Questions for Herbalife1

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February 7, 2013
Des Walsh and Herbalife (the “Company”) executives have repeatedly committed to having a fact-based conversation and total transparency about Herbalife‟s business. Specifically, Des Walsh stated during a recent interview:
“Our commitment is to total transparency . . . we benefit from people understanding our company, our products, our business model, and so we will answer any and all questions in that area.”
Given Mr. Walsh‟s comments, Pershing Square would welcome responses to the following questions:
Pyramid Scheme Questions:
Based on Herbalife‟s reading of the 2004 FTC Staff Advisory Opinion, the Company appears to conclude that “the primary motivation for purchasing should be resale and / or consumption.” This conclusion suggests that Herbalife believes that internal consumption is otherwise indistinguishable from independent third-party sales in the FTC‟s determination of a pyramid scheme. As recently as November 2012, however, the FTC published the following on its website: “One sign of a pyramid scheme is if distributors sell more product to other distributors than to the public – or if they make more money from recruiting than they do from selling.”i

o In light of the FTC‟s November 2012 statement, why does the Company continue to look to the FTC‟s 2004 Opinion for guidance as to whether or not internal consumption is a red flag for a pyramid scheme?
Rather than respond to Pershing Square‟s argument that Herbalife distributors primarily obtain their monetary benefits from recruiting rather than retailing, the Company‟s presentation on January 10, 2013 seemed to focus on establishing that retail customers do, in fact, exist for Herbalife product. However, in Webster v. Omnitrition, 79 F.3d 776, 782 (9th Cir. 1996), the Ninth Circuit clarified that “Omnitrition cannot save itself simply by pointing to the fact that it makes some retail sales.”
o What proof can the Company provide that bona fide retail sales (defined as sales to non- distributors) at sufficient profits occur such that Herbalife‟s distributors obtain their monetary
1 This document is based upon a presentation entitled “Who wants to be a Millionaire?,” made by Pershing Square Capital Management, L.P. (“Pershing Square”) on December 20, 2012, to which Herbalife Ltd. (“Herbalife”) responded, among other things, with its own presentation at an Investor and Analyst Day on January 10, 2013. Please see full disclaimer at the end of the document.

benefits primarily from sales to independent, third-party retail customers rather than from recruiting rewards?
In Herbalife v. Ford, No. 07-2529 (C.D. Cal.), Judge Feess stated that “Herbalife‟s entire business model appears to incentivize primarily the payment of compensation that is „facially unrelated to the sale of the product to the ultimate users because it is paid based on the suggested retail price of the amount ordered from [Herbalife], rather than based on actual sales to consumers.” (Dkt. # 374 at 16 (quoting Omnitrition, 79 F.3d at 782).) The Company‟s January 10, 2013 investor day presentation argued that “all compensation is directly linked to product sales.”
o What does the Company mean by “directly linked to product sales”? By this statement, is the Company referring to the fact that commissions are determined as a percentage of the Suggested Retail Price (“SRP”) of product purchased from the Company? Does the Company believe that a bona fide retail sale is required (that is, a sale to someone who is not part of the marketing scheme) in order for commissions to be related to the sale of products to ultimate consumers? If not, why not?
In Herbalife v. Ford., Judge Feess looked to “federal law as articulated in Koscot and adopted in this Circuit in Omnitrition in a case that seems to me to be completely indistinguishable from the present lawsuit.” (June 1, 2009 Hr‟g Tr., Dkt. # 300, at 6.)
o Yet, Herbalife‟s 2011 10-K states that the Company believes there are “significant differences between our marketing system and that described in the Omnitrition case.” Please elaborate on these “significant differences.”
Can you point to any case law that would serve as a basis for the Company to argue that its royalty overrides are determined based on “the sale of product to ultimate users”?
According to a white paper paid for by Herbalife and written by Professor Anne T. Coughlan, a non- lawyer, marketing professor: “an illegal pyramid scheme awards payments to participants for mere recruiting.” (Anne T. Coughlan, FAQs on MLM Companies, July 2012, at 3.)
o Can you point to any case law that defines the phrase “mere recruiting”?
When a Supervisor recruits a new distributor who qualifies to become a Supervisor by purchasing
4,000 Volume Points of product in one month at a 42% discount (approximate cost: $2,600):
o Isn‟t it true that the sponsoring Supervisor receives an 8% Wholesale Commission for this purchase of product (roughly $320)?

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o Isn‟t it true that the upline Sales Leaders receive 5% Royalty Overrides (up to three active levels) and 7% Production Bonuses (roughly $880)?
o Are these payments in any way related to the actual retail price at which the product is resold, if it is resold, by the qualifying Supervisor?
California’s Permanent Injunction Against Herbalife
Herbalife‟s 2011 10K states that: “All of our officers and directors are subject to a permanent injunction issued in October 1986 pursuant to the settlement of an action instituted by the California Attorney General, the State Health Director and the Santa Cruz County District Attorney.”
The Injunction states: “The provisions of this final judgment are applicable to: (a) defendants, Herbalife, Mark Hughes, and each of them, and their respective successors in interest, whether corporate or otherwise, and (b) those officers, directors and employees of said defendants and any other entities acting under, by or on behalf of either such defendant or pursuant to their direction, who have notice of this injunction.”ii
Among other things, the Injunction restricts Herbalife from “establish[ing], maintain[ing], or operat[ing] a marketing plan in which… (2) Any compensation, however denominated (including but not limited to ‛commissions,‟ ‛overrides,‟ ‛achievement bonuses,‟ or any term of similar import), defendants pay or participants receive is based upon anything other than the retail sale of defendants‟ products.” (Id. ¶ 5(A).)
The Injunction goes on to define the term “retail sale” as follows: “The term “retail sale” as used in this Section 5 means a sale at defendants’ product(s) in any of the following situations: (1) to persons who are not part of defendant’s marketing program or distribution system; or, (2) to persons who are not buying to become part of defendants marketing program or distribution system; or, (3) to persons who, although desirous of becoming or who are a part of defendants’ marketing plan or distribution system are buying for their own personal or family use.” (Id. ¶ 5(C).)
o How can the Company‟s policy of paying Wholesale Commissions be in compliance with Section 5(A)(2) of the Injunction if Wholesale Commissions are paid whenever a Non-Sales Leader distributor orders product directly from Herbalife, and if in many cases, the purchasing Non-Sales Leaders are not strictly “buying for their own personal or family use”?
o Is it the Company‟s policy to only pay Wholesale Commissions when Non-Sales Leaders purchase product directly from the Company expressly for “personal or family use”? If so, how does the Company determine whether product purchased by Non-Sales Leaders will be

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internally consumed as opposed to being purchased for advancement in Herbalife‟s marketing plan or for resale outside of the network?
o Did Herbalife pay Wholesale Commissions to Non-Sales Leaders in 1986, the year this injunction was put into force?
Section 5(B) of the Injunction states that “defendants shall be in compliance with this Section 5, as long as a verification or documentation system they implement allows them, at any given point in time, to verify or document to plaintiffs that any and all participants who receive commissions, bonuses, overrides and/or advancement from defendants in defendants‟ marketing program, after entry of this judgment, are based on retail sales made by or through such participant(s) or others introduced directly or indirectly under participant(s).”
However, in an 8-K filed on May 2, 2012 with the SEC, the Company disclosed that “We don‟t track [sales to non-distributors] and do not believe it is relevant to the business or investors.”
o Given the Company‟s numerous public admissions that it cannot and does not track “retail sales,” how is it possible for the Company to be in compliance with Section 5(B) of the Injunction?
Under Section 3(Q) of the Injunction: “Pursuant to Business and Professions Code Sections 17203 and 17535, defendants are hereby permanently enjoined and restrained from: “Making false or misleading representations with respect to any specific goals for participants in defendants’ marketing program relating to the number of new customers or new participants a participant may obtain within a specific time period or an amount of money a participant may earn through bonuses and overrides.”
Pershing Square‟s December 20th presentation listed a number of reasons why Herbalife‟s Statement of Average Gross Compensation of US Supervisors – 2011 (the “2011 Statement of Average Gross Compensation”) was likely to mislead investors and potential distributors, including (i) the fact that 93% of Herbalife distributors (including Non-Sales Leaders) were excluded from the table, (ii) the statement referred to “Average Earnings” but was not adjusted for distributor expenses, (iii) the statement seemed to use a definition for the term “Active” that is inconsistent with other public Herbalife disclosures, (iv) the statement overstated the actual percentage of distributors who reached the rank of Supervisor and above, and (v) the statement failed to properly demonstrate the true probability of reaching the upper echelons of Herbalife‟s marketing plan.
We further note that in response to such criticisms leveled by Pershing Square and others, Herbalife issued yesterday a new and substantially revised version of its Statement of Average Gross Compensation for U.S Distributors. We believe that this new disclosure confirms the material
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inadequacy of previous Statements of Gross Compensation that were presented to new distributors when inducing them to participate in the Herbalife network, and that the release of this revised statement does not eliminate the serious problems with its predecessor. (Please note that Pershing Square will separately comment on this new Statement of Average Gross Compensation in due course.)
o Given the examples above and the recently revised disclosure, does the Company believe its historical distributor earnings disclosures were not misleading and in compliance with Section 3(Q) of the Injunction? In light of this significant disclosure modification, does the Company feel it has an obligation to refund losses of those distributors who were misled as a result of its previous materially misleading earnings disclosures?
o Pershing Square‟s presentation also pointed out that Herbalife marketing materials in Brazil suggest new distributors can reach the President‟s Team in two years. In addition, Herbalife Today magazines suggested that, when Herbalife entered Ireland, distributors could reasonably expect to reach the President‟s Team in fewer than three years. We note that nearly ten years after entering the Irish market, there were no President‟s Team members in Ireland.iii
In light of this, what is the Company‟s defense against the allegation that it proffered misleading representations to prospective Herbalife distributors as to “specific goals for participants in defendants‟ marketing program relating to the number of new participants a participant may obtain within a specific time period or an amount of money a participant may earn through bonuses and overrides”?
o On a December 16, 2008 investor day conference call, Michael Johnson made the following statement:
o Pershing Square‟s presentation explained that very few Herbalife distributors achieve levels in the Herbalife marketing plan that would allow for them to become “millionaires.” Specifically, we estimated that only one out of approximately 10,000 new distributors reach the President‟s Team (median compensation: $336,901 – before taxes and expenses).
In light of this, how can Michael Johnson‟s statement that “people become millionaires at Herbalife” be in compliance with Section 3(Q) of the Injunction?

