The Billionaire Who Nearly Brought Herbalife Down

Betting on Zero

Ted Braun (2016)

Film Review

This is the very sad story about efforts by billionaire hedge fund manager Bill Ackman to end Herbalife’s predatory pyramid scheme by 1) short selling* their stock and 2) pressuring regulators to end their deliberate exploitation of low income and minority communities.

Bloomberg News reporter Christine Richard’s 2011 book Confidence Game describes how Ackman helped to bring down MBIA (Municipal Bond Insurance Association) by purchasing credit default swaps against them. In 2012, she alerted Ackman to a similar scam perpetuated by the multibillion dollar international health supplement company Herbalife. Ackman’s response was to short sell Herbalife’s stock (in an endeavor to drive their stock price down) and to engage in a multimillion dollar investigation and public information campaign to pressure federal and state regulators to take regulatory action.

Herbalife was founded in the 1980s by Mark Hughes. After Hughes died in 2000 from an accidental overdose, former Disney CEO Mark O Johnson took over as Herbalife CEO. Just like other pyramid schemes, Herbalife derives profit, not from selling health products, but from continuously recruiting new distributors – and pressuring them to recruit other distributors.

According to the investigation Ackman commissioned, only 17% of these distributors could make a living selling Herbalife. Forty percent earned less than $1,000 and 40% were left with a garage full of Herbalife products which had passed their expiry date. One reason Herbalife is so difficult to sell is that it’s three to four times more expensive than Slim Fast, the closest equivalent available in pharmacies and supermarkets.

In the US, Herbalife deliberately targets illegal migrants in the Hispanic community, who are reported to immigration if they complain about the way the company treats them. The film profiles a grassroots group in Los Angeles that organized a series of protests highlighting the fraud Herbalife had perpetuated against them. In 2014, they joined a class action suit of 1.5 million former Herbalife distributors. Despite losing an average of $10,000 apiece, the California judge approved a settlement awarding them $10 each.

In 2016 the FTC ruled that Herbalife was indeed a pyramid scheme. The penalty imposed was essentially a slap on the wrist – a $200 million fine and an order to restructure their corporation.**

Ackman’s short selling scheme was defeated the same year when rival billionaire Carl Icahn*** invested heavily in Herbalife shares to short up their stock price. Ackman would exit his short position in 2018.

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*Short selling means investing in way to derive income if the stock price falls. When a large number of investors (or a large hedge fund) short sells a single stock, it can force its price to collapse.

**Herbalife was required to reduce shipping costs they charged distributors, to increase their acceptance of unsold product, to crack down on unofficial distributors, and to engage an independent monitor.

***In 2017, Trump appointed Icahn as his key regulatory advisor.

Public library patrons can view the full film free on Kanopy.