According to an article by Michelle Celarier in the New York Post, billionaire investor Bill Ackman will release the results of an almost two-year investigation by his Pershing Square hedge fund into Herbalife Ltd. (NYSE:HLF) nutrition clubs next week.

Ackman is reported as saying the findings of the probe will make it clear how the nutrition clubs, which are owned and operated by independent Herbalife distributors, are a big part of the supplement firm’s fraudulent pyramid scheme. Pershing Square has a billion dollar plus short bet on Herbalife.

Charlie Munger: Invert And Use “Disconfirming Evidence” Charlie Munger is considered to be one of the best investors and thinkers alive today. His thoughts and statements on investment research, investment psychology, and general rational behavior are often incredibly insightful. Anyone can learn something from this billionaire investor and philosopher. Q2 2020 hedge fund letters, conferences and more If you’re looking for value Read More

Highly profitable Herbalife Ltd. (NYSE:HLF) is under investigation by a variety of federal and state regulators, but the firm has continued to maintain it is not a pyramid scheme.

Pyramid scheme

A pyramid scheme is generally understood as an illegal business scheme where the profits come mostly from recruiting of new distributors, not from actually selling products to customers. A pyramid scheme needs a constant flow of new distributors or it collapses.

Details on Herbalife nutrition clubs

The Post articles details that nutrition clubs were first introduced in Mexico by Herbalife distributors as an effective method to introduce customers to the firm’s shakes and supplements and to recruit other distributors.

There are more than 3,000 nutrition clubs in the New York area, according to an Herbalife Ltd. (NYSE:HLF) exec. A large number of the clubs are clustered around the hispanic Corona neighborhood in Queens.

Herbalife critics have long said that Herbalife’s nutrition clubs are really just recruitment venues, or what Ackman has called a “pyramid within a pyramid.”

The Post article quotes Herbalife Ltd. (NYSE:HLF) executive president’s team member Brad Harris, a former hydraulic mechanic who runs several nutrition clubs, as telling prospective club recruits that, “People are going to see this and want to duplicate this and that’s when you start making royalties, which is the exciting part of our business.”

“We can actually build a distributorship by doing what we’re doing here,” Harris continued, explaining the role of Herbalife weight-loss challenges sponsored by nutrition clubs.