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o Pershing Square‟s presentation analyzed 393 testimonials and earnings claims from editions of Herbalife Today magazines from 1997 through 2004. The average earnings per year from the claims implied an annual income of $178,000 per year. However, the typical “Active” U.S. Herbalife Sales Leader only earned $637 in “gross compensation” in 2011.iv
Given these figures, how can Herbalife‟s published testimonial income claims be in compliance with Section 3(Q) of the Injunction?
o Pershing Square‟s presentation provided numerous examples of senior Herbalife distributors who made exaggerated income earnings claims to prospective Herbalife recruits. For example, Doran Andry, Chairman‟s Club Member, has a video providing a “live” testimonial implying that earning “lifestyle” money as an Herbalife distributor is a reasonable expectation.
How can marketing materials like this be in compliance with Section 3(Q) of the Injunction?
The Notion that the Majority of Distributors are “Discount Customers”
After the January 10, 2013 Herbalife investor day, Michael Johnson stated that “90% of our distributors, OK, are buying our product, and let me try to clarify this, buy it for one reason and they buy it for the self-consumption.” If 90% of Herbalife distributors are discount customers who only sign up because they want to buy Herbalife product at a discount to SRP, then:

o Why is Herbalife‟s discount customer renewal rate so much lower than that of Costco or GNC (Costco: ~90%, GNC: ~70%, Herbalife: ~10% per its 2005 10K)?

o Why would anyone pay $59 for the Mini-International Business Pack (“IBP”) to become a 25% discount customer (or alternatively, $109 for a full IBP), when Herbalife products are widely available to non-distributors at discounts of 35% or more?

o If Non-Sales Leaders are discount customers who purchase product for self-consumption (at a 25% to 42% discount to SRP), why do they pay sales tax assuming the product is sold at 100% of SRP?

o Why does Herbalife refer to the majority of its Non-Sales Leaders as “small retailers” in its SEC filings if they are in fact discount customers?

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o Why are discount customers required to sign a 48,000-word Distributor Agreement in order to purchase Herbalife products?
o Why does Herbalife report “Retail Sales” in its SEC filings assuming all sales are at 100% of SRP if in fact a high percentage of product is sold to discount customers at discounts of 25% or more?
o According to the Company‟s Sales & Marketing Plan: “The Herbalife money-back guarantee does not apply to products purchased by Distributors, whether or not consumed by them, and this fact must be presented to individuals who become Distributors.”
Why are discount customers ineligible to receive Herbalife‟s Money Back Guarantee?
Why do discount customers have to resign as distributors and give up their discount 
before they can return any product to the Company?
o Herbalife independent distributor presentations claim the Company has 65 million customersv (which would imply that ~3 million of Herbalife‟s distributors have an average of more than 20 customers each).
How is this possible if such a high percentage of Herbalife distributors sign up simply to get the 25% discount?
o According to the Lieberman survey, 44% of Distributors expect to earn nothing.
Shouldn‟t this figure be 90% if, in fact, 90% of distributors are discount customers
who only buy the product for self-consumption?
o Why would an upline distributor sponsor a discount customer to join Herbalife rather than sell the product directly to the discount customer at a 25% discount, which would forego the requirements that the discount customer pay $59 (or $109) for the mini-IBP (or full-IBP) and sign a Distributor Agreement?
o In the Wedbush Securities Conference on December 9, 2009, John DeSimone stated “But the majority of the payout, you can see, more than [half] is the retail profit. Retail profit based off of 2008 figures was $1.8 billion for our distributors. The royalties, production bonus and Mark Hughes bonus was under $800 million, so less than half.”
What is the basis for Mr. DeSimone‟s belief that the majority of the distributor payout is retail profit?
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If the Company believes that 90% of distributors only sign-up to buy the product at a discount to SRP for the purpose of self-consumption (i.e., they don‟t go on to resell the product at retail and earn a “retail profit”), why does management refer to 100% of distributor allowances as “retail profit”?
In the Amended Final Judgment and Order in FTC v. BurnLounge, No. 07-3654 (C.D. Cal.), the Court defined a pyramid scheme as follows:
o “`Prohibited Marketing Scheme‟ means an illegal pyramid sales scheme (see e.g., Webster v. Omnitrition Int‟l, 79 F.3d 776, 781 (9th Cir. 1996), Ponzi scheme, chain marketing scheme, or other marketing plan or program in which participants pay money or valuable consideration in return for which they obtain the right to receive rewards for recruiting other participants into the program, and those rewards are unrelated to the sale of products or services to ultimate users. For purposes of this definition, “sale of products or services to ultimate users” does not include sales to other participants or recruits or to the participants‟ own accounts. Dkt. # 474 at 5 (emphasis added)”
How do you reconcile your attempt to define distributors as retail customers in light of the 2011 BurnLounge Court decision in California, the judicial district where Herbalife is headquartered?
Internal Consumption
How much of the Company‟s final sales to actual consumers, by percentage and dollars, is sold to people outside the distributor network, and how much is sold within the distributor network (over the last five years)?
Why have the Company and management answered this simple and straightforward question in so many different and inconsistent ways?
o Response to David Einhorn on May 1, 2012: Des Walsh: “So, we don’t have an exact percentage David because we don’t have visibility to that level of detail.”
David Einhorn: “Do you have an approximation?”
Des Walsh: “So well, again going back to our 70% rule, we believe that it‟s at 70% or potentially in excess of that.”
o In an 8-K filed On May 2, 2012, Herbalife states: “We don‟t track [sales to non-distributors] and do not believe it is relevant to the business or investors.”

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o Michael Johnson upon Pershing‟s announcement (on 12/19/12):
Kate Kelly: “Can you give us a percentage figure though Mr. Johnson as to what 
percentage of your sales are outside that distribution network.”
Johnson: “90%.”
Kate Kelly: “So the vast majority?”
Johnson: “Absolutely!”
o Michael Johnson after Herbalife‟s investor day (on 1/10/13):
“It was a misstatement. 90% of our distributors, OK, are buying our product, and let 
me just try to clarify this, buy it for one reason and they buy it for the self- 
“What we have in our company today is we have a tremendous amount of 
customers;” “I don‟t have a number for you.”
o If the Company does not track retail sales, what other empirical basis do you have to explain the above answers? Why have you provided materially different answers to the same question?
In the Company‟s January 10, 2013 investor day presentation, management references the 2004 FTC Staff Advisory Opinion and deduces from that Opinion that “the primary motivation for purchasing should be resale and / or consumption.” However, in announcing the recent case against Fortune Hi- Tech, the FTC highlighted that the key to a legitimate MLM is an emphasis on selling to “independent third parties” (FTC Midwest Director, Steve Baker, Jan. 28, 2013 Press Conference). Further, on January 28, 2013, the FTC posted on its website a consumer-education piece about pyramids and stated: “If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is mainly based on the number of people you recruit and your sales to them, it‟s a pyramid scheme.”vi
o In light of the above statements by the FTC, does the Company still believe that it can be indifferent to the amount of product sold or consumed within the network versus the amount of sales to independent third parties in the determination as to whether Herbalife is a pyramid scheme?
o Why don‟t you actually track sales to independent third parties, particularly when your competitors, like Tupperware, track this information?
Tupperware CEO comments during a 1/29/13 interview with Jim Cramer: Jim Cramer:

