Bill Ackman: Herbalife is a pyramid scheme

[Lambkin]

Pershing Square hedge fund is shorting Herbalife
http://www.chicagotribune.com/business/ ... ote]During a talk on Thursday before an audience of 500 at an event sponsored by a charitable group, Ackman said Herbalife is a "pyramid scheme" that has "grown remarkably rapidly" without demonstrating "much substance" to justify the growth.

He criticized the company for inflating the suggested retail price of its products and overstating its retail sales in public filings.

Shares of Herbalife, which tumbled 12 percent Wednesday after Ackman confirmed his hedge fund was shorting the stock, fell another 6.4 percent to $34.94 on Thursday morning on the New York Stock Exchange.[/quote]

[Lambkin]

Lots of news about this

http://www.businessinsider.com/cnbc-bil ... ng-2012-12

http://www.forbes.com/sites/steveschaef ... hort-case/

[wserra]

And now from the LA Times:

Hedge fund titan Bill Ackman accused Herbalife of paying its sales staff far more money to recruit new distributors than to actually sell its products.

That results in the roughly 2.6 million distributors at the bottom of the sales pyramid making little or no income, while a handful at the top hauls in millions, he said.

As my 11-year-old would say, "Well, duh."

[notorial dissent]

And in other equally startling news flashes, "Water is Wet!!!!

[Lambkin]

Today the New York Post revealed results of their FOIA request, which show that the FTC is investigating Herbalife.

http://www.nypost.com/p/news/business/s ... oeMkv4WFQK

The existence of the probe emerged after the Federal Trade Commission, responding to a Freedom of Information Law request by The Post, released 192 complaints filed against Herbalife over the past seven years.

Other complaints contained a note referring to a “pending law enforcement action.” The FTC did not say whether the action was civil or criminal.

[Burnaby49]

Big article on MLM's in general and Herbalife in particular in today's National Post. Article writer thinks Ackman lost his gamble:

http://business.financialpost.com/2013/ ... h-caution/

[Burnaby49]

In today's Wall Street Journal.

The Federal Trade Commission opened an investigation into Herbalife Ltd., the maker of nutritional supplements that has spent more than a year battling hedge fund manager William Ackman over allegations it is a pyramid scheme.

Shares in Herbalife plunged as much as 17% Wednesday after the company said it had received a so-called civil investigative demand from the FTC. The agency confirmed the investigation, which raises the stakes in a standoff with billions of dollars in the balance.

Herbalife said it complies with all laws and regulations and welcomed the inquiry as a chance to clear its name.

[Burnaby49]

An update;

http://www.slate.com/articles/business/ ... _back.html

[Judge Roy Bean]

Herbalife to Pay $200 Million Over Claims of Misrepresentation

http://www.wsj.com/articles/herbalife-t ... 1468584397

Herbalife Ltd. has reached a deal to pay $200 million in a settlement with the Federal Trade Commission that will enable the company to avoid being classified as a pyramid scheme, a victory in its long-running battle with activist investor William Ackman.

Missed the kiss of death.

[Lambkin]

It's hard to see how this decision will change the fundamental truth about MLM: a few get to be predators, the rest are prey. Will recruits no longer be customers after this change?

[notorial dissent]

It sounds to me like all they did was slap them on the wrist and short them some cash, can't see that it accomplished anything.

[GlimDropper]

This is more than a ($200 million dollar) slap on the wrist, how much more? It's a little soon to say.

Kevin Thompson is an attorney specializing in MLM law and compared to many (most?) people in that group he seems to be a pretty decent guy. His summary of the settlement can be found here. A few quotes:

At the company level, 80% of Herbalife’s revenue from product sales needs to be generated via a combination of retail sales and “Rewardable” internal consumption. “Rewardable” is defined as a quantity less than $200 per month per distributor. The amount of “rewardable” internal consumption cannot comprise of more than 1/3rd of the total revenue, or else Herbalife is forced to reduce its payout by 10% (which basically works as a tax on the top earners).

Internal combustion consumption is a major battleground here, it is of course the driving force in the industry and a 2004 FTC staff advisory opinion (PDF warning) had left the industry with what they felt was some level of justification for their "customers, we don't need to show you no stinking customers" business model. That might be changing. This settlement only applies to Herbalife but between it and the continuing case against Vemma it's clear that retail sales to people outside the comp plan are starting to become something like a thing MLMs might want to figure out how to make sorta like part of what they do (who'da thunk it?).

From the micro-perspective of an individual distributor, Herbalife in the future CANNOT pay any distributor who fails to have at least 66% of his or her total sales (personal and downline included) come from retail customers. Where am I getting this from? From the line in the Order that states, “Rewardable transactions (i.e., compensation) shall be limited such that no more than one-third of the total value of a participant may be attributed to [internal consumption] transactions.”

First off, no current MLM company, especially not a "major" one like HLF can currently trace a plurality let alone a majority of their sales to anything like a common sense definition of a "retail sale" so this requirement either kills HLF or changes it radically from what it currently is (not that either is a bad thing).

I've spent time in the past reviewing the Amway rulings from the late 1970s, I believe they are the largest setback the FTC has faced in the area of pyramid scheme law but they almost didn't need to be. The 70% safe harbor provision (affiliates can not purchase new inventory until 70% of previously purchased inventory had been sold or consumed) could have been something more than an excuse for MLM companies to only grant affiliates refunds on 30% of their other than most recent purchases which is largely how they turned out being and no fewer than ten retail sales per affiliate per month in order for that affiliate to get paid is actually a wonderful idea, if enforcement was more than just imaginary.

Is there hope this will turn out any different? Perhaps. From the settlement:

Herbalife will pay for an Independent Compliance Auditor (ICA) who will monitor the company’s adherence to the order provisions requiring restructuring of the compensation plan.

The ICA will be in place for seven years and will report to the Commission.

HLF is in a pickle, if this settlement is the best they were able to carve out for themselves it isn't hard to imagine what the FTC would have been suing for if this went to court. This does only apply to HLF but it hopefully indicates a shift in the FTC's approach to pyramid enforcement.

A list of 14 points of interest from the settlement from Oz over at BehindMLM: [Link]

On a not quite but completely related note, the Direct Selling Association (DSA) has had a few hand fed congresscritters introduce the rather Orwellian titled Anti-Pyramid Promotional Scheme Act of 2016, H.R. 5230 (hint, the removal of the word "Anti" would make the title far more accurate). The largest change is to the definition of "ultimate user":

(10) ULTIMATE USER.—The term “ultimate user” means a non-participant in the plan or operation, or a participant who purchases reasonable amounts of products, goods, services, or intangible property for personal use and whose purchase is not made solely for purposes of qualifying for increased compensation.

This gets back to the internal combustsumption argument above, the DSA wants to retrofit the definition of ultimate user as used in anti pyramid statutes to include internal (affiliate) purchases as long as they can so much as pretend they have another reason, any reason at all really, other than being paid for doing so, to make that purchase. In short, the DSA, on behalf of it's constituent members wishes to make it nearly impossible to convict a company (preferably a dues paying member of their association) of being a pyramid scheme.

That is, most unfortunately, the best idea they've come up with recently to get MLM companies to pay for the right to call themselves members of the DSA. Years ago they tried to sell themselves on the notion that DSA membership was in some way an indication of quality, of ethics, that MLM professionals should prefer and promote DSA member companies based on moral superiority.

Multi Level Marketing professionals will buy (and attempt to sell) an astounding array of things, from magic gas pills to $75/bottle fruit juice yet almost none of them are stupid enough to equate DSA membership with anything even remotely like moral or ethical behavior.