Ackman: ‘Haven’t Covered a Share’ of Herbalife

Bill Ackman CEO of Pershing Square Capital Management LP.
Norm Betts | Bloomberg | Getty Images
Bill Ackman CEO of Pershing Square Capital Management LP.

Activist Bill Ackman doesn't appear to be quaking in his boots with so many investors betting against him on Herbalife, including as I wrote two days ago, activist Robert Chapman.

(Read More: Activist Takes on Ackman Over Herbalife)

In a phone conversation Thursday night, the vacationing Ackman told me, "We stand by everything we have said. We haven't covered a share. And we look forward to the company's rebuttal."

Ackman, who recently gave a three-hour presentation laying out his short thesis on Herbalife -- explaining why he believes the multi-level marketer is behind an illegal pyramid scheme -- also scoffed at Chapman and others who say a principal reason to be long is that the Federal Trade Commission will likely do nothing. (On Wall Street, that kind of rationale is often referred to as a "hold your nose and buy" kind of investment.)

CEO Michael Johnson has disputed claims that he ran a pyramid scheme and accused Ackman of "market manipulation." Herbalife declined to comment Friday in advance of its scheduled rebuttal to Ackman at an investor's day Thursday in New York. Many investors expect the company to also announce the mother of all stock buybacks at the presentation.

Ackman said he will be preparing his own rebuttal to the rebuttal.

Personally, I'll be interested in Herbalife's response to Ackman's red-flagging Johnson's comment in response to a question by Kate Kelly on CNBC that 90 percent of the company's product sales are to customers outside of its distribution network. The amount of products sold to actual customers outside the distribution network is one of the key issues in the multi-level marketing fight.

(Read More: Herbalife Under Fire: Clubs, Hopes and Losses .)

From that transcript:

Kate: Can you give us a percentage figure ... Mr. Johnson as to what percentage of your sales are outside of that distribution network?

Johnson: 90 percent?

Kate: So the vast majority?

Johnson: Absolutely.

In the 10 months I've been writing about Herbalife, I've never heard that number. In fact, the company, which recently hired a research firm to come up with an estimate of sales outside of its research network, has previously insisted it can't say with certainty how many sales go to non-distributor customers.

That, in fact, was the genesis of a question from investor David Einhorn last May that caused Herbalife's stock to plummet. From an SEC filing by Herbalife in response to Einhorn:

We don't track this number and do not believe it is relevant to the business or investors.

Herbalife believes the majority of its distributors are discount buyers, who become distributors in order to purchase their favorite Herbalife products at a minimum discount of 25 percent (either directly from the company or from their upline distributor/supervisor). In addition, some of these distributors will also share with, or retail the products to other friends, family, and customers.

The percentage of product of any multi-level marketing company consumed by its distributors is substantial. This is not surprising since consumers who are enthusiastic about the products become distributors in order to purchase at a discount and possibly to share and sell the products to others. In addition, in order to minimize the risk of product being accumulated by distributors, the company has policies in place such as the 70% Rule, the Ten Customer Rule and the Buy Back policy.

Several other points:

Chapman said he believes even if U.S. regulators took action against Herbalife, the U.S. is only 20 percent of its business. Again -- true, but the U.S. being the U.S., there is a possibility any action in this country could trigger a domino effect in other parts of the world. China already bans multi-level marketing. (Herbalife and others operate differently in that country.) And a Belgian court has ruled Herbalife a pyramid scheme. The company is appealing.

(Read More: Selling the American Dream: Investigations Inc.)

Also, Chapman says he believes the company is strong enough to effectively brush off any residual effects of new rules and regs, including additional disclosure requirements. That's unclear. Herbalife and the Direct Selling Association, which represents the industry, lobbied hard against something called the Business Opportunity Rule. This rule would have required disclosure so onerous that Herbalife warned in its SEC filings that if implemented "in its original form, would negatively impact our U.S. business." In the end, after five years of lobbying, all multi-level marketing was left out of the final rule when it was implemented early last year.

In other words -- and plenty of people disagree with me on this -- any change in disclosure or rules could do the equivalent to multi-level marketing that a regulatory clampdown did to for-profit education: The ultimate in hard business model resets.

My bottom line: Don't expect the final chapter anytime soon.

—By CNBC's Herb Greenberg; Follow him on Twitter:@herbgreenberg and Google

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CORRECTION: An earlier version incorrectly suggested that Chapman had cited the "pyramid scheme" allegations in his investment strategy for Herbalife.