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“Can you define very quickly for our viewers what direct selling is and why you’re distancing yourself from some of the other companies that are– that claim to be in your industry?”
Rick Goings:
– “Over 90% of our sales are through a retail customer. Only 10% to the sales force, and they buy that because we have so many new products every year”
– “Most of the network marketers, the bulk of their products are consumption by their network”.
– “You wouldn’t believe the level of detail we have”
– “We have a report there of what happened the previous week, what the sales were, 
what the recruits were, who they were to and people that went to the party. We manage our businesses right down to the detail of it.”
On a May 2010 investor call, John DeSimone referred to “a lot of other distributor statistics that we have visibility to that you investors don‟t. So we‟ve got a dashboard that gives us statistics on every one of our distributors and it‟s close to three dozen statistics. And it‟s a lot of information. So it tells us order patterns for distributors. It gives us the statistical analysis to determine who‟s doing clubs, which are more predictable versus who‟s doing recruiting that they‟re bringing a lot of people but they‟re not sticky. And so it gives us a lot of information into visibility.”
o What are the three dozen distributor statistics that Herbalife collects that it does not share with investors? Do any of these statistics track the amount of product that is sold outside the Herbalife network? If not, why not?
“Retail Sales”
Herbalife‟s compensation to distributors, as well as its charges to distributors for shipping, handling, taxes and other charges, are calculated based on percentages of the Company’s SRP for its
products. SRPs also drive the Company‟s statement of “Retail Sales” and of distributors‟ “Retail Profits.”
o What is the actual retail price at which Herbalife products are sold to independent third- parties and distributors who consume the product? What would the Company’s “Retail Sales” be if they were based on actual retail prices, not SRP?
Rules 17-A and 18-E of your Sales and Marketing Plan, which binds all distributors, requires distributors to create records of each sale, including product sold, sale price and name and contact information for each customer.

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o In light of all the recent questions about the Company‟s sales outside the distributor network and its importance, why have you not simply requested these receipts from all of your distributors so Herbalife could generate empirical evidence which would demonstrate the amount and pricing of third-party retail sales?
Lieberman’s Finding that 92% of Herbalife Ultimate Users are Non-Distributors
According to extrapolations from the 2,000 individuals polled in the Lieberman survey, Herbalife has stated that ~5.7 million U.S. households purchased Herbalife product in the three months prior to the study. Based on the Company‟s disclosure, there were approximately 500,000 Herbalife distributors in the U.S. as of 12/31/11. Based on Michael Johnson‟s January 10, 2013 comments, 90% (i.e., 450,000) of these distributors are “discount customers” who only buy the product for self- consumption. This implies that there are only approximately 50,000 active distributors in the U.S. (i.e., distributors who are selling the product to independent third parties). This would imply that each of these 50,000 distributors have, on average, about 114 third-party independent customers for Herbalife products. Does the company have any evidence that would suggest that this is true?
Based on the figures above, approximately 450,000 of Herbalife‟s U.S. customers are distributors or discount customers, and approximately 5 million of Herbalife‟s U.S. customers are non-distributors or retail customers. This suggests ~92% of Herbalife‟s “customers” are non-distributors or non- discount customers. In a January 2013 investor presentation, Nu Skin disclosed that 10% of its U.S. customers are “retail customers” and 50% are “preferred customers” – customers who sign up to purchase Nu Skin product at a discount.
o In light of the similarities between the two companies‟ business models, how is it possible that Nu Skin has five times more discount customers than retail customers while Herbalife has 11 times more retail customers than discount customers?

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Herbalife’s Argument that Non-Distributors Account for 32% of U.S. “Direct Ship” Volume
In its January 10th presentation, Herbalife disclosed that in the U.S. in 2012, Herbalife shipped 32% of its volume to non-distributors (31% of orders). According to the Company, these shipments were comprised of 1.4 million orders directly shipped to 460,000 non-distributor unique addresses at an average order size of approximately 260 Volume Points. In 2012 YTD, the ratio of Volume Points to Retail Sales in the U.S. was 1.11 times. Assuming a 7% Surcharge and 4% shipping expense, these 260 Volume Point orders would cost $320 (at full SRP); note that non-distributors supposedly pay 100% of SRP when buying from the Company.
o Why would a non-distributor pay $320 for 260 Volume Points of product when he or she could pay $59 to become a 25% discount customer and purchase the same products for ~$300 (including the $59 IBP) and then have a 25% discount on all future purchases? Furthermore, how is it possible that these non-distributors had an average order size of $320 when they are purchasing product for their own use? This seems like a lot of Formula 1 and vitamins for one order for one customer.
o Please provide the breakdown of the 32% of sales shipped to non-distributors by orders submitted at 25% discount, 35% discount, 42% discount and 50% discount levels.
The Sales & Marketing Plan notes that “FedEx takes typically three to five working days for delivery, and it is recommended that someone be available at the “Ship To” address to accept the shipment. (You may desire to address your shipment to your neighbor, friend, relative, etc.)”
o Could distributors shipping product to alternative addresses account for the volume Herbalife claims is being purchased by non-distributor customers?
Herbalife’s Argument that 92% of Volume is from Mature Markets
In its January 10th presentation, Herbalife stated that 92% of its 2012 YTD September volume came from “Mature Markets” (i.e., markets that Herbalife entered more than 10 years ago).
o Why is this analysis based on Volume Points instead of Net Sales?
o We note that based on pricing sheets obtained from the internet, the ratio of Retail Sales ($USD) to Volume Points for Formula 1 in Malaysia was ~2.1x in 2011, but only ~0.6x in Japan.

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Why does the ratio of Net Sales to Volume Points vary significantly in certain mature markets versus certain emerging markets? In light of the disparate ratios of Net Sales to Volume Points in different markets, isn‟t it misleading to attempt to demonstrate consistent growth using Volume Points rather than net sales?
We note that in the 1990s when Herbalife disclosed Retail Sales by country, the following footnote was in the 10-K: “The Company records sales data based on the country from which distributor orders are shipped by the Company.” (emphasis added)
o Is Herbalife‟s country-specific Volume Point disclosure more a function of Herbalife‟s shipping logistics than true end-demand for the products?
o If a 25% distributor in Vietnam whose sponsoring Supervisor is based in the United States buys $100 of product directly from Herbalife, where is the revenue booked, in the United States (a mature market) or in Vietnam (an emerging market)?
o How many President‟s Team members have distributors from more than one country in their downlines?
To help conduct additional analysis on the extent of “pop and drop” by country, please provide Net Sales by country for each of the last ten years for each country in which Herbalife products are or have been offered.
We note that in recent investor presentations, the Company has highlighted its “city by city” approach to growth.
o What evidence can the Company provide to prove that the seemingly stable growth of mature markets is not being driven by the “pops” of rolling out Nutrition Clubs in newly entered cities masking the “drops” of previously entered, saturated cities?
Herbalife’s Argument that “the Vast Majority of our Sales Take Place at a Full Retail Price”
In the Q&A section of Herbalife‟s investor presentation, management was asked what percentage of SRP Herbalife product is sold to retail customers. Management responded that “the vast majority of our sales take place at a full retail price,” but provided no evidence for this assertion.
o Given (i) that the Company has stated it does not track the actual retail price at which products are resold to third-party retail customers and (ii) the evidence from Pershing Square‟s presentation that Herbalife products routinely sell on independent distributor

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websites and eBay for discounts of 35%+ from SRP, how can the Company state that its products are resold at “full retail price”? What is the empirical basis for this assertion?
In response to Pershing Square‟s evidence that Herbalife products are sold on eBay at a discount of more than 35%, you stated that eBay is not a “proxy for market prices” because “most people . . . shop at eBay to find branded product at a discount price.”
o How do you respond to the fact that GNC‟s Lean Shake sells on eBay for a premium to its retail price of approximately 2%? Do you deny that, in addition to eBay, Herbalife products are sold on distributor websites at discounts of 35% or more?
Management went on to state that “And arguably, in Nutrition Clubs, because it‟s a method of going to market where you‟ve got servings, you‟ve actually got, got sales taking place where the cumulation may be actually be even higher than suggested retail, even if by serving basis.”
o However, Rule 5-E Walk-In Traffic of Herbalife‟s Nutrition Club procedures states: “Nutrition clubs are not retail locations and operators may not state or imply that they are. It is not permissible to sell product servings to anyone. Products servings are only available to registered Nutrition Club members as part of their daily, weekly or monthly membership fee.”
o Given that products are not allowed to be sold at retail at Nutrition Clubs per Herbalife‟s own rules and policies, why does the Company assert that “sales [take] place where the cumulation may be actually even higher than suggested retail [price]”?
Lieberman’s Finding that Only 4% of Herbalife Distributors Join to Earn “Full-time Income”
If, according to the Lieberman survey, only 4% of Herbalife distributors join with expectations of earning “full-time income,” then:
o Why do so many Herbalife Independent Distributor presentations emphasize “lifestyle money”?
o Why is the average Herbalife monthly income reflected in Herbalife Today magazine testimonials equal to $178,000 per year?
o Why was Herbalife‟s 2011 Statement of Average Gross Compensation for prospective distributors stratified so that three of the five boxes (60% of the table) represented distributor earnings disclosure for “full-time earners” who only represent less than 4% of Herbalife‟s Total Leaders?

