A year ago, activist investor Bill Ackman rocked Wall Street with a $1-billion bet that shares of Herbalife Ltd., the Los Angeles seller of weight-loss and nutrition products, would slide to zero.
Herbalife was a "pyramid scheme," bound to be undone by regulators and destroyed, he told the Los Angeles Times and other media outlets Dec. 19.
Herbalife shares plummeted 42% in the next five days, hitting a midday low of $24.24 on Christmas Eve. At the time, it seemed that 2013 would be difficult for Herbalife.
The company certainly faced adversity this year, but not its stock.
Herbalife shares surged 130% this year as the company deflected Ackman's allegations with growing profits and a key legal victory. This month, an appeals court in Belgium reversed a lower court finding — often cited by Ackman — that Herbalife was a pyramid scheme.
"Herbalife's 2013 story is one of resilience, validation and continued success," Herbalife President Des Walsh said Tuesday in an interview with The Times.
"For 12 months, we have been the subject of an unrelenting torrent of misinformation and misrepresentations about our company and our business model," he said. "Now ... it is good to see that every one of the false statements made about Herbalife has been thoroughly discredited."
The debate centers on how the 33-year-old company compensates its team of independent sales people.
Ackman contended that the salespeople made more money recruiting new sales agents than they did selling products, a key component in a pyramid scheme.
Herbalife maintained that its salespeople receive compensation for their own sales and a percentage of sales made by those they bring into the business, an incentive for mentoring them.
Several high-profile investors sided with Herbalife, including billionaire investor Carl Icahn. He bought a 15% stake in Herbalife, had two of his representatives added to the company's board and rode its stock to gains estimated at $500 million.
Ackman, meanwhile, has lost about $500 million on his Herbalife short, according to research by Barclays Capital Inc. financial analyst Meredith Adler.
Ackman recently disclosed that he had reduced his short position 40%, but he is not going away. He has pressed regulators to intervene and said he believes they ultimately will.
"The few Herbalife distributors that make money earn the vast majority of their profits from recruiting. Herbalife is a pyramid scheme that will be shut down by regulators," Ackman's company, Pershing Square Capital Management, said this week.
Despite the performance of its stock, the year was not a smooth one for Herbalife. A former distributor filed a lawsuit against the company in federal court, echoing Ackman's allegations. And numerous Latino groups and lawmakers have called on the Federal Trade Commission and state attorneys general to investigate the company.
In April, accounting firm KPMG said it was resigning as Herbalife's auditor because a rogue partner had participated in an insider-trading scheme involving shares of Herbalife and other Southern California firms. KPMG withdrew its approval of Herbalife's financial statements for 2010, 2011 and 2012.
Without audited financial statements, Herbalife postponed plans to finance a major repurchase of its shares — a move that typically could drive up its stock price.
Even though Herbalife was not to blame for KPMG's resignation, Ackman seized on the controversy. He urged the company's new accounting firm, PricewaterhouseCoopers, to look at "accounting and disclosure issues" in the company's financial statements.
On Monday, Herbalife said PricewaterhouseCoopers had completed its re-audit and found no need for material changes. The company's stock gained more than 9% on Monday. It added 93 cents Tuesday to close at $75.76.
Tim Ramey, an analyst with D.A. Davidson & Co., said the company's financial performance this year was impressive, especially in the face of Ackman's attacks.
"I'm certain that it ate up tons of senior management time. But you won't see it from the numbers. They have really kind of firewalled it," Ramey said.
One of those asking regulators to investigate Herbalife was Brent Wilkes, national executive director of the League of United Latin American Citizens. He said the company promotes the opportunity for its independent salespeople to generate vast wealth, when most end up losing money.
Wall Street should not determine the validity of Herbalife's business model, he said.
"If there's any frustration, it has to do with everybody's fascination with the stock price," Wilkes said Tuesday.
"The fascination should be on whether ... the people that become distributors with the goal of making money are able to do so by selling the product," he said. "And if they're not, why the heck is this type of business allowed to exist?"
stuart.pfeifer@latimes.com
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