Hedge fund manager alleges Herbalife is pyramid scheme The company denies the claims and alleges stock manipulation by a hedge fund manager. Herbalife Ltd. is girding for a fight against a Wall Street money man who's betting $1 billion that the company is nothing more than what he called a "pyramid scheme." The Los Angeles maker of nutritional products rushed to defend itself Thursday against a hedge fund manager's accusation. Hedge fund titan Bill Ackman accused Herbalife of paying its sales staff far more money to recruit new distributors than to actually sell its products. That results in the roughly 2.6 million distributors at the bottom of the sales pyramid making little or no income, while a handful at the top hauls in millions, he said. "This is the best-managed pyramid scheme in the history of the world," Ackman said. The company denied the allegation and accused Ackman of trying to manipulate the stock. Herbalife shares slumped 10% on Thursday and are off 21% in the two days since Ackman announced that the company is in his sights. "Today's presentation was a malicious attack on our business model based largely on outdated, distorted and inaccurate information," Herbalife said in a statement. We are not an illegal pyramid scheme. Herbalife, which bills itself as a so-called multilevel marketer, has beaten back similar accusations in the past. But the company has rarely faced a nemesis such as Ackman. The 46-year-old billionaire has fashioned a career on high-stakes gambits in controversial companies. His fund firm, Pershing Square Capital Management, manages $12 billion. Showdowns between companies and skeptical investors historically play out behind closed doors, especially in the normally sleepy pre-holiday period. But in a measure of the aggressive tactics favored by an emerging breed of activist investors, Ackman launched a public blitzkrieg Thursday. He gave a flashy multimedia presentation to a packed conference room in New York that was streamed live on the Internet. "I've never seen anything quite like it," said Timothy Ramey, an analyst at D.A. Davidson & Co. I've never seen an investor spend 31/2 hours of time at a major venue being webcast and then make TV appearances to make his point. It's the largest orchestrated bull or bear case that I've ever seen. The brawl has potential repercussions for both sides. Ackman claimed to have spent one year doing intensive research on Herbalife's operations, an unusually extended period given Wall Street's thirst for immediate results. Earlier this year, Ackman began betting that Herbalife's stock would fall sharply. His fund is "shorting" more than 20 million shares of the company. In a short sale, an investor borrows stock and sells it immediately, hoping to later buy the shares at a reduced price and return them to their actual owner. Ackman promised to donate all profit from his Herbalife bet to charity, and portrayed his public diatribe as intended for the public good. "I'm very fortunate to have the means to pursue this," he said. I am independently wealthy. When I believe in something, I can say what I want and do what is right. For Herbalife, the fight threatens to damage its credibility among investors who have always been sensitive to claims that its business is illegitimate.