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o Based on a similar survey on its website, why did the Direct Selling Association (“DSA”) find that 35% of respondents (out of 26,267) joined direct selling organizations “to earn full- time income”?

Formula 1: Price “Per Serving”
Herbalife criticized Pershing Square for comparing the price of Formula 1 to comparable products on a “Per 200 Calorie Serving” basis, arguing that “Per Serving” was the more relevant denominator.
We note that Formula 1‟s serving size is substantially smaller than that of competitive products.
o Why is a serving of Formula 1 only 0.88oz while the average serving of Slim-Fast, Ensure,
Lean Shake, Genisoy and Total Soy is 1.42oz?
When both are mixed with water, why is a serving of Formula 1 only 90 calories while a serving of GNC‟s Lean Shake is 180 calories?

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We note that, while the term “meal replacement” is not defined in all markets, European Directive 96/8/EC for “meal replacement for weight control” stipulates that “energy provided by a meal replacement shall not be less than 840 kj (200kcal)”vii(emphasis added). Additionally, Amy Greene (Herbalife Vice President) has discussed the “steal one meal a day from fast food” concept with a “200-calorie meal replacement shake.”
o Given that Herbalife markets Formula 1 as a “meal replacement” and Herbalife marketing materials recommend Formula 1 be served mixed with water at Nutrition Clubs, why is a single serving of Formula 1 only 90 calories when mixed with water? How could a 90-calorie shake be a “meal”? Why is using a “per 200 calorie serving” not the correct way to compare the cost of Formula 1 with comparable products?
Herbalife’s $44mm of Spend in “Science and Technical” Activities
In response to Pershing Square‟s observation that Herbalife‟s GAAP R&D spending is “not material,” the Company noted in its January 10, 2013 investor day presentation that it has spent $44mm in “science and technical” activities in 2012.
We note that Herbalife‟s $44mm includes money spent on “technical operations,” “quality assurance,” “quality control,” “product safety,” “regulatory compliance,” “nutrition affairs, “regulatory,” “product licensing,” and “strategic sourcing.”
o What do these items have to do with research and development? Can you please provide a breakdown of costs in these nine categories and explain what these activities include?
Does Herbalife‟s $44mm include fees that Herbalife pays Dr. Ignarro and other doctors for speaking at Herbalife distributor events (such as Extravaganzas) and other services?
o Why has Herbalife paid Dr. Ignarro, a Nobel laureate, more than $15 million? What services does he perform for the Company on an annual basis that justify these payments?
Does Herbalife‟s $44mm include “product licensing” fees Herbalife pays to license patents to manufacture and distribute Niteworks?
What has Herbalife‟s GAAP R&D been for the past 5 years?
Recruiting Rewards in SG&A

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In response to Pershing Square‟s estimate that Herbalife includes substantial recruiting rewards in SG&A, the Company responded in its January 10, 2013 investor day presentation that only $36 million of SG&A expenditures in 2011 were “promotion-related.”
o Please define what is included as “promotion-related” per the Company $36mm disclosure.
In Herbalife‟s 2010 10-K, the Company disclosed that “Distributor reward and recognition is a significant factor in motivating our distributors. In 2010, 2009, and 2008 we invested approximately $101.6 million, $84.1 million, and $89.6 million, respectively, in regional and worldwide events and promotions to motivate our distributors to achieve and exceed both sales and recruiting goals.”
o Why did Herbalife stop disclosing this metric in its 2011 10-K?
o Did this spending really decrease from $101.6mm in 2010 to $36mm in 2011?
o Aren‟t these costs promotion related? If so, why did you not include them in your answer to our question?
We note that, according to the 10-K, Herbalife paid “compensation to China sales employees and service fees to China independent service providers totaling $96.8 million” in 2011. Additionally, in a 1/3/13 research report, Wedbush stated: “Again, we are in agreement with the Ackman analysis that some adjustments should be made to the commissions tally from SG&A expense. For example, we would likely classify approximately $63 million of SG&A as commissions / royalty overrides because of the China market. Given the unique set of regulations governing direct selling in China, of which Herbalife is one of only a small handful of companies authorized by the Chinese government to conduct direct selling in that country, the company must classify what all other countries consider to be royalty overrides, into SG&A for China.”
o Given that much (if not all) of this $96.8 million is effectively the same as royalty overrides, why did the Company exclude it from its $36 million “promotion related” SG&A disclosure?
Herbalife‟s 2011 10K states that SG&A expenses are comprised of “labor and benefits, sales events, professional fees, travel and entertainment, distributor marketing, occupancy costs, communication costs, bank fees, depreciation and amortization, foreign exchange gains and losses and other miscellaneous operating expenses.”
o Please break down the $1.1 billion of 2011 SG&A expenses into each of these categories. o If only $36 million of Herbalife‟s $1.1 billion of 2011 SG&A expense was “promotion
related,” what did you spend the other ~$1 billion on?
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Why is there no operating leverage in SG&A?
Are VAT payments included in SG&A?
Herbalife’s Buyback Policy
In its response to Pershing Square‟s presentation, management stated that “if somebody wishes to return product, we make it very easy for them to do that.” (Des Walsh, January 10, 2013) Recently, the FTC released 188 complaints against Herbalife on its website. A distributor‟s inability to return product is a recurring theme throughout many of these complaints. viii
o How does the Company reconcile its statement that returning product for a refund is “easy” with these numerous complaints?
Herbalife‟s presentation states that “Herbalife buyback policy accepts either product purchased directly from the Company or in the „field.‟” However, Herbalife‟s Sales & Marketing Plan (p. 23) states that “if a customer requests a refund… Herbalife will exchange the returned product with the identical replacement product for the Distributor as soon as all the required documentation has been received.”
o Does Herbalife‟s Buyback policy refund “field” purchases or does it simply allow for a product exchange?
Why did the Company only eliminate the 10% restocking fee in May 2012 and first introduce a buyback policy in Mexico in January 2013?
Herbalife’s Numbers Don’t Add Up
According to page 59 of the Herbalife investor presentation, 60% of Herbalife‟s volume is comprised of Non-Sales Leader purchases (assuming “purchases that do not qualify the purchaser for a royalty, bonus, or sales leader qualification” are made by Non-Sales Leaders). If 60% of volume is purchased by Non-Sales Leaders who are buying the product for self-consumption, and if 32% of volume is shipped directly to non-distributors who are buying the product for self- consumption, then only 8% of volume could have been purchased by Sales Leaders for daily consumption / Nutrition Clubs. This contradicts the Company‟s repeated statements that daily consumption / Nutrition Club volume accounts for 35% to 40% of Herbalife‟s volume.
o How can you reconcile these percentages?
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Do the 60% of “Purchases that Do Not Qualify the Purchaser for a Royalty, Bonus, or Sales Leader Qualification” include purchases by Non-Sales Leaders that make them eligible to purchase product at a higher discount level (i.e. Non-Sales Leaders who are “working their way up to Supervisor”)?
In your May 2012 investor presentation you disclosed that “New Sales-Leader qualification volume percentage of total Volume” was only 16% in 2011. This is similar to the Company‟s disclosure in its January 10th investor presentation that only 15.2% of volume is from “Volume Points That Meet New Sales Leader Qualification.” Based on the following observations, this number appears to be improbably low:
o Excluding China, Herbalife reported 3,768 million Volume Points in 2011

