Estimate of Legal Costs Raises - Pyramid Allegations for Herbalife

Billionaire hedge fund manager Bill Ackman has accused Herbalife of being a pyramid scheme.

Herbalife now estimates it will spend $25 million to $40 million this year to defend itself against allegations by hedge fund manager Bill Ackman.

The Los Angeles nutritional products company estimates it will spend $25 million to $40 million this year on legal and advisory fees to defend itself against Ackman's allegations that the company runs a pyramid scheme in which most of its independent salespeople lose money.

That's twice as much as the company estimated in February when it said in an earnings release that those costs would be $10 million to $20 million. Herbalife spent $9.5 million in the first three months, the company said in its quarterly financial report recently filed with regulators.

Even for a company the size of Herbalife, which reported $4.1 billion in sales last year, such legal expenses could be painful. If the fees reach $40 million, that would amount to 8% of last year's $477-million profit.

"I think the increase is a red flag for the company recognizing that they have additional legal exposure," said Michael S. Weinstein, a former federal prosecutor who now heads the white-collar defense team at law firm Cole Schotz in Hackensack, N.J.

"That legal exposure could be as a result of either a government investigation or increased litigation resulting from the recent allegations about their business practice," he said.

Herbalife executives declined to say whether regulatory scrutiny prompted the increased estimate of legal fees.

"We originally underestimated the likely costs," Herbalife spokeswoman Barbara Henderson said in an email.

"In February, we were very early in the process of building our plan for defending ourselves against the malicious and reckless attack from a short seller. Now, 2 1/2 months later, the plan is better developed and the costs are better understood," she said.

The controversy erupted in December when Ackman made a presentation — streamed live on the Web — that he said showed that Herbalife operates a pyramid scheme. He said about 90% of the company's salespeople make no money, while a fortunate few get rich, collecting commissions for recruiting others into the business.

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