Pershing Square Capital Management Seeks Meeting with New Herbalife Compliance Chief, Senior Vice President Pamela Jones Harbour

Nineteen Page Letter Outlines Significant Compliance Deficiencies and Details Inherent Conflict Between Protecting Distributors Vs. Company Profits

NEW YORK--()--Pershing Square Capital Management today invited Pamela Jones Harbour, newly appointed Senior Vice President of Global Member Compliance & Privacy, at Herbalife to meet face-to-face to discuss the significant compliance challenges that confront Herbalife.

“Viewed against the backdrop of Company’s long history of lax or nonexistent compliance programs, the arrival of someone with an enforcement and consumer protection background is long overdue”

“Based on our extensive investigation over the past three years, we believe Herbalife operates the largest and best-managed pyramid scheme in the world,” writes Pershing Square Capital Management Senior Counsel David Klafter. “Your job will be an enormous undertaking, especially given the lax attitude toward compliance that has existed at Herbalife in the past. You may find yourself at the fulcrum of choosing between protecting consumers or protecting the Company. Based upon our research, we do not believe you can do both. We are ready to meet anytime, anywhere.” (pages 1-2, 5)

According to Herbalife, Ms. Harbour’s new role will be to lead a global compliance team of nearly four million distributors across 91 markets and to “develop and enhance policies and infrastructure that ensure effective education, training and mentoring programs for the nearly four million independent Herbalife members worldwide, underpinned by robust and consistent monitoring and enforcement procedures.”

Herbalife’s compliance efforts to date have been virtually non-existent. Enforcement of rules purportedly designed to encourage retail sales and discourage inventory-loading is essentially non-existent. Herbalife also has repeatedly refused to collect its distributors’ retail receipts, which distributors are contractually required to create, maintain and provide to the Company upon request, even after Pershing Square offered to pay the cost of doing so. Herbalife has made only the weakest of excuses for its failure to track and report retail sales.

“Viewed against the backdrop of Company’s long history of lax or nonexistent compliance programs, the arrival of someone with an enforcement and consumer protection background is long overdue,” remarked Klafter. (page 11)

Because of the critical importance of independence for a compliance position and the undue influence that senior distributors and senior management of Herbalife have exerted over compliance efforts in the past, the invitation requests that Ms. Harbour come without other executives of the Company.

The complete letter can be found here.

Compliance Priorities

The letter outlines a number of ways in which a new compliance chief could curtail some of the most harmful practices that are prevalent throughout Herbalife.

“In practice, the Herbalife compensation system incentivizes distributors to focus their efforts on recruiting new distributors into the scheme rather than selling Herbalife products to genuine retail customers outside the distribution network. Only a radical redesign of Herbalife’s compensation system could remedy serious and ongoing violations of consumer protection laws and securities laws,” added Klafter. (page 11)

The following are seven priority areas in need of immediate investigation and resolution:

1. Nutrition Club “Training” Programs

2. Herbalife’s Compensation Statements

3. Deceptive Income Claims

4. Sales of Recruiting Materials

5. Lead Generation

6. Product Claims

7. Rules Purportedly Designed to Incentivize Retail Sales

Recent Weak Earnings Underscore Long-Term Problems & Urgent Need for Independent Oversight

In the wake of the Q3 report, “Herbalife-friendly analysts are tying together the Company’s revised business practices with its recent financial set-backs. Herbalife recent changes, however, are largely window-dressing – or worse, as they allow Herbalife and its top distributors to keep misleading consumers while claiming to clean up their practices.

“Herbalife has been immodestly praising itself for having the ‘Gold Standard’ of consumer protection, an accolade which we think can only be awarded consumers or regulators. Many of the Company’s recent changes, however, actually create greater opportunities to mislead recruits.

“Even if Herbalife wanted to clean up its improper practices, Herbalife faces an inherent conflict with its top distributors who continue to profit massively from recruiting, not retailing. In order to make substantive changes to the marketing plan, Herbalife needs a vote of the distributors (as evidenced by the July 2014 vote that management described on its recent conference call). Top distributors’ self-interest dictates that they would want to continue their most aggressive recruitment methods without impediment. The compliance department will have to navigate these issues, as even Herbalife does not fully control its own rules.

“Given the clear tension between compliance and recruitment, there may be pressure on you, as Chief of member compliance, to soften compliance requirements in order to accommodate continued growth. You will be in the spotlight.

“To create a serious compliance effort at Herbalife, if you were permitted to do so and supported in that effort, will require enormous resources and resolve. We look forward to hearing from you to arrange a meeting to explain these issues in greater detail,” concluded Klafter. (pages 4-5, 19)

About Pershing Square Capital Management, L.P.

Pershing Square Capital Management, L.P. ("Pershing Square"), based in New York City, is a SEC-registered investment advisor to private investment funds. Pershing Square manages funds that are in the business of trading — buying and selling — securities and other financial instruments. Funds managed by Pershing Square are short the stock of Herbalife Ltd and own put options on the Company. Pershing Square may increase, decrease, dispose of, or change the form of its investment in Herbalife for any or no reason, at any time. Pershing Square may change its views about or its investment positions in Herbalife at any time, for any reason or no reason. Pershing Square may buy, sell, cover or otherwise change the form or substance of its Herbalife investment. Pershing Square disclaims any obligation to notify the market of any such changes. Please see the full Disclaimer appearing on website


Farrell Sklerov, 212-843-8289

Release Summary

Pershing Square Capital Management Seeks Meeting with New Herbalife Compliance Chief, Senior Vice President Pamela Jones Harbour