Why Herbalife Spent $700,000 on its CEO’s Home Security

Key Speakers At The 2015 Milken Conference
Michael Johnson, chairman and chief executive officer of Herbalife Ltd., speaks at the annual Milken Institute Global Conference in Beverly Hills, California, U.S., on Tuesday, April 28, 2015. The conference brings together hundreds of chief executive officers, senior government officials and leading figures in the global capital markets for discussions on social, political and economic challenges. Photographer: Patrick T. Fallon/Bloomberg via Getty Images
Photograph by Bloomberg — Getty Images

After Herbalife (HLF) filed an S.E.C. disclosure on Monday revealing that it had spent nearly $700,000 to beef up its CEO’s home security last year, many people were left wondering why.

The company’s explanation in its filing was fairly vague: “In 2013, we received information that led us to conclude that there were threats to our company and certain of our executives, and specifically [CEO Michael] Johnson.”

I can shed some light on what the company is referring to.

Herbalife, of course, is the meal replacement shake and nutritional supplements company that has been under a short-selling attack for more than three years by billionaire activist investor Bill Ackman’s hedge fund, Pershing Square Capital Management.

Ackman maintains that Herbalife is an illegal pyramid scheme that defrauds the overwhelming majority of its distributors and preys on the undocumented Hispanic community in particular. The company vigorously rejects these accusations, insisting that it is a lawful, multi-level marketing company that sells highly valued products to millions of consumers and properly discloses the business risks and opportunities it offers to its distributors. I wrote a feature story about the epic struggle between the $5 billion-in-sales public company and Ackman’s then-$19 billion investment fund, which was published last September and entitled The Siege of Herbalife.

Last summer, in connection with my research for that story, Herbalife showed me information which I ultimately elected not to use at that time. I’ll relate some of it now, since it may help explain why the company spent $694,000 on CEO Johnson’s security and almost $31,000 more protecting the home of Alan Hoffman, the company’s de facto communications chief (formally, its executive vice president of global corporate affairs).

Ackman’s short-selling presentation began on December 19, 2012, with a three-and-a-half hour, 342-slide webcast lecture at a 500-seat auditorium at the AXA Equitable Center in Midtown Manhattan.

Shortly thereafter, Herbalife CEO Johnson and his family began to experience personal harassment and threats, according to incident reports Herbalife provided to me, and which it said had been drawn up by Johnson’s private security detail.

The first two phone calls to his residence took place a few days after the presentation, with a male voice telling Johnson’s wife, and, later, Johnson himself, that his wife and children “would have to pay for what Michael has done.”

Such calls continued to both the residence and his wife’s cell phone. On December 27, 2012, his wife got one while driving her daughter home from a soccer game. “An unknown male stated how nice they looked in their white Mercedes,” according to the incident report. The caller made specific references to the soccer game, and “told [Johnson’s wife] to warn her son at home that something bad was going to happen to him. It was accurate a son was home at that time.” (Johnson notified the Los Angeles Sheriff’s Department of the incidents, according to the incident reports, but decided not to draw up a police report at that time.)

Twice in January and once, again, in June 2013, hundreds of leaflets were thrown over the wall of Johnson’s home in Malibu. On two occasions the leaflets showed photocopies of a news story about Johnson’s high compensation, and on one of those occasions his face had an X drawn through it. (Thanks to massive appreciation in the company’s share price, Johnson has made more than $160 million from sales of stock and options since joining in 2003.) After one of these incidents, the car the vandal fled in was eventually located in a neighborhood in South Los Angeles but was found to have been stolen and “cleaned with a chemical agent to destroy any fingerprint evidence,” according to the incident report.

In June 2013, a security sweep of an executive conference room at Herbalife’s headquarters in the L.A. Live complex near Staples Center turned up a voice-activated recording device hidden behind a television monitor. That September, another such recording device was found hidden in a pen in Johnson’s home office, in his garage, according to the reports.

The perpetrators of these and similar incidents—which extended into late 2014, from what I was shown, but which evidently continued into 2015, according to the company’s filing on Monday—have never been caught.

Thankfully, the marathon struggle between Herbalife and Pershing Square now appears to be approaching closure—though precisely what that will entail remains a mystery. Prompted by Ackman’s campaign, the Federal Trade Commission did finally commence a formal probe into Herbalife in April 2014. The company disclosed last month that it and the FTC are now in talks in an attempt to resolve that inquiry. The company warned, however, that all possible outcomes were still on the table, ranging from “the filing by the FTC of a contested civil complaint, further discussions leading to a settlement which could include a monetary payment and other relief or the closure of these matters without action.”

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