Bill Ackman promised a bombshell, but the activist investor's latest attack against Herbalife landed with a thud on Wall Street.
Shares of the Los Angeles nutritional products company jumped 25% on Tuesday after the longtime Herbalife critic unveiled what he said was new evidence that the company operates a pyramid scheme that victimizes its predominantly poor and Latino sales force.
"He over-promised and under-delivered," said William D. Cohan, a former investment banker and author of several books, including "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street."
On Monday, Ackman had said on CNBC that his presentation would prove that Herbalife "is going to collapse," and panicked investors sold the stock, driving its shares down 11%.
But there was no sign of concern one day later. The company's stock surged as Ackman failed to generate new concern among Herbalife shareholders during a New York speech that was streamed live on his website, herbalifepyramidscheme.com.
Herbalife was on the counterattack, issuing a news release before Ackman's speech. It said an economist it hired had concluded that its business model is not a pyramid scheme and that its sales force has a genuine opportunity to profit.
The company also issued sharply worded counterarguments on Twitter during Ackman's presentation, including this one: "Mr. Ackman's stereotypes of Latinos as uneducated and uninformed were insulting and he should apologize."
Ackman did make some new charges in his presentation, arguing that prospective Herbalife salespeople are promised unattainable success and are required to work without pay at storefront nutrition clubs as part of their training. He also said the average Herbalife nutrition club operator loses $12,000 a year, which Herbalife later said was untrue.
As the stock price soared, Ackman said he was not worried.
"We've never been in this thing for the short term. We've been in for the long term, and stock price movements have not affected our point of view," Ackman said.
He also said he believes Herbalife may have been buying back shares to inflate the stock price.
"What they do when there's really bad news like this is they use all of their remaining firepower to buy back stock to kind of blunt the accusations," Ackman said. "Here's the really interesting thing with Herbalife: When there's something negative going on, the price goes up.... [But] you can only prop up the stock for so long."
The battle between Ackman, chief of hedge fund Pershing Square Capital Management, and Herbalife has been one of the most closely watched on Wall Street.
Ackman began the attack in December 2012, saying he was convinced that regulators would shut the company down. He announced that he had shorted the company's stock by more than $1 billion, betting that its stock price would fall.
Ackman's allegations have prompted investigations by the Securities and Exchange Commission, Federal Trade Commission, FBI and at least two state attorneys general, but so far none has taken action.
On Tuesday, Ackman said he has spent $50 million in his investigation of Herbalife, sending undercover investigators around the world to gather evidence of impropriety.
His main issue is the way Herbalife sells its weight-loss and nutrition products. Rather than making them available in stores, the company sells them through independent distributors worldwide. They profit from sales they make, plus commissions from sales of others they recruit into the business.
Ackman said the vast majority of distributors lose money and give up, while a fortunate few "at the top of the pyramid" reap huge rewards from recruiting.
Dan Alpert, managing director at Westwood Capital, a New York-based investment bank, said Ackman is a shrewd investor — but he might not prevail in his Herbalife fight.
"Does somebody at some point say, 'Uncle!' and admit defeat?" Alpert said.