Herbalife Shareholders Can Expect More Than 'Slap on the Wrist,' Ackman Says

It seems nothing can deter Bill Ackman from his conviction that Herbalife (HLF) - Get Report shares will eventually topple.

In rolling out bleak first-quarter earnings for his hedge fund, Pershing Square, on Wednesday -- in which about a quarter of the fund's capital evaporated -- the billionaire activist took another swing at the nutrition-products distributor.

In his letter, he said Herbalife shareholders missed the big picture when the company crushed its first-quarter earnings forecast earlier this month by failing to look at the fine print.

Within the company's quarterly filing, Herbalife recognized that the Federal Trade Commission could soon levy significant penalties because of the manner in which Herbalife conducts its recruitment of distributors, Ackman said, pointing to a specific passage of the filing: "The discussions with the FTC are in the advanced stages, but there are still a number of material open issues that could preclude reaching final agreement," Herbalife said. "If discussions with the FTC do not continue to progress, it is likely that litigation would ensue."

Ackman has long maintained Herbalife operates a pyramidal business model that preys on low-income Latino communities in recruiting workers, who rarely turn a profit and often end up friendless and awash in personal debt. He publicly announced his fund had taken a $1 billion short position against Herbalife in December 2012, after which shares have more than doubled.

Ackman has pointed to interference by other activists, namely Carl Icahn, for the reverse direction of the share price, and that Herbalife's fundamental weaknesses will ultimately vindicate him. As for the FTC investigations probing Herbalife, Ackman said in his letter that Herbalife investors are naive to expect merely a monetary fine of up to $200 million, equating that to a "slap on the wrist."

Shareholders, according to Ackman, "appear to ignore the fact that the company may not be able to settle with the FTC, and instead, will be sued by the FTC for being a pyramid scheme, or, alternatively, that a settlement's 'injunctive and other relief' may materially impair HLF's future profitability and growth potential."

Ackman's fund booked a more than 25% gross loss for the quarter, with the majority of the damage wreaked by troubled Canadian drugmaker Valeant Pharmaceuticals (VRX) , which composed 16.2% of the fall, followed by a negative 3.5% contribution by a bullish stake in Mondelez (MDLZ) - Get Report , and with 1.4% of the negative return tied to Herbalife's stock appreciation in the first quarter.