Amid Herbalife Debate, Prof. Keep Gets Some Hedge-Fund Pupils - WSJ.com 8l3Ll 13 9:1s AM

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MARKETS Updated August 30, 2A13,7:14 p.m. ET

Amid Herbalife Debate, Prof. Keep Gets SomeHedge-Fund PupilsHerbalife Debate Has Inuestors Seeking Insight From a New Jerseg Business Scholar

By EMILY GLAZER

Afteryears of lecturing in the classroom on the dangers of pyramid schemes, Prof. William Keephas a whole new set of pupils.

Mr. Keep, a marketing professor and dean of the College of NewJersey's business school, hasbeen consulted with in recent months by roughly two dozen investment firms, including BillAckman's Pershing Square Capital Management LP and George Soros's Soros Fund ManagementLLC. The funds, which together control tens of billions of dollars of investment cash, have soughtto tap into his expertise in the arcane field of multilevel marketing, an understanding of which iscrucial to parsing the debate over Herbalife Ltd.'s business model.

Mr. Ackman alleges that Herbalife, which sells an arrayof nutritional products through a network of aboutthree million independent distributors, is a pyramidscheme. The company says its business practices arelegrtimate. So far, investors appear to be taking thecompany's side, as its stock-which dipped sharplyafter Mr. Ackman launched his campaign against it lastDecember-is up about BS% this year. Herbalife sharesrose slightlv, to about $6r on the New York Stock

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Daryl Peveto for The wall Street Journal EXChange, On Ffiday aftefnOOn.Prof. Wlliam Keep has moved from relativeobscuritv to adviser to hedge funds' In multilevel-marketing companies, people who serve

as distributors earn money on sales to consumers andfrom other distributors theybring into the business. By contrast, in a pyramid scheme, theprimary source of cash comes from recruiting additional distributors, rather than consumer sales.

Mr. Keep likens one to "a crude wealth transfer scheme akin to a chain letter and withoutinvolving products or services."

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Amid Herbalife Debate, Prof. Keep Gets Some Hedge-Fund Pupils - WSJ.com 8l3Ll 13 9:15 AM

The 6o-year-old says he has never opined on whether Herbalife is a pyramid scheme, but, in aletter he sent to the Federal Trade Commission on Aug. 8, he wrote that the company lacks"sufEcient transparency for consumers and investors to make this critical assessment."

Herbalife Chief Financial Officer John DeSimone saidin an interview that the company has been "extremelytransparent and provided more than enoughinformation for outsiders to make an evaluation of ourbusiness model." He added: "For certain people, therewill never be enough informatiolr."

Mr. Keep's rise from relative obscurity to adviser tohedge funds began when an article Mr. Keep co-authored was referenced in a presentation Mr. Ackmanmade in mid-December outlining his bet againstHerbalife, which is based on Mr. Ackman's belief thatits distributors make more money recruiting than byselling to end users. The article, "Marketing Fraud: AnApproach for Differentiating Multilevel Marketing from

$rramid Schemes," written with Federal TradeCommission Senior Economist Peter Vander Nat, is *id"ly seen by investors as a pre-eminentpaper on the topic. A quote from the article is featured prominently on a Pershing Square website,factsaboutherbalife.com. (Mr. Keep's name wasn't initially included on the website, but he laterasked Pershing Square to add it.)

An FTC spokesman declinedto eomment.

Other hedge funds and brokers, eager to gain an edge in the high-stakes Herbalife debate, tooknotice. JNK Securities Corp., a New York brokerage, sought out Mr. Keep and hosted a meetingwith him and roughly ro institutional investors at BarAmericain, an upscale midtown Manhattaneatery. There, Mr. Keep lectured the group on how to spot pyramid schemes, people familiar withthe matter said. (One red flag, he says, is when a company has abnormally high profit margins.)

"Bill Ackman and [other] investors entered a world I've been watching and having dealings withlong before they knew what a pyramid scheme \Mas," Mr. Keep says. The son of a potato-chipsalesman, he says he makes roughly $zoo,ooo a year and marvels at the company he now keeps."They're Srving out bonuses that are multiple times my income....I have one home, and it's notpaid for."

Mr. Keep has more recently played another role in the Herbalife drama. Mr. Ackman, who made a

$r billion bet that shares of Herbalife would fall, has accused the Soros firm of conspiring withother hedge funds to drive up the price of Herbalife shares.

OfEcials from the Securities and Exchange Commissionquizzed Mr. Keep this summer on communications he hashad with officials from Soros, which is on the opposite side

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Scam FilterThe College of New Jersey's William Keep isan expert in discerning when a multilevelmarketing company becomes a pyramidscheme.

Amid Herbalife Debate, Prof. Keep Cets Some Hedge-Fund Pupils - WSJ,com 8/31113 9:15 AM

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of the Herbalife battle from Mr. Ackman and has taken a4.9% stake in the company.

Michael Vachor, a spokesman for Soros Fund Managemetrt,declined to comment on questions relating to the SEC.

It isn't clear why the SEC, which has also made inquiriesabout Herbalife's business practices, is interested in thatcommunication. Mr. Keep says the SEC showed no signs heis a target of an inquiry. An SEC spokesman declined tocomment.

A person familiar with the matter says the meetings Mr.Keep held with porLfolio managers at Soros weren't a factorin the firm's decision-making on Herbalife.

Mr. Keep doesn't charge his Wall Street advisees a fee for hissenrices, he says, adding that his dealings with them havehelped raise both his profile and that of the College of NewJersey, whose business school is ranked Sgth nationally,

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As a state employee, Mr. Keep abides by strict ethics rules, he said. All the information that hasbeen discussed at his meetings with investors is already public, he says.

He has accepted two lunches, a dinner and a stay at a hotel in Washington when he traveled therefor an investor meeting. "But I paid for mytrain ticket," he says.

-luliet Chung contributed to this article.

Write to Emily Glazer at emily.glazer@wsj.com

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