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There are so many components to Bill Ackman's smear campaign of Herbalife (NYSE:HLF) that it's impossible to address them all in one article. From my first hand knowledge, I'll share some insights.

Product

First, a little perspective. In the '80's Herbalife introduced Herbalifeline, a soft-gel capsule containing Omega 3 and 6 fatty acids from cold-water fish. At the time mainstream medicine considered this to be fringe science. It didn't take a huge research budget for Herbalife to identify this opportunity thirty years ago. It took partnering with forward-thinking scientists, understanding the western diet is not working, and a willingness to invest in an idea.

Today, Omega 3 supplementation is considered a critical part of heart health and a healthy diet. So much so that GSK now markets a prescription Omega 3 supplement called Lovaza. Why would a consumer purchase a product via prescription that they can buy at the grocery store? It's simple, insurance reimbursement.

The weight-loss market is bigger than ever and more global than ever. What a product like Formula 1 does is offer a healthy alternative to consumers who might otherwise consume high-calorie, unhealthy meals. That means instead of consuming McDonald's, Hungry Man, or beans and rice, consumers drink a nutritious protein based shake defined as healthy by the US government. The result is consumers lose weight while getting balanced nutrition. There is no magic pill.

To deny there is a market for Herbalife products or state consumers should simply eat better is ignoring human nature, food economics, and good marketing.

Business Opportunity

Product access through broad distribution is critical to success of most businesses. A great product that consumers can't find is nothing more than a bookend in a lab.

Herbalife products address a consumer need and a business opportunity does exist.

Though direct selling is not for everyone, it is perhaps the original social network and is a very effective way of engaging with consumers and telling the story.

My first visit to a nutrition club was in Boston with representatives from several major investment firms. Until you go, it is impossible to appreciate what is happening. The social component should not be underestimated. To say nutrition clubs operate in the shadows reflects an arrogance and naivety of how a large portion of the population lives and socializes.

The vast majority of distributors and distributor leaders are good people, making an honest living, doing something they enjoy and believe in. No different than other businesses, some succeed, but most fail.

No doubt direct selling has challenges brought about by some distributor leaders who over promise and encourage the "fast track" to success. These distributors need to be disciplined or terminated. My experience is that Herbalife has been taking the necessary steps to discipline unethical behavior while encouraging sustainable growth, ultimately leading to increased distributor renewal rates.

The fundamental question to this entire drama is if the FTC will require Herbalife to make changes to its compensation plan and would any such changes damage the business going forward. That's a technical matter that only the regulators and Herbalife can answer.

I wouldn't bet one-dollar the FTC will shut down the company or its distributor base will depart.

Brand

Michael Johnson has done an outstanding job improving the Company's brand since taking the helm. The launch of Herbalife24 added even more authenticity to the Company's mission of encouraging a healthy, active lifestyle.

While twenty-five years ago the name Herbalife may have been tainted, today millions of consumers of all ethnicities, ages, shapes, and sizes have a good image of and experience with the Herbalife brand.

For those who say Herbalife products are expensive, I say, "so what." That's one component of the relationship between the Company, its customers, and the overall "value" proposition. Last I looked, we still live in a capitalist country.

Conclusion

I'm amazed that so many intelligent, educated individuals try to put everything in a box that fits their image of how business and consumers should operate.

I don't know Bill Ackman, but I'm confident he's an intelligent man. He's in business to make money for his investors and whether he sincerely believes Herbalife will go to zero is his prerogative. I can't imagine Pershing Square investors are too happy with the drama of his methodology.

I do know the guys who run Herbalife. They work endlessly to build a better business, deliver a quality product, and weed out bad distributors. If regulators ask them to make a change, the change will be made, and the distributors will adapt. For those who say differently, they just don't know what they are talking about.

If the accusations Mr. Ackman has made turn out to be accurate, as determined by regulators and the courts, Herbalife should be held accountable. If the accusations he has made turn out to be false, as determined by regulators and the courts, Pershing Square should be held accountable.

In even the best of scenarios a bumpy ride ahead is likely. Herbalife's been through this before, survived, and became a better company. They will again.

Source: Herbalife Is Not Going To Zero

Additional disclosure: Until August 2012 I was a Vice President at Herbalife.