o 16% of 3,768 implies 603 million Volume Points were generated from newly qualifying Sales Leaders
o Based on the increase in Sales Leaders disclosed by the Company in 2011, we estimate that there were ~217,000 New Sales Leaders who qualified in 2011 (excluding China)
o As a result, in 2011, 217,000 distributors became New Sales Leaders by generating 603mm Volume Points, for an average of ~2,800 Volume Points per New Sales Leader. We note that 18% of New Sales Leaders in 2011 qualified using the “5K” method, which implies that New Sales Leaders who qualified in one month or two months did so with an average of ~2,300 Volume Points per New Sales Leader. This raises the following questions:
How can distributors qualify to become a New Sales Leader with fewer than 4,000 Volume Points?
In 2007, when the “5K” method did not exist, the average Volume Points per New Sales Leader was ~3,500. Is the decline in average Volume Points per New Sales Leader an indication that more and more distributors are using the “buddy system” to achieve Sales Leader status? What is the “buddy system” and how does it work? Is it a violation of the Company‟s rules for distributors to use the “buddy system” to qualify for supervisor and above?
Does the decline in average Volume Points per New Sales Leader potentially indicate that Herbalife is running out of new recruits who can afford to buy enough product to sign up as a Supervisor?
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Herbalife’s Argument that “Many Newer Entrants Can and Do Receive Higher Compensation than their Sponsors”
In its response to Pershing Square‟s December 20th presentation, the Company disclosed that 80% of Herbalife‟s 100 top earners in 2011 earned more than their sponsor.
o We note that Herbalife President‟s Team members are eligible to receive the discretionary Mark Hughes Bonus.
If you excluded this bonus from your analysis, what % of Herbalife‟s top 100 earners in 2011 would have earned more than their sponsor?
o Does this analysis include sponsors who are no longer distributors with Herbalife (i.e., even a Sales Leader who earned $1 would earn more than his or her sponsor if his or her sponsor is no longer a distributor)?
We note that Herbalife had ~500,000 Sales Leaders in 2011. If you did the same analysis for all 500,000 Sales Leaders (instead of only looking at the top 100 earners, or the top 0.02% of Sales Leaders), how many Sales Leaders earned more than their sponsor in 2011?
Management went on to say that “what you earn is based not on your placement but rather on your activity.”
o What is the average gross compensation for Sales Leaders with between 0 and 5 distributors in their downline? What is the average gross compensation for Sales Leaders with between 5 and 15 distributors in their downline? Between 15 and 25? Between 25 and 50? Between 50 and 100? Between 100 and 150? More than 150?
Distributor Turnover
Please state, for each of the past five years, how many people enrolled that year by distributor
level. Of each annual group of new distributors, how many remained distributors at each succeeding year-end and what was their gross compensation? The data may be arranged as in this illustration:

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Median Comp
Founder’s Circle

Chairman’s Club

Presidents’ Team

Millionaire Team

GET Team

World Team


Non-Sales Leaders
(1) Include Wholesale Commissions, Royalty Overrides, Production Bonuses, Mark Hughes Bonuses, and all other payments
Of the group of distributors who resigned in each of the past five years, what was the average duration of their Herbalife distributorship?
Why did you stop disclosing the turnover rate for Non-Sales Leaders after 2005?
Since the Company went public in 2004, how many distributors have reached President‟s Team? How many distributors have become Sales Leaders? How many total new distributors have joined Herbalife?
When a Sales Leader fails to requalify, is the Sales Leader removed from Herbalife‟s distributor base or is the Sales Leader dropped to Non-Sales Leader status?
What is the average amount of time it has taken for the Company‟s current President‟s Team members to reach President‟s Team (calculated from the time they signed their Distributor Agreement)?
Beginning in 2009, Herbalife reported “Total New Distributors” in its Regional Key Metrics supplement. We note that this metric, however, is not reported in any of Herbalife‟s public financials (i.e. 10-Ks / 10-Qs).
o Why doesn‟t the Company include this metric in its audited financials?
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The Company‟s 2011 10K states that “Distributors who purchase our product for personal consumption or for short-term income goals may stay with us for several months to one year.”
o This statement implies that 100% of Non-Sales Leaders turnover every year. Is this true? If not, what percentage turn over each year?
What has the Company‟s annual processing fee for Non-Sales Leaders been for the last five years? Does the Company ever waive this fee?
Wholesale Commissions
In an Herbalife Q&A disclosure, Herbalife notes that “Wholesale Profit is paid by the company as a commission check.”ix
o How much did the Company pay distributors in Wholesale Commissions over the last five years (per year)? By region?
Why does Herbalife refer to Wholesale Profit as “single-level earnings” when commissions can be “split” and paid to multiple levels of distributors (as shown in the Herbalife diagram from your Marketing Plan shown below)?

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Given that other multilevel marketers (“MLMs”) (e.g., Reliv International) account for Wholesale Commissions as an operating expense (Reliv International 2011 10K), why does Herbalife treat Wholesale Commissions as a reduction in net sales?
When a customer buys a TV from an electronics retailer for $1,000 and receives a $100 rebate, the retailer records $900 of net sales. This accounting treatment is appropriate because the purchasing customer receives the rebate.
o Given that Herbalife pays Wholesale Commissions to upline distributors rather than to the distributor who purchases the product, why does the Company account for these payments as if they were rebates, which has the effect of reducing the amount of recruiting rewards and commissions shown on the Company‟s income statement?
We note that Nu Skin “preferred customers” must purchase product at wholesale directly from Nu Skin.
o What is the business rationale for the Company‟s policy that does not require distributors to purchase product directly from Herbalife?
What percentage of Wholesale Commissions paid in 2011 were paid to Sales Leaders and what percentage were paid to Non-Sales Leaders?
Deception and Income Claims
In its December 20, 2012 presentation, Pershing Square raised a number of material concerns with Herbalife‟s 2011 Statement of Average Gross Compensation, including disputing Herbalife‟s representation that more than 25% of Distributors reach the rank of Supervisor, and the fact that 93% of Herbalife distributors who earn zero commissions were excluded from Herbalife‟s presentation.
After questions from David Einhorn in May 2012, 2011 Herbalife modified its Statement of Average Gross Compensation in July 2012 to note that the dollar figures shown “are gross, not net income.”
o What are the actual average and median net earnings for Herbalife distributors in each of the distributor levels?
o Why didn‟t you provide an estimate of the costs that are incurred by distributors at each earning level to achieve the gross compensation shown, so that prospective distributors can figure out how much money they might actually make?

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In the Company‟s revised 2011 Statement of Average Gross Compensation for U.S. Supervisors, the median gross compensation for “Active” Leaders is $637. The median gross compensation for Total Leaders is $741.
o How could the median compensation for Total Leaders be higher than it is for Active Leaders?
Why did the table in Herbalife‟s Statement of Average Gross Compensation shown to all prospective distributors only include the average gross compensation for Active Leaders (approximately 7% of total U.S. Distributors as of 12/31/11) and exclude the 93% of distributors who received zero commissions?x
In the Company‟s 2008 investor day presentation, Herbalife disclosed the amount of World Team, GET Team, Millionaire Team, and President‟s Team members as of Q3‟08 (excluding China): 75,234 World Team; 14,057 GET Team; 3,284 Millionaire Team; 1,200 President‟s Team (incl. 36 Chairman‟s Club)
o Based on this disclosure, there were 5.4 times more World Team members than GET Team members in 2008. But in the 2008 Statement of Average Gross Compensation for U.S. Supervisors, World Team represented 2.7% of Total Leaders and GET Team represented 2.2% of Total Leaders, which implies there were only 1.2x more World Team members than GET Team members (in the U.S.). What explains the discrepancy between these ratios? To the extent Herbalife only included “Active” World Team members in its 2008 Statement of Gross Compensation, is the definition of an “Active” World Team member the same as the definition of an “Active” Supervisor?
o Multiplying the “Average Earnings” in Herbalife‟s 2008 Statement of Average Gross Compensation for World Team, GET Team, Millionaire Team, and President‟s Team members by the number of members in each category disclosed in the 2008 investor presentation implies Herbalife would have paid over $1.4bn in Royalty Overrides and Production Bonuses (and this does not even include the Supervisor level). However, in Herbalife‟s 2008 10-K, the Company only paid $797mm in “Royalty Overrides” in 2008. Please explain the unexpected outcome of this calculation? Did Sales Leaders outside the U.S. earn approximately half as much as Sales Leaders in the U.S.?
Please disclose a Statement of Average Gross (and Net) Compensation in 2011 for all Herbalife distributors (as opposed to just U.S. distributors).

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Why don‟t you provide a Statement of Average Gross (and Net) Compensation in 2011 for all of the countries in which Herbalife operates on your website so that distributors can have better transparency into the Herbalife business opportunity on a global basis?
In the 2011 Statement of Average Gross Compensation for U.S. Supervisors, Active Leaders were reported as 39.4% of Total Leaders. In the 2011 Regional Key Metrics supplement (and in the 10K), Herbalife reported “Avg Active Sales Leaders” of 56,741, or 52.4% of Total Sales Leaders for the North America region.
o Did Herbalife have a separate definition of “Active” for these various disclosures? If so, why?
Why is the Gross Compensation of members of the Founder‟s Circle and Chairman‟s Club who reside in the United States excluded from the 2011 Statement of Average Gross Compensation for U.S. Supervisors? Why are you concerned about disclosing to rank-and-file distributors the enormous sums earned by these distributors at the top of the distribution structure?
Why do Herbalife Independent Distributor presentations claim “everything is really easy” given that only one out of every ~5,000 new Herbalife distributorsxi achieves an income level commensurate with Herbalife testimonial-based income claims? 
Herbalife Independent Distributors
What roles do Chairman‟s Club and Founder‟s Circle members play in the company‟s operations, decisions, plans etc.? What is the average, highest, and lowest compensation paid to Chairman‟s Club and Founder‟s Circle members by the Company?
Your Sales & Marketing Plan states that Herbalife distributors “are prohibited from selling leads” and may not “earn any compensation (directly or indirectly) for referrals” of distributors to third- party lead providers. (Rule 26-E(l).)
o Are you aware that a substantial number of your senior-most distributors have affiliates (e.g., Income at Home, IOffice, Online Business Systems, Financial Success Systems, etc.), which sell leads and other business tools to Herbalife distributors for substantial amounts of money?
o What steps, if any, has Herbalife taken to enforce this rule? How many, if any, distributors have been disciplined for violating this rule?

