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Herbalife probe set to expose sales secret behind Ackman’s bet

Bill Ackman and his Pershing Square Capital Management say Herbalife is a pyramid scheme, which the company denies. Records showing retail sales could refute the claim.Lucy Nicholson/Reuters/File 2013

WASHINGTON — Federal investigators probing Herbalife are uniquely equipped to answer the question at the heart of Bill Ackman’s $1 billion bet against the company: Do people buy its products for their own use?

Sixteen months after going public with his claim that Herbalife is a pyramid scheme, the hedge fund manager has failed to force it to disclose receipts crucial to his thesis. The records, which Herbalife’s 550,000 US distributors are required to hold, may prove whether its protein shakes and vitamins are bought by consumers seeking healthy products or merely by distributors trying to get rich quickly.

The Federal Trade Commission, which is investigating, can end the stalemate by forcing distributors to disclose sales records. While the receipts aren’t automatically submitted to the company, Herbalife routinely audits the records for compliance, and the FTC may seek those results as well.

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Herbalife, which denies Ackman’s claims, disclosed in March that the FTC had started a civil probe into its practices following months of lobbying by Ackman and his Pershing Square Capital Management. The FBI is also investigating, and Illinois Attorney General Lisa Madigan is examining consumer complaints against the company.

Herbalife has said it is cooperating with the FTC, but the Cayman Islands-based company has said it has no knowledge of an FBI investigation.

In an attempt to demonstrate it has real customers, Herbalife commissioned a Nielsen survey last year that estimated 7.9 million US adults purchased its products for personal use in the previous three months. The online survey of more than 10,000 people was conducted in April and May. Of the 349 respondents who said they had purchased for personal use, 87 percent said they did not buy as a distributor themselves. Most bought weight-management products, the company said.

In a 2012 study, also commissioned by Herbalife, Lieberman Research Worldwide surveyed 2,000 people intercepted on mainstream websites. About 5 percent had purchased an Herbalife product within the past three months. Of those, about 78 percent said they were not registered distributors.

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Ackman isn’t satisfied.

‘‘Herbalife has incurred substantial expense in commissioning surveys while it has avoided collecting contractually available empirical data which would answer questions about the sales of Herbalife products to end consumers,’’ he said in a June statement.

The FTC has said a hallmark of a pyramid scheme is when participants earn money from recruiting others rather than selling products to consumers. The ensuing transfer of wealth benefits the top of the pyramid while those at the bottom lose money buying products they can’t sell.

Herbalife hasn’t budged on Ackman’s call for the sales records. ‘‘Whatever we release, it isn’t going to be enough for this guy,’’ chief executive Michael Johnson said.

The company’s distributors, who operate as independent contractors, value the privacy of their sales records and fear the company may go around them to sell to their customers directly, chief financial officer John DeSimone said. Also, receipts alone are meaningless without an audit, he said.

‘‘If you know that you are required to sell product, and if you’re not selling it, you can just as easily fake the receipts . . . ’’ he said. ‘‘The only way to validate the receipts is through the audit process, and we jump right to the audit process.’’