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Net Net: Promoting innovation and managing change

Ackman takes aim at Herbalife for China dealings

A pedestrian walks past an advertisement for Herbalife products endorsed by Argentine football superstar Lionel Messi in Beijing, China, 10 March 2012.
Imaginechina | AP

Hedge fund manager Bill Ackman renewed his attack on Herbalife, saying Tuesday that it operates a pyramid scheme in China in violation of local rules—just like he has long claimed about the nutritional supplement company's practices in the U.S. and around the world.

"Herbalife is violating the direct-selling and pyramid laws and criminal law in China," David Klafter, Pershing Square Capital Management's senior counsel, said during a more than two-hour webcast for about 300 observers, including journalists, analysts and others.

The price of Herbalife shares drifted lower Tuesday but rose initially during the presentation, apparently in response to traders largely dismissing the revaluations in the presentation.

Appears Ackman trying to move stock price: Harvey Pitt
Appears Ackman trying to move stock price: Harvey Pitt

(Read more: Carl Icahn criticizes eBay, Bill Ackman—again)

Klafter joined Ackman and others affiliated with Pershing Square in claiming that Herbalife violates Chinese law in several ways.

Pershing insisted that Herbalife pays its distributors cuts from the sales of unlimited numbers of new sellers that they've signed up, or their "down line." But Chinese law limits commissions to 30 percent of sales volume and only for sellers they've directly recruited, not those under their recruits.

In short, making money off Herbalife in China is more about signing on new sellers than actually selling the product, according to Ackman.

The country represents about 10 percent of Herbalife's net sales, according to the presentation.

Ackman said he would "make a couple billion" if Herbalife went out of business today.

Herbalife strongly denied it was doing anything illegal in China.

"Herbalife remains confident in its business in China, which is built on customers enjoying and benefiting from our nutrition products each and every day. We will continue to invest in this important market and collaborate with the Chinese government to deliver high-quality nutrition to the Chinese consumer through lawful direct selling practices. The presentation reflects Mr. Ackman's continued failure to fundamentally understand Herbalife's business model," Herbalife said in a statement following the call.

"Herbalife (China) has designed and implemented a business model unique to China that is in compliance with Chinese direct-selling and anti-pyramid regulations, and includes strict rules of conduct that prohibit, among other things, illegal recruitment, 'pyramid' activities, false product and income claims, and conduct that is deemed illegal under Chinese laws."

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The presentation comes as The New York Times wrote a front-page story Monday detailing Pershing Square's attempts to convince lawmakers and advocacy groups that Herbalife is a pyramid scheme.

Ackman addressed the story on the call, denying any undue influence on lawmakers and any connection between his financial donations to politicians and his Herbalife campaign. He also noted that Herbalife has spent $30 million itself in Washington fighting his campaign.

(Read more: Nu Skin stock tanks after Chinese investigation)

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.