Herbalife (HLF) Protects its CEO from Ackman's Accusations

Herbalife Ltd. (HLF has reportedly spent around $700,000 in 2015 to protect its Chief Executive Officer (‘CEO') Michael Johnson from threats and accusations by activist investor Bill Ackman and his Pershing Square Capital Management LP. Ackman accuses the company of being an illegal pyramid scheme business model.

As per Bloomberg, in 2015, the company spent around $694,000 on security expenses, including home services and an additional $33,000 on other top executives.

We note that the company is under pressure from billionaire Ackman since 2012 when he made a $1 billion bet against the company, questioning its business practices. He claimed that the company is running a pyramid scheme, which involves making money by way of recruiting more salespeople rather than selling products. Such models are illegal because they eventually collapse once there are no more people to recruit.

Herbalife, on its part, has been denying the charges from the very beginning. The company clarified that it operates like a multi-level marketing company similar to Nu Skin Enterprises Inc. NUS, USANA Health Sciences Inc. USNA and Avon Products Inc. AVP.

However, Ackman's back-to-back allegations prompted a civil investigative demand in 2014 from the FTC related to the company's marketing practices. Herbalife is reportedly in talks with the U.S. Federal Trade Commission (‘FTC') about resolving a probe into whether the company is a pyramid scheme.

Very recently, the dietary supplement maker announced in a Securities and Exchange Commission ("SEC") filing that it is currently under federal investigation for overstating its worldwide membership growth in 2015. The Los Angeles-based company cited database error as the reason for the misrepresentation. Though these errors will not impact the company's financial statements, many law firms have issued lawsuits against the company. Such allegations have severely impacted its share price and investors' confidence.

Herbalife carries a Zacks Rank #3 (Hold).

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