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.


*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.

Reverse Mergers: Americans Caught in Chinese Investment Scams

The China Hustle

Directed by Ted Rodstein (2018)

Film Review

This documentary exposes a recent scam which some 400 small Chinese companies used so-called “reverse mergers” to list their companies on the New York Stock Exchange (NYSE) – a move enabling them to attract American investors.

At preset, the Chinese government bans direct foreign investment in China’s businesses. However between 2006 and 2012, two enterprising US investment banks (Roth and Rodman and Renshaw) enlisted small Chinese companies to enter into “reverse mergers.” Locating legally registered US companies that had ceased operations, the two banks recruited Chinese companies to legally “merge” with the defunct companies. This, in turn, enabled the Chinese companies to register on Wall Street and sell shares to US investors.

A pattern emerged, in which Roth and Redman and Renshaw obtained high accreditation ratings from their auditor (Deloitte) and aggressively promoted the stocks. Then they sold their holdings just before they collapsed – reaping hundreds of millions in profits.

Becoming suspicious, Dan David, co-founder of the due diligence firm Geoinvesting, became suspicious and went to China to visit some of these companies. In every case, he found they were exponentially overstating the size and volume of their operations, as well as the revenue they generated.

He first took his findings to the investment bankers at Roth and Redman and Renshaw, then to the SEC (which is theoretically responsible for preventing this type of fraud) and finally to Senator Pat Toomey. The latter was part of the Senate committee investigating n the potential risk China posed to the US economy.

When it became obvious there was no other way to end the fraud being perpetrated on US investors, David began collapsing the share price the companies he investigated by short selling* their stocks.

In this way he ended 40 reverse merger scams by shutting down the companies.

Before the massive fraud came to public attention, public pensions funds lost more than $14 billion in reverse merger scams, with private investors losing $20-50 billion. Rodman and Renshaw was eventually forced into bankruptcy.


* Short selling involves the sale of an asset that the seller has borrowed in order to profit from a subsequent fall in that asset’s price. It commonly has the indirect effect of driving the share price down.