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o In a November 28, 2007 investor presentation, Herbalife‟s then-CFO stated the following:
Does Herbalife actively participate in or in any way fund the generation of “online leads” that are ultimately sold to Herbalife distributors?
Is Herbalife aware that senior Herbalife distributors push new distributors to buy leads at substantial prices for as much as $130 per lead?xii If Herbalife is truly a product company, then why are senior- distributor affiliates pushing new distributors to purchase leads?
Do you believe that Herbalife has a duty to ensure that the income claims made in Independent Distributor presentations are consistent with reality? What steps, if any, has the Company taken to ensure that false or misleading claims are not made in Herbalife Independent Distributor presentations?
Anthony Powell recently left Herbalife and claims to have taken 16,000 distributors with him to another MLM. Des Walsh stated that Powell “had a slightly different philosophy.” Herbalife spokesperson Barb Henderson said: “Anthony Powell‟s stated focus is on creating „explosive growth‟ fueled by lead purchases.”
o Given Mr. Powell‟s 22 years with the Company, when did the Company discover that Mr. Powell and the Company had „a difference in philosophy‟?
o Why did the company pay Mark Hughes‟ Bonuses to Mr. Powell over the last five years if the company did not support his business approach?
o Do any other senior distributors (President‟s Club, Chairman‟s Club, and Founders Circle) “have different philosophies” and / or emphasize “lead purchases”? What are you doing to stop these distributors from engaging in inappropriate and / or illegal behavior?
o Why does the Company selectively enforce its policy regarding distributors soliciting downlines to move to another MLM? Under what circumstances are policies not enforced? Was there a special situation that enabled Powell to leave on good terms and Ford et al to wind up in court? Was there an agreement negotiated and / or executed between Herbalife and Anthony Powell or any of his businesses or subsidiaries around the time of his leaving? Was there any consideration paid by either party as the parties “agree(d) to part ways”?
How much has the Company paid to settle legal disputes with distributors or former distributors each year for the past five years? How many distributors have been paid settlements by the Company during the last five years?

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The Lieberman Survey
Please release the Lieberman surveys‟ detailed findings, methodology, research design, question wording and ordering, participant demographics, and other details sufficient to enable the survey approach to be analyzed by an expert in survey methodology and design.
Why have you chosen to use Lieberman market research and public opinion data based on the survey of 2,000 participants to make claims about your customers instead of relying on internal Herbalife data and customer analysis based on your millions of supposed customers?
Does the Company have any other survey data on these same subjects, whether collected by Lieberman, the Company or other parties? 
Actual Retail Price
One of the most critical issues in determining whether or not Herbalife is a pyramid scheme is the actual retail price at which Herbalife products are resold to bona fide retail customers. Knowing the actual retail price would assist in calculating the actual Retail Profit earned by Herbalife distributors and in determining whether Herbalife “participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers.” See Peter J. Vander Nat & William W. Keep, Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes, 21 J. Pub. Pol‟y & Mktg. 139, 144 (Spring 2002). Given the importance of this issue:
o Why didn‟t the Company respond to Pershing Square‟s analysis, based on pricing data obtained from independent Herbalife distributor websites and eBay that Herbalife products retail for approximately 35% less than adjusted SRP?
o Why is the SRP of Herbalife multivitamin tablets more than three times the price of comparable multivitamins such as Centrum?
o Why are Herbalife‟s products offered at SRPs substantially higher than comparable products sold in retail stores around the world?
o Why do Herbalife investor presentations refer to 100% of distributor allowances as “retail profit” (a statement which assumes products sell for 100% of adjusted SRP)?

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Based on our assumptions for actual retail price, Wholesale Commissions, and internal consumption in the Pershing Square presentation, we estimated that the average Herbalife distributor earns approximately $5 per month in Retail Profit (before taxes / expenses).
o Given that the Company did not respond to this claim, do you agree with our calculation? If not, what does the average Herbalife distributor earn per month in Retail Profit before expenses and taxes and what is the basis for your estimate?
Financial Statements
Given what appears to be consistent annual cash flows in the business, why are there such dramatic and increasing fluctuations in the intra-quarter revolver amounts (e.g., $581M in borrowings from long term debt and $633M in principal payments on long term debt in Q3 2012 alone)?
What percentage of Herbalife‟s sales volume comes in the last five business days of each month? What percentage of Herbalife‟s Net Sales has occurred in January in each of the last five years? What percentage of Herbalife‟s Net Sales has occurred in the last five business days of January in each of the last five years?
Why is it that 22% of the cash on Herbalife‟s balance sheet as of 9/30/12 is domiciled in Venezuela, a country that represented only 3% of Herbalife‟s net sales for the first nine months of 2012?
Why is it that only 1% of the cash on Herbalife‟s balance sheet as of 9/30/12 is invested in U.S. dollars ($4.7mm) given that the U.S. represents approximately 20% of Herbalife‟s total sales?
What percentage of the Company‟s cash is domiciled offshore?
Why are distributor allowances for Literature, Promotional and Other positive (whereas they are 
negative for all other product categories)?
Why are allowances for product returns accounted for as a reduction to net sales as opposed to as an expense (i.e. a bad debt expense)? 
Discontinued Disclosure Items 
Please explain the rationale for Herbalife discontinuing the following disclosure items:
o In 2004, after reemerging as a public company, Herbalife stopped disclosing “Retail Sales” by country;

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o In 2005, Herbalife stopped disclosing distributor turnover;
o In 2006, Herbalife stopped disclosing the turnover rate of Non-Sales Leaders;
o In 2009, Herbalife stopped disclosing the number of President‟s Team members;
o In 2011, Herbalife stopped disclosing New Sales Leaders;
o In 2011, Herbalife stopped disclosing worldwide events and promotions expenditures; and
o In 2011, Herbalife stopped disclosing the composition of Non-Sales Leaders by discount bracket (until David Einhorn asked about it)
Enforcement of Herbalife Rules
The United States Court of Appeals for the 9th Circuit held in Omnitrition that evidence of “the actual effectiveness of … anti-pyramiding distribution rules” is “crucial” in determining whether MLM programs constitute a pyramid scheme. See Webster v. Omnitrition, 79 F.3d 776, 783-84 (9th Cir. 1996) (emphasis in original); see also id. (“there must be evidence that the program‟s safeguards are enforced and actually serve to deter inventory loading and encourage retail sales” (emphasis added)).
o What proof does Herbalife have of the “actual effectiveness” of its 70% rule and 10- customer rule? In each of the past five years:
How many Herbalife distributors in the U.S. were (i) audited and (ii) disciplined for failure to sell product to at least 10 separate retail customers in a given month (over the last five years)? When a distributor purchases Herbalife product for personal use, can that purchase be used to satisfy the 10-customer rule?
How many Herbalife distributors in the U.S. were (i) audited and (ii) disciplined for failing to sell to retail customers and/or sell at wholesale to downline distributors at least 70% of the total value of Herbalife products they retained for resale (over the last five years)?
What group or department within Herbalife conducts audits for compliance with respect to these rules? Why don‟t you publicize the results of whatever compliance audits you do perform?
o In the Ford case, Judge Fees noted in 2009 that he had “serious question[s] as to whether or not” the Herbalife 10-customer rule and 70% rule “are not exalting form over substance and

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aren‟t just there for the purpose of creating the impression that the second element of the Koscot test has been met.” (June 1, 2009 Hr‟g Tr., Dkt. #300, at 6.)
What has Herbalife undertaken since Ford to resolve these “serious question[s]?”
Under Rule 17-A of the Company‟s Sale & Marketing Plan, Herbalife distributors are required to maintain records of distributor and retail sales for two years. Since Herbalife has the ability to track all distributor and retail sales by obtaining this information from distributors, why hasn‟t Herbalife done it? 
Shipping & Handling
Given the similarities in business models and international footprints, how is it possible that Herbalife‟s shipping & handling costs were only $58 million in 2010 (2.1% of net sales)xiii while Avon‟s were nearly $1 billion (9.5% of net sales)?
How can Herbalife‟s shipping & handling costs as a percentage of net sales be so much lower than Avon‟s given Herbalife products that are typically bulkier and heavier?
In 2010, the Company recorded $397 million in Shipping & Handling revenue. In the same year, the Company disclosed in correspondence with the SEC that it only spent $58 million in Shipping & Handling costs. In other words, Herbalife‟s Shipping & Handling charges to distributors represented an approximate seven times markup of the actual cost of shipping and handling the product.
o Why is shipping & handling such a huge profit center for the company?
o A GNC customer can buy $100 of product online and GNC waives the shipping and
handling charge.
Why does Herbalife charge Supervisors more than 20% in packaging, shipping and handling charges when they pay $100 for products (14% packaging and handling plus ~8% shipping as a percentage of the discounted purchase price)?
o Does this $397 million number include the additional Surcharges and Logistics fees Herbalife charges in countries like El Salvador, Costa Rica and Colombia? If not, where does this income show up in Herbalife‟s P&L?
Does Herbalife book revenue for product that is “purchased” by distributors but never actually shipped to or picked up by them?
In a 2011 letter to the Chairman of the House Committee on Ways and Means, Herbalife stated that “South Korea‟s 40% tariff on imported herbal tea products is among the highest in the

