Bill Ackman Took a $1 Billion Short Position on Herbalife in 2012
Unite Here Local 54 has asked the New Jersey Attorney General to investigate Herbalife Ltd. The casino workers union says it believes the nutrition supplements company is positioned to prey on unemployed casinos workers.
The Atlantic City casino workers union is one of a growing number of organizations which have called for various officials to investigate Herbalife. These groups contend that Herbalife Ltd, which ostensibly is a nutrition supplement company, is a pyramid scheme.
Bob McDevitt Writes a Letter
Unite Here Local 54 President Bob McDevitt to the Acting Attorney General of New Jersey, John Hoffman, expressing his concerns. McDevitt said in his letter to Hoffman, “We are…concerned about the potential for Herbalife to prey on unemployed or desperate casino employees in the Atlantic City area in the wake of the economic downturn.”
Herbalife has denied the claims, though its spokesman declined to comment on the contents of Bob McDevitt’s letter. A spokesman for John Hoffman also declined comment. After news of the letter broke, shares of Herbalife were down 0.8 percent to $46.32 in afternoon trading.
William Ackman’s Bet
The company came under scrutiny in 2012, when William Ackman accused Herbalife of being a fraud. Mr. Ackman, who is a billionaire investor, placed a $1 billion bet with anyone willing to take up the offer that Herbalife Ltd would come under regulatory scrutiny.
Not everyone agreed with William Acker. Several other billionaire investors, including Carl Icahn, bought shares in the company. Icahn, who owns the Trump Taj Mahal and the Tropicana casinos in Atlantic City, is the biggest investor in the company.
Federal Investigations of Herbalife
Meanwhile, numerous federal and state agencies have begun to investigate Herbalife. The governmental bodies investigating Herbalife include The U.S. Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC), Department of Justice, the Federal Bureau of Investigation (FBI), and the Attorney General of New York.
About Unite Here Local 54
Unite Here Local 54 is a workers union which represents about 10,000 Atlantic City casino employees. These workers include housekeepers, janitors, waitresses, and cooks at the casino-resorts.
Last year, 4 Atlantic City casinos closed their doors, putting 3,000 members of Unite Here Local 54 out of work. Bob McDevitt and the leaders of Unite Here believe those workers could become targets of scam artists. The question is whether Herbalife is a legitimate business or whether it is a scam.
What Is a Pyramid Scheme?
A pyramid scheme is a profit-making scheme which only sustains itself so long as new members can be recruited. Pyramid schemes are similar to Ponzi schemes, with the difference being that a Ponzi scheme is a fraudulent investment management service, while a pyramid scheme is presented either as an investment opportunity or as chance to sell a marketable product.
When a person joins a pyramid scheme, they supposedly buy the right to either recruit other people into the investment plan or the right to sell a particular product. The person must pay the individual who recruited them a certain commission. That individual must be the person who recruited them, so the money flows up in a pyramidal fashion. The originator of the scheme therefore makes a lot of money, because everyone in the scheme is ultimately paying them a small fee.
The problem with the pyramid scheme is it is only self-sustaining as long as more people are being recruited. If a critical mass is reached or if people ever lose confidence in the scheme, then it falls apart overnight. Under US law, only the originator of a pyramid scheme is committing a crime, as least so long as no one along the structure knows they are involved in such a scheme.
Herbalife Scheme?
Those who allege Herbalife Ltd is a pyramid scheme believe the company is not truthful about the get-rich-quick scheme of nutritional supplements. Instead, they point to the structure of recruitment, which they say is not up-front about how little someone can make selling the products. Herbalife says it is transparent about the profits (or lack thereof) when they talk to recruits.
Of course, the problem goes beyond the 3,000 Unite Here Local 54 workers who were put out of work last year in Atlantic City. In all, the city lost 8,000 casino employees and 9,000 workers in all. In a city with 40,000 people, including the 23% who are children under-18 and the 14% who are seniors over-65, that represents a huge segment of the pool of workers. With local unemployment at dangerous levels for the city government’s health and the community’s health, a pyramid scheme could target a wide section of the Atlantic City population.
