(Corrects 10th paragraph to show company says it does not pay
* More information on earnings by distributors
* Company president concedes data may not placate critics
* Hedge fund manager Bill Ackman has big short position
By Martinne Geller
NEW YORK, Feb 6 Herbalife Inc, the
embattled nutritional supplements company, is disclosing more
information about how much its U.S. distributors earned in 2012
than it did in 2011, though the details are unlikely to satisfy
critics like billionaire hedge fund manager Bill Ackman.
Specifically, Herbalife laid out on Wednesday the ranges of
gross compensation it pays to distributors at various levels,
how many distributors it had last year at each level, and what
their average gross payments were.
The shift toward greater disclosure comes in the face of an
attack by Ackman, who has a $1 billion bet against the company
and alleges that its direct-selling model is nothing more than a
"well-managed pyramid scheme". He has said he believes the
company's stock price will eventually go to zero.
The new disclosure, to be posted on Herbalife's website on
Wednesday, is more open about how much money Herbalife pays its
independent sales people, a central theme in the high-stakes
debate over the legitimacy of its business.
Herbalife President Des Walsh told Reuters that Herbalife is
not a pyramid scheme because its distributors do not get paid
anything for recruitment in and of itself. He does agree that
recruitment is a path to greater income, since distributors can
get payments related to the sales performance of distributors
In Herbalife's 2011 disclosure about distributor
compensation, it only mentioned payments for those distributors
that made it to supervisor level or higher, a group that in 2012
only accounted for 17 percent of all U.S. distributors. It also
did not say in 2011 how many people were at each level,
describing the level's size only as a percentage of an
Still, the increased disclosure is unlikely to silence
critics like Ackman, who asserts that Herbalife distributors
make 10 times as much from recruitment as they do from selling
"We believe many of those critics are guided by a profit
motive and to that extent it is likely that any information we
provide will continue to be criticized, not because of its
insufficiency or its inadequacy, but simply because it is not in
the interest of these people to accept anything that we say,"
Walsh said in an interview on Wednesday.
The disclosure, which Reuters reviewed before its posting,
also mentions a "money-back guarantee" of 90 days for its
"international business packs" and one year for return of
resaleable inventory upon leaving the business.
It also says distributors are not paid for sponsoring new
The amount of money made from selling product, versus
recruitment, is something regulators would consider in
determining if a direct-sales company is a pyramid scheme.
Officials at the U.S. Federal Trade Commission have
described pyramid schemes as arrangements where promised profits
are based on recruiting others, rather than any real sale of
goods to the public.
Herbalife is a 32-year-old company that sells products
through a network of independent distributors, some of whom set
up shops where customers go to have Herbalife diet shakes or
tea. It has denied Ackman's claims, saying it is a financially
strong and successful company.
Walsh said the company wants to give prospective Herbalife
sellers and investors more information.
He said the company is also planning to hire a vice
president of research, which will help it get a better sense of
its market. The company recently initiated a search, Walsh said,
and hopes to fill the position in a few months.
Compensation in 2012 ranged from average payments of $104
for 2,466 people at the lowest distributor level to average
payments of $724,030 for 194 people at the top.
But the payments do not include money earned on actual sales
of Herbalife products to others, or take into account expenses
incurred by the distributor, which could include product and
advertising costs, training, rent and travel costs.
As such, Herbalife cautioned that the figures are not
actually representative of the compensation a distributor will
Herbalife said in the 2012 disclosure that 88 percent of its
distributors received no payments in 2012, as 71 percent of them
did not sponsor other distributors. The remaining distributors
did sponsor other distributors, but did not earn any money since
the sponsored distributors did not have meaningful sales.
Herbalife also said that 73 percent its distributors join
the network primarily to receive wholesale prices on the
product, rather than to make money.
In addition to the more detailed data, Herbalife adopted a
cautious tone in its statement, warning potential sellers that
an Herbalife distributorship is "something like a gym
membership: results vary with the time, energy and dedication
you put into it".
"It is hard work," the statement said. "There is no shortcut
to riches, no guarantee of success."
BATTLE OF THE TITANS
Herbalife shares tumbled nearly 39 percent in the days
following the December news that Ackman's $11 billion fund
Pershing Square Capital had a short position valued at around $1
billion. It more than recovered but then fell again in January
on fears of U.S. regulatory action.
The shares closed at $35.75 on Tuesday, down about 40
percent from a year ago.
In preparation for a counter-attack, Herbalife has bought
several domain names, including "billackman.biz,"
"billackman.info," and "billackman.net." But Walsh said the
company has not yet decided what to do with them.
Aside from Ackman, the storm over Herbalife is attracting
other influential investors. Third Point's Daniel Loeb has a
stake in the company and has come out against Ackman's argument,
and Carl Icahn is reported to have a stake though he has not
publicly confirmed it.
Icahn had slammed Ackman's position and the two billionaires
later faced off on live television in a bruising verbal scrap
that included insults and expletives.
Earlier this week, Herbalife shares fell after a New York
Post report said it was the object of a law enforcement probe,
citing a disclosure by the FTC that was later described by the
agency as containing inappropriate boilerplate language.
Federal and state regulators shut down direct-sales company
Fortune Hi-Tech Marketing last month following complaints that
the company was operating a pyramid scheme.
(Reporting By Martinne Geller in New York; Editing by Tim