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world.”xiv The letter further stated: “Based on 2009 trade levels, Herbalife will save more than $2.5 million per year due to eliminated duties in South Korea.” Based on Herbalife‟s 2011 10-K, Herbalife‟s net sales in Korea in 2009 were approximately $115mm. This suggests Herbalife‟s “Retail Sales” in Korea would have been ~$150mm in 2009 (assuming Sales Leaders in South Korea purchase at a 30% discount to SRP).
o Given that Korea imposes a 40% tariff, why wouldn‟t Herbalife‟s savings be substantially higher than the $2.5 million the Company reported if Korea eliminated duties on imported herbal tea products?
Why does Herbalife charge a 15% “Surcharge” (in addition to a 7% “Packaging and Handling” charge) in El Salvador, Costa Rica and Colombia?
Why does Herbalife charge its distributors a Packaging & Handling charge when they pick up product directly from a distribution center?
How much did Herbalife pay FedEx and UPS in the United States each year over the last five years?
What other means does Herbalife use to ship product and what are the costs associated with those shipping methods? 
Nutrition Clubs 
The Company states that 35% to 40% of its volume is from the daily consumptionxv / Nutrition Clubs channel. Can Herbalife please reconcile this representation with the following explicit prohibitions against Nutrition Club operators selling product: 
“Rule 2-A:
A daily, weekly or monthly membership fee may be charged to cover operational costs such as rent, utilities, etc.; these membership fees must not represent the price or cost of products, which may be offered to members and their guests for consumption.” 
“Rule 3-B:
Nutrition Clubs are social gatherings, bringing people together with a focus on good nutrition. They are not retail stores or outlets, nor are they restaurants or carry-out establishments. 
Subject to this restriction, Club operators may offer complimentary products such as shakes, teas, Formula 1 pies and Herbal Aloe Concentrate. Club operators may post a list of available flavors of shakes and teas, as well as any optional ingredients such as protein or fiber, but

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consistent with the proper operation of a Nutrition Club they may not post, list or charge individual prices for these products or ingredients. The only permissible Nutrition Club fees are daily, weekly or monthly membership fees to cover operational costs such as rent and utilities.”
Source: USA Rules 2010
o Given these restrictions, how can Herbalife represent that 35% to 40% of volume (i.e., retail sales) is generated from the daily consumption / Nutrition Club channel?
o How do you ensure that all of your rules are being followed at the Nutrition Clubs? What audits, inspections and other compliance efforts does the Company undertake? We note that the Nutrition Clubs shown in various Company publications violate several of the Company‟s rules.
Nutrition Clubs are required to abide by an onerous set of restrictions and rules, including the following:
No exterior signage at residential locations
No mention of Herbalife or its logo on the Club exterior
Windows and doors must be covered so that a passer-by cannot see inside
No advertising or promotion
No depiction of the product visible from the exterior
No indication whether the Club is open or closed
Product must be provided in a disposable cup
No attracting walk-in customers
No sales of product servings
Customers not allowed to carry out product except in small, unmarked containers
o Herbalife has indicated that these rules are meant to “protect its business model,” avoid “attracting customers in off the street,” since it‟s a “person to person business.” Is another explanation that these rules are designed to circumvent various federal, state and local laws with respect to food service establishments, retail establishments and franchises?
o If the goal of Nutrition Clubs is to generate retail sales and drive consumption, why does Herbalife place so many restrictive rules on Nutrition Club operators that, in many cases, strongly discourage potential retail customers?
o Do U.S. Food and Drug Administration (“FDA”) rules on use prohibitions on food service establishments apply to Nutrition Clubs? How about local laws, such as New York City Health Code, Article 81, or state regulations, such as title 14 of the New York Compilation of Codes, Rules and Regulations? Do clubs in California require a permit to operate per the California Retail Food Code? Do states require health certifications to operate a home based
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Nutrition Club? Do you actively manage locally regulated retail selling establishment rules? Do you require distributors to submit proof of compliance with regulatory requirements and / or requisite legal requirements when opening up a Nutrition Club? Do you at least inform your distributors of the various specific rules and regulations that may be applicable to Nutrition Clubs? Do you believe that any of your Nutrition Clubs operate in violation of the law?
o Do distributors pay any sort of membership fee (to Herbalife or to other distributors) to operate a commercial-based Nutrition Club?
The Company has encouraged investors to visit Nutrition Clubs and do their own due diligence. o Why isn‟t Herbalife willing to publicly provide the addresses of Herbalife‟s 4,200 and
16,300 commercial-based Nutrition Clubs in the US and Mexico, respectively?
In May 2007, CEO Michael Johnson described the growth of Nutrition Clubs as “exponential.” Why do Nutrition Clubs grow exponentially?
If the goal of Nutrition Clubs is to “steal a meal from fast food,” why did the exponential growth of Herbalife‟s Nutrition Clubs in Mexico from zero to 40,000 clubs not have any impact on Burger King‟s Mexican system-wide sales between 2003 and 2007?
Describe the economics of Nutrition Clubs including start-up expenses, ongoing capital expenditures, typical profit and loss statements, etc. Do you provide any additional disclosure about the potential risk and rewards of opening a Nutrition Club to your distributors? In the U.S., what is the average number of customers per day who go to commercial-based Nutrition Clubs? What is the average life of a Nutrition Club before it closes or changes hands? 
Marketing Plan Questions
In its 2011 10K, Herbalife reported $5.4bn in Retail Sales. Please disclose what percentage of these sales were purchased directly from the company by Sales Leaders, what percentage were purchased directly from the company by Non-Sales Leaders at a 42% discount, what percentage were purchased directly from the company by Non-Sales Leaders at a 35% discount, and what percentage were purchased directly from the company by Non-Sales Leaders at a 25% discount. Rather than determining these percentages based on the order size of the purchase, please calculate these percentages based on the ordering distributor‟s discount level (as this information is readily available to the Company).

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In 2011, what percentage of TAB team members‟ collective Personal Volume was comprised of Personally Purchased Volume?
Does Herbalife have, or has Herbalife ever had, any sort of plan, whereby distributors can deduct income from their monthly royalty override checks to meet their monthly volume thresholds? If so, please describe how this plan works.
What amount, by percentage and dollars, of the $1,138 million of Royalty Overrides paid in 2011 were royalty “roll-ups”?
What is the business purpose for paying a senior distributor a commission on the purchase of products of a recruit more than three levels below in his or her downline?
In the recently released complaints against Herbalife from the FTC, a senior distributor that was with Herbalife for 20 years, made the following complaint: 
“Executive Presidents Team Members ARE NOT SELLING ANY PRODUCT OUTSIDE THE NETWORK, they just buy the product from the company and donate it to some charity (Herbalife Houses from the Herbalife family foundation)”xvi
o How much (a) money and (b) product has been donated to Herbalife Family Foundation (or Casa Herbalife) in the each of the past five years by
– The Company?
– Each member of the President‟s Team, Chairman‟s Club and Founders Circle?
o Can senior distributors qualify for their royalty override check by donating to these charities as opposed to purchasing product?
o When product is contributed to these charities, what valuation is used for tax purposes – SRP, Supervisor‟s Invoice Price of 50% of SRP, or some other valuation?
Management / Board Questions
To your knowledge, is the SEC investigating Herbalife or any of its affiliates?
o If the answer is yes, please advise as to when you became aware that the investigation had
begun and state whether Herbalife is cooperating with the investigation.
o Have Herbalife officers and/or directors hired separate counsel with respect to that investigation? Or with respect to any other matter?

