Wednesday, April 15, 2015

A Twin, a Pilot and an IRS Agent Walk Into an Herbalife Nutrition Club

I think I now understand why Bill Ackman would claim Herbalife executives are hiring criminal defense attorneys; he's probably nervous, very, very nervous. According to Herbalife, the claim is not only false, but could be part of an effort to "drive down the stock price in an effort to enrich himself and his investors in advance of options expiring on Friday." It's also pretty laughable commentary coming from a guy that just hired a former DOJ unit chief as senior counsel at Pershing Square.

So why would Ackman be nervous? That's simple, his thesis is falling apart and he has BILLIONS on the line as the Feds circle the wagons around him. There are lots of people that think Bill Ackman is dead on with his thesis, but based on court filings this week in California, I think his thesis is just dead.

According to documents filed April 13th by PLAINTIFFS in the Bostick class action suit against Herbalife, out of 1,533,339 class members a grand total 7,238 class members have submitted claim forms. That is 0.4% of the entire class filed claims. You've got better odds of being an identical twin, or being on a plane with a drunken pilot, being audited by the IRS or getting your identity stolen, than you do of being a claimant in the Bostick case.

There are so few claimants in fact, that plaintiffs filed a motion to increase the pro rata awards from 50% to 75%. Forget for a moment that the Ackman/Celarier-associated group of 18 out of Chicago objected to the settlement, or that the Ackman-associated NCL, led by Sally Greenberg filed a motion for leave to file an amicus, and simply focus on the facts generated in the settlement proceedings.

In the filing the plaintiffs state that as of
"April 6, 2015 the aggregate amount of Pro Rata and Flat Rate awards due under the Settlement Agreement is $5,738,761.49. Of this amount, $76,520.00 is attributable to Flat Rate awards and $5,662,241.49 to Pro Rata awards." 

That means that a grand total of 3826 people(or 665 in any one year) filed for a flat rate award. Let's put that in perspective. In 2013 there were a total of 525,251 active members in the United States. Out of that half a million people, there were 4667 people that earned between $10001 and >$250,000 in 2013. In fact, out of all the complaints Ackman has lobbed at Herbalife, and even with all the warnings the company has provided participants that the odds of success as a distributor member are against you, you actually would have had a better chance at becoming a President's team member and earning $100,000 or more in 2013, than you were to seek a flat rate payment claim as a dissatisfied member in the Bostick case (704 earned >$100,000 vs. 665 Bostick claimants for the same period).

I'm sure there are plenty of shorts that would argue the flat rate claimants were less motivated to file because the payment was limited to $20. OK, so entertaining that rather unconvincing argument, let's look at the remaining 3412 claimants that filed for a pro rata awards instead (those who purchased more than $750 of products). Surely they'd be more motivated to seek compensation during the class period right? I mean, they've got more at stake financially, so of course they'd seek claims (or so I'd think). Reality doesn't agree with that argument though. There were actually fewer persons that filed for pro rata award (3826 vs. 3412) and the average claim for the pro rata recipients is only $1659.51.

So again, I'm left to wonder, out of millions of Americans that participated in Herbalife over the class period, and spent a significant amount of money on products ($750 or more) how is it that only 3412 people have filed a claim for purchases over $750? How could this be? I thought Bill said the whole business model was predicated on Herbalife convincing millions of people to build their downline and load inventory with thousands of dollars of purchases? I though Brent Wilkes said Herbalife preys on the poor disenfranchised Latinos he claims to represent. Remarkably, although Mr. Wilkes claims to have their best interest at heart, plaintiffs lawyers (again, these are the lawyers fighting against Herbalife in the Bostick case) stated in their declaration:

"4. Notably, days after the Settlement was announced, the NYPost predicted that  some critics, including Hispanic activists, hope to stop the $15 million settlement reached Friday in a class-action lawsuit by several distributors. “We plan to object to the settlement because it won’t begin to pay for the true damages that Herbalife has caused this class,” said Brent Wilkes, executive director of the League of United Latin American Citizens. 5. Prior to any settlement and before the Court ruled on Herbalife’s Motion to Dismiss, in July of 2013, I reached out to Mr. Wilkes, the national executive director of the Washington-based League of United Latin American Citizens, or LULAC to introduce myself as counsel for Dana Bostick because Mr. Wilkes had publically criticized Herbalife. See I left a message with Mr. Wilkes’ office to contact me because I thought that Mr. Wilkes might have information that would assist the class in the prosecution of this action. Neither Mr. Wilkes nor anyone from his office returned my phone call. The New York Times later revealed that LULAC had accepted a $10,000 contribution from the Pershing Square hedge fund that has taken a purported $1,000,000,000.00 short position against Herbalife’s stock in 2013."

The Dracht declaration continues to describe that despite being contacted by two additional law firms in the Chicago area prior to the announcement of the settlement (and as early as September of 2014) that he never heard anything again from those lawyers  "or from any representative of the Chicago area LULAC." Well that's just plumb confusing. Of course it makes perfect sense then that a group of 18 people drummed up by LULAC and affiliated with no less than two law firms prior to the settlement announcement would be so inadequately informed (or completely uninformed) of their class action rights for many months after the settlement announcement, in spite of Plaintiff's lawyers appealing directly to the National Executive Director of LULAC and in spite of LULAC's direct involvement and in spite of the much publicized LULAC/NCL/Ackman hootenanny IN CHICAGO a full MONTH before their claim window closed and a full two months before their objection window closed. Great question for Mr. Brooks and Mr. Wilkes is how many of these 18 objectors were present at the the January 12th event organized by Julie Contreras and attended by Sally Greenberg, Brent Wilkes and Bill Ackman? Furthermore, why wasn't counsel for the class action group invited to be at that Chicago-centric meeting where they could have reinformed, the previously reinformed, reinformed, notified & uniformed future objectors?

In fairness there were a total of 21 objectors to the settlement, only 18 of which were part of the Chicago group, represented by Brooks. Of the other 3, 2 objected on the grounds of late notification and later withdrew their objections, and the other 1 objected on the grounds that Herbalife was being unfairly treated(no I'm not being facetious). Getting back to the Brooks group though, 5 objected on the grounds that they'd not been timely notified and 10 objected because they received the notice, but did not understand they could both object to the settlement and file a claim. I find those to be particularly odd objections especially after you consider that multiple lawyers in Chicago contacted Dracht specifically in connection with what ultimately turned out to be the Chicago 18, and that this state of confusion was limited only to the Chicago 18 and no other persons.

There is a lot of other fun facts contained in those filings, but suffice it to say that you don't have to take Bill Ackman's word for it that millions of Americans have been defrauded by a company, when all you need to do is see for yourself that out of millions of members involved in Herbalife, a scant handful actually sought a monetary claim. Don't take my word for it either, just read the plaintiff's filings for yourself below*.

*If you want to go deeper, the second Scribd document is a single combined 267 page file including the motion to increase pro rata award, aswell as the declarations and exhibits of counsel for class plaintiffs, declaration and exhibit of claims administrator as well as opposition to amicus.
Correction: A previous version of this post stated in error that Douglass Brooks filed an amicus.