yet overall Ackman has had some success in discrediting Herbalife.  The Federal Trade Commission has reportedly begun an investigation into the company’s activities.  On the stock price front the issue is less clear;  Herbalife stock was trading in the $51 to $52 dollar range at the beginning of 2012, the year in which Ackman took his huge short bet.  The stock is now trading at about $40 to $41, but hit a high of $81.81 earlier this year.

Non-compliant statements

This latest video takes a different tack and looks at what kind of statements Herbalife distributors make about the products.  This latest seven minute video samples footage from individual distributors as well as scenes shot at larger scale events that dates back to 2000 ranging up to about 2012. According to US law, dietary supplements cannot claim to prevent, diagnose or treat any illness. Non-compliant statements made by the distributors in the video include:

  • “I haven’t had an asthma attack since I’ve been taking the products.”
  • “I haven’t had a migraine in over six years.”
  • “I have no more problems with my stomach; within two days I felt like a different human.”

The video includes testimonials from users of the products who claim to have avoiding having surgery for arthritis by using Herbalife’s products, to have weaned themselves from asthma inhalers or have avoided having hysterectomies.

“Herbalife and its distributors are continuously coached to make such false representations to get consumers to buy their products and to recruit new distributors,”​ the video concludes. “These practices leave consumers with the impression that Herbalife products can replace the need for actual medication.”

Strong compliance culture

It has been a question within industry as to what kind of statements are made about the dietary supplement products sold through network marketing organizations when it comes to the private communications between distributors and customers or those they seek to recruit into the business. Through a spokesman, Herbalife responded that the company has a strong compliance culture. In early October the company hired former FTC commissioner Pamela Jones Harbour to head its compliance division.  From the company’s point of view, with millions of distributors it’s not unreasonable to assume that there are a few outliers, and Ackman had comb through almost 15 years worth of footage to find enough non-compliant statements to put together a short video.

"Herbalife has strict rules and guidelines regarding product claims and enforces them rigorously through training and extensive monitoring. Pershing Square has manipulated the truth since it began its campaign against our company to enrich its shareholders, and selectively picking out a few anecdotes does not accurately reflect the activities of the millions of members and customers who use our products on a daily basis,”​ Herbalife spokesman Julian Cacchioli told NutraIngredients-USA.

Cacchioli supplied NutraIngredients-USA with a claims guide that the company gives to distributors. The guide instructs distributors about what kind of claims are regulated and what government agencies oversee claims. It also goes through what types of claims are admissible and gives guidance about how to share personal experience with the products so as not to present a non-compliant testimonial.  

The stock market appears to have discounted Ackman’s latest attack.  Shares of Herbalife were up slightly in early trading.  But with the huge amount of money at stake, it’s likely that this won’t be his last attack on the company.

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