Executive Prison Sentences and Fraud Deterrence

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One of the key parts of Sarbanes-Oxley, the legislation created to address the problem of massive financial statement fraud at public companies like Enron and WorldCom, was the increased prison sentences for executives participating in fraud.

Supporters of the legislation cheered harsher potential punishment for executives as one of the keys that would help prevent fraud.

Others weren’t so sure that longer prison sentences would really do anything to deter executives who want to commit fraud. If you’ve studied corporate fraud for any length of time, you have seen that fraud by executives is often fueled by feelings of arrogance and entitlement. These are important pieces of the fraud puzzle for executives, and they are part of the reason why executives may be unphased by penalties for committing fraud. Continue reading

When Upper-Level Executives Go Bad

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It’s easy to assume that upper-level executives in companies with fraud scandals were always bad people. By assuming that they were inherently bad people, we don’t have to confront the issues related to trusting people who seemed trustworthy. We don’t have to explore the idea that people can turn bad or choose a bad path or give in to greed.

Yet the fact remains that many executives who committed fraud were at one time considered rising stars with good values. If it was recognized that their ethics were a little lower than preferred, some were still promoted because those in charge believed the results were more important than the methods.

Many may look at executives like Kenneth Lay and Jeffrey Skilling of Enron infamy, and believe that they were bad people long before Enron. The role of the villain is sometimes easy to fill when you have someone like Tyco’s Dennis Kozlowski, who was busy buying unusually lavish items with company funds. Certain people just make good villains in our minds. Continue reading

Herbalife $HLF Doesn’t Want You to See This Video

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Herbalife (HLF) does not want you to see or hear the evidence that the company is nothing more than a recruiting scheme. Audio and video footage was obtained of CEO Michael Johnson talking about how Herbalife is a recruiting company:

It’s the recruiting, meaning bringing new distributors into our company, which is the most vital part of our bloodstream. We bring new distributors in, we grow. It’s that simple. It’s that simple. And the company has built its whole reputation, its whole life, on recruiting.

But every time someone publishes this audio or video footage, Herbalife makes a bogus copyright claim and has it taken down. Continue reading

Herbalife CEO Michael Johnson on Recruiting

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Michael Johnson, CEO of Herbalife, talks about how the company is based on recruiting. ” Today, we’re recruiting. We’re still a recruiting company, and we’ve got to never not be this [again pointing to the word “Recruiting” on the slide behind him]…”

This is the problem with multi-level marketing. The “business” is not about the product. It is about recruiting. The product is merely an inconvenience that is necessary to make it appear that these companies are not pyramid schemes. Read more at Quoth the Raven.

Update: Video is now available here.

Herbalife $HLF CEO Michael Johnson on Recruiting

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michael-johnson-herbalife-recruitingLast week a video was posted to YouTube showing Herbalife CEO Michael Johnson talking about recruiting. Herbalife had the video pulled from YouTube on the basis of copyright infringement. That is most certainly a bogus claim. I’m not an attorney, but I’m smart enough to understand the concept of fair use:

In its most general sense, a fair use is any copying of copyrighted material done for a limited and “transformative” purpose, such as to comment upon, criticize, or parody a copyrighted work. Such uses can be done without permission from the copyright owner. In other words, fair use is a defense against a claim of copyright infringement. If your use qualifies as a fair use, then it would not be considered an illegal infringement.

The clip was a part of a longer video (about 71 minutes long) was first reported on in June 2015 by Michelle Celarier at the NY Post. The video clip posted last week was about a minute and a half long, and it was posted in order for people to comment upon it. No one was trying to steal some copyrighted materials from Herbalife and infringe on that copyright. Instead, the whole point was to expose what Michael Johnson said about Herbalife’s recruiting.

So why would Herbalife want to make a bogus copyright claim? Because the clip of CEO Michael Johnson put the company in a really bad light. And we can’t have that! Continue reading

The Price of Free Speech is $200,000

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medifast-lawsuit-check-to-tracy-coenenFree speech is a privilege we enjoy in the United States. But it is anything but free. My personal price for the right to express my opinion about Medifast, Inc. was 5 years of my life and nearly $200,000. (Of course, that doesn’t include the emotional toll that the case took, as Medifast’s malicious pursuit of its meritless case against me was clearly designed to ruin me professionally.)

Case Summary

To summarize Medifast’s bogus case against  the defendants:

Continue reading

Herbalife’s Fake Business Opportunity

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MLM bussines structure.In a video released this week, Pershing Square (the hