Bill Ackman's in a tough spot. (Scott Eells, Bloomberg)
Bill Ackman's in a tough spot. (Scott Eells, Bloomberg)

Nearly a year ago, the activist investor Bill Ackman made a huge bet: that investors, if informed that a $7 billion global company with a 30-year track record was a fraud, would run for the exits.

The wager was a $1 billion short against Herbalife, a multilevel marketing operation that recruits distributors to sell weight-loss products. Last December, Ackman made the case to an investor conference that the company was actually a massive pyramid scheme, preying on "distributors" who pay to sign up before realizing that the product is too expensive to sell. Eventually, he implied, it would collapse under its own weight.

The stock dropped about 38 percent in a week, but that wasn't enough for Ackman, who'd set a price target of zero. And then, something terrifying happened: The stock started rising again. Activist investor Carl Icahn took the other side of the bet by becoming the company's single biggest shareholder in January. George Soros piled in, and now the stock is trading at nearly double what it was before Ackman tried to destroy it, while he loses millions of dollars in fees to maintain his short position. If the stock stays where it is indefinitely, or rises further, he could lose much more.

So what's a poor billionaire to do?

Tomorrow, Ackman is scheduled to make another presentation to another bunch of rich people, and is expected to drop more dirt on Herbalife on top of what he's compiled online. But really, he's got basically one chance at salvation: governmental interference.

At first, that looked like a viable option; the Securities and Exchange Commission opened an investigation almost immediately after Ackman launched his crusade. But the regulator hasn't been heard from since, even as it shut down another pyramid scheme and issued an alert about what such schemes look like. So Ackman has brought the full court press to Washington, hiring lobbyists to counter Herbalife's own, and meeting with the enforcers to make his case.

"There's reasons we're still short the stock. If we didn't think [regulatory authorities] would take action, we would've given up a long time ago," Ackman said in an interview in D.C, on Tuesday. "We've got an unbelievable amount of resources on this."

Billions ride on the outcome -- as well as a business that touches tens of millions of people around the world.

The last year in Herbalife's stock. (Google Finance)

Hispanics as victims

The good news, for Ackman, is that he's got help from the people who may actually be hurt by Herbalife's business model. A number of Hispanic and consumer advocacy organizations have spoken out against the company, urging state attorneys general to take action and filing complaints with the Federal Trade Commission, which also has the power to bust pyramid schemes if it finds they make most of their money from signing up distributors rather than actually selling products.

That's what Brent Wilkes, director of the League of United Latin American Citizens (LULAC), thinks is going on. He became aware of Herbalife back in July, when the company invited him to a meeting as part of an outreach campaign to Latino organizations. It didn't go well.

"I thought the company representative was trying to pull the wool over my eyes, so we decided to take them on," Wilkes says. "The central question here is: Are the Latino distributors making money, or are they losing money? What is the average income? They refused to tell me that."

Here's what the company says: 71 percent of its "distributors," or 351,000 people in 2012, don't actually sell products at all, but just take advantage of wholesale pricing for their own consumption (Herbalife just recently started calling these people "members" rather than distributors, but says the change "has no impact on the marketing plan"). Of the people who do sell products -- 142,797 of them -- only 4,351 make more than $10,000 in royalties and bonuses per year from Herbalife. That's not counting profits from selling products at retail prices, but the company doesn't offer those numbers, so it's unclear how many people actually make money on the scheme.

What's more, the company's marketing (including some amazing videos) is mostly about the lucrative business opportunity, rather than the benefits of signing up as a distributor to obtain products for personal use. Wilkes thinks many people discover only later that they can't sell the product.

"That's what I hate about the company. It's almost Orwellian. 'It is what it is because we say it is.' They just reclassify them as customers," Wilkes says. What's more, he adds, there's a reason Herbalife targets Latinos. "They believe that Latinos are trusting. And many of them are undocumented -- when they realize they've been taken, and they quit, they're less likely to go to the police."

Wilkes has spoken with people from Ackman's investment fund, Pershing Square, but both of them opted against financial support for LULAC's awareness-raising about Herbalife's perils, to avoid the perception of a conflict. Still, the word is getting out. Rossana Espinoza, a small business coach and trainer with Washington D.C.'s Latino Economic Development Center, remembers being pulled into an Herbalife marketing session while walking through Adams Morgan, the city's most Hispanic neighborhood.

"It seemed like a scam, because it was presented as an opportunity with little to no risk," Espinoza said. If her clients ask about becoming Herbalife distributors, she'll point them to opposition from Latino groups and the class action lawsuit currently pending against it.

Will it be enough?

For Ackman's purposes, the Latino community's support goes only so far. Wilkes says he'd be happy for Herbalife to continue as a successful company, with certain modifications to its business model. That doesn't work for Ackman -- he basically wants Herbalife to be shut down or go bankrupt, the sooner the better.

It's difficult to assess the prospects of that happening.

For the SEC to take action, it would need evidence of falsified financial statements, misleading labels, or other forms of outright deception. Tom Sporkin, a 20-year SEC enforcement veteran who ran the office charged with taking complaints like Ackman's, says he appears to be doing all the right things to make the regulator take notice -- but is skeptical that he can supply the kind of material it's looking for.

"If you tell investors and the rest of the public that you're selling boxes of air, you're fine, you can charge $100 for them," he says. "Mr. Ackman needs to tell the SEC where exactly the company is lying in its disclosure. As long as there's accurate information, the investors will determine the price of a company that sells boxes of air. That's what's great about the U.S. securities markets."

The Federal Trade Commission can consider cases more holistically, but the criteria for prosecution are still fairly technical. While it shut down another multi-level marketing scheme in January,* FTC watchers currently appear doubtful about whether Herbalife clears the bar.

Of course, it's possible that Ackman knows more about the state of the SEC investigation than he's able to let on. But that's exactly why Wall Street doesn't seem to care about his barrage. Every week that goes by without action from D.C. makes the market more confident it's a safe investment.* The respected CEO of cereal company Post Holdings recently took a 5 percent stake in the company, and Icahn continues to loudly argue that Herbalife's been around for three decades, so why would it collapse now?

"The real issue is Herbalife keeps making money, and it does it in a legal way, as far as I'm concerned," he told Fox Business in September. "You may like the product, you may not like the product. You may say it sells for too high, but hey, if you go to these jewelry stores on Fifth Avenue instead of the ones on 47th Street, you can say they're too high. That does not mean they're illegal, that means they do a service."

Meanwhile, the company -- which has vigorously defended itself against Ackman's claims -- is building in more protections for distributors, such as requiring training and buying back unsold inventory with no restocking fee, which reassures analysts that it's on the up and up.

Even analysts, though, don't know enough to judge whether or not the company's business model is illegal -- they essentially go on faith, and precedent, as well.

"I have no way of proving Ackman right or wrong. And that's, in a way, the biggest problem," says Meredith Adler, who covers the company for Barclays Capital, and is bullish on the stock. "In the end, you make a judgment call, because you don't have enough facts. His judgment call is that it's a pyramid scheme; my judgment is that it's not."

For that reason, nothing that Ackman does or says will matter unless D.C. regulators get behind him.

"All I'm going to say is, people do what they want to, whether it's buying vitamins or investing in stocks," Adler says. "People are nowhere near as rational as you think they are."

Corrected to reflect that the FTC has, in fact, shut down pyramid schemes since disciplining Amway in the 1970s, and that Herbalife disclosed the SEC investigation in its filings. 

A slide from Ackman's presentation - Herbalife's products are more expensive, calorie for calorie, if you pay retail. (Pershing Square Capital Management)