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Are there any ongoing investigations of Herbalife by any US Federal or State agencies? If so, which agencies and what are they investigating?
Are there any ongoing investigations of Herbalife by any foreign regulatory authorities? If so, which authorities and what are they investigating?
Has the Board of Directors considered hiring or hired independent counsel to investigate the issues raised by Pershing Square? If not, why not?
Have Herbalife‟s auditors questioned Herbalife‟s business model in any “management letters” during the last five years? Please provide copies of those letters.
What amount of Herbalife stock has Michael Johnson sold in each fiscal quarter since 2007? Please provide a schedule of stock sales by other named officers of the Company over the last three years.
Have any Herbalife board members received the Mark Hughes Bonus? If so, which board members and how much in which years?
How are Mark Hughes‟ bonuses determined? What criteria are considered in determining who and how much to reward? How much discretion does the Company have in allocating these bonuses? 
In the Test-Aankoop lawsuit in Belgium, Herbalife labeled many of the documents it introduced into evidence “confidential”, including documents about issues critical to a pyramid-scheme analysis such as turnover figures for Herbalife‟s Belgian distributors and data on unsold Herbalife products.
o Will Herbalife publicly disclose the documents it labeled “confidential” in the Belgian action so the market can assess the strength of Herbalife‟s positions in that case for itself?
o Why keep these documents hidden from the public‟s view, particularly when they relate so directly to whether the Belgian court was correct in determining that Herbalife is a pyramid scheme? If Herbalife is so confident that this decision will be reversed on appeal, then wouldn‟t Herbalife want to vindicate itself in the public arena as well?
How does the company determine the price of product “sold” to its Luxembourg subsidiary or affiliate before product is resold to other foreign jurisdictions? How does the company determine the price of product sold from the Luxembourg subsidiary/affiliate to other foreign jurisdictions?

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How much of the company‟s profits are earned in Luxembourg?
What other transfer pricing or other techniques does the company use that reduce its U.S. taxable 
and worldwide income? 
FDA & Product Related Questions:
We understand from a source that we deem reliable that up until the last few years, the company resold product that was returned from distributors. If so, how did the company protect consumers from product that might have been tampered with or otherwise improperly stored by the distributor who returned it?
Has the company‟s Lake Forest manufacturing facility at all times complied with FDA Current Good Manufacturing Practices (“cGMP”) regulations?
Has the FDA ever inspected the Lake Forest facility? If so, when was the last time the FDA inspected the Lake Forest manufacturing facility and what were its findings?
Has the company ever sold product manufactured at the Lake Forest facility during a period when the facility was not cGMP compliant? 
Other Questions
In January 2012, the New York Times published an article suggesting that an Herbalife account had been used to facilitate money laundering in Mexico.xvii
o Does the Company admit or deny this allegation? Was an Herbalife account being used to launder money? If so, was the Company aware of it? If the account was being used to launder money, how could the distributor responsible for that account possibly have been in compliance with Herbalife‟s Ten Retail Customer and 70% Rules?
o Have any former or current senior Herbalife executives or distributors ever been involved in money laundering or been accused of aiding and abetting money laundering anywhere in the world?
For each of the following countries, are royalties paid in local currency or US Dollars: Bolivia, Brazil, Bulgaria, Canada, Colombia, Costa Rica, Ecuador, El Salvador, Ghana, India, Ireland, Jamaica, Latvia, Mexico, Norway, Paraguay, Peru, Zambia?

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Why does Herbalife have ATM machines in Mexico?

Does Herbalife have formal or informal programs for promoting the distribution of its products in the U.S. among any of the following populations: (1) Hispanics, Koreans or other ethnic groups, (2) college students, (3) the unemployed, (4) single parents, (5) the elderly or (6) the physically disabled?
During the Company‟s January 10th presentation, it made repeated comments about the changes at Herbalife during the past few years (e.g., “we are changing”; “our retail efforts are growing”, “the new Herbalife”, Herbalife Then and Now, etc.). Why was the “then vs. now” narrative such a big focus of your presentation?
Why is confidence so important in your business?
Please explain Simon Davies‟ job function as Director of Internal Audit (and previous roles) while at Herbalife. We ask given his current role as Chief Analytics Officer and previously Chief Financial Officer of Fortune Hi-Tech, which was recently shutdown by the FTC for being a pyramid scheme.
How many employees and / or outside firms do you have working on providing blog commentary or comments to articles / media that may be negative towards Herbalife? Why did Herbalife buy sites called and
Several of the investment banks providing sell-side research on Herbalife disclose that they have received “non-investment banking, securities-related” compensation from Herbalife. What are these fees for? In total, how much has Herbalife paid (or promised to pay) to these banks for these services?

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o For example, “D.A. Davidson & Co. received compensation from this company for non- investment banking, securities-related, services within the past 12 months. D.A. Davidson & Co. expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months.”xviii
The Girl Scouts
In Herbalife‟s Q&A, Michael Johnson compared Herbalife‟s business model to that of the Girl Scouts:
o “When it comes to the sales model, there’s a strong draw together, called the Direct Selling Association, the DSA. And they are very aligned with this. They are very together in this mission that we have to protect our industry, to grow it, to put a good image on it, and to build it stronger. There‟s all sorts of different functions that happen in the DSA that take place there. The attack is sad to me. Girl Scouts sell cookies on a direct selling method; nobody attacks them.” (emphasis added)
When Girl Scouts sell cookies, do eleven levels of “upline” Girl Scouts receive sales commissions?
Do the top 1% of Girl Scouts receive 88% of the award badges?
How many former Girl Scouts have sued the Girl Scouts‟ organization and accused it 
of running a pyramid scheme?
How many foreign regulators have declared the Girl Scouts a pyramid scheme?
How many Girl Scouts have lost tens of thousands of dollars selling cookies?
How many Girl Scouts run side businesses selling names and contact information for other Girl Scouts for $130 per lead?

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Further Information
To learn more about Herbalife and to read public documents, court records and financial filings underlying Pershing Square‟s conclusions and opinions, please go to For more detail on the assumptions used by Pershing Square to draw its conclusions and opinions, as of the date of the presentation, please see “Who wants to be a Millionaire?” posted on the website.
Pershing Square Capital Management, L.P. (“Pershing Square”) is an investment adviser to funds that are in the business of buying and selling securities and other financial instruments. Pershing Square currently has a short position in Herbalife Ltd. (“Herbalife”) common stock. We do not own any options on Herbalife common stock.
Pershing Square will profit if the trading price of Herbalife common stock declines and will lose money if the trading price of common stock of Herbalife increases.
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.
The information and opinions expressed by Pershing Square are based on publicly available information about Herbalife. Pershing Square recognizes that there may be non-public information in the possession of Herbalife or others that could lead Herbalife or others to disagree with Pershing Square‟s analyses, conclusions and opinions.
Pershing Square‟s information and opinions include forward-looking statements, estimates, projections and opinions prepared with respect to, among other things, certain legal and regulatory issues Herbalife faces and the potential impact of those issues on its future business, financial condition and results of operations, as well as, more generally, Herbalife‟s anticipated operating performance, access to capital markets, market conditions, assets and liabilities. Such statements, estimates, projections and opinions may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties beyond Pershing Square‟s control.
Although Pershing Square believes the information and opinions it expresses are substantially accurate in all material respects and does not omit to state material facts necessary to make the statements therein not misleading, Pershing Square makes no representation or warranty, express or implied, as to their accuracy or completeness or any other written or oral communication it makes with respect to Herbalife, and Pershing Square expressly disclaims any liability relating to its information and opinions or such communications (or any inaccuracies or omissions therein). Thus, shareholders and others should conduct their own independent investigation and analysis of the presentation and of Herbalife and other companies mentioned.
Pershing Square‟s presentation, information and opinions are not investment advice or a recommendation or solicitation to buy or sell any securities. Except where otherwise indicated, the information and opinions speak as of the date thereof, and Pershing Square undertakes no obligation to correct, update or revise the information or opinions or to otherwise provide any additional materials. Pershing Square also undertakes no commitment to take or refrain from taking any action with respect to Herbalife or any other company.
As used herein, except to the extent the context otherwise requires, Pershing Square includes its affiliates and its and their respective partners, directors, officers and employees.
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i (
ii (Final Judgment and Permanent Injunction, California v. Herbalife, No. 92767 (Cal. Sup. Ct. Oct. 14, 1986), at ¶ 2, available at
iii Source: 2010 Statement of Average Gross Compensation of Irish Supervisors
iv Herbalife’s Statement of Average Gross Compensation of U.S. Supervisors
v See following independent distributor presentation, which cites 65 million customers:
vi (
vii (
viii (
ix (Herbalife’s Marketing Plan Enhancements 2011: marketing-plan-q-and-a.pdf)
x See page 180 of Pershing Square’s December 20, 2012 presentation
xi Pershing Square analyzed 393 testimonials and earnings claims from editions of Herbalife Today magazines from 1997 – 2004. The average earnings per year from the claims implied an annual income of $178,000 per year. 1 in 5,000 is used because to earn $178,000 per year, a distributor would either need to be a “senior Millionaire Team member” or a “junior President’s Team member.”
xiii Source: Herbalife filings and SEC response letter dated April 21, 2011
xv Morgan Stanley Global Consumer & Retail Conference 11/14/2012
xvi 2013-Jan-28-2013-1.pdf 709
xvii ( xviii D.A. Davidson & Co. Herbalife research report dated January 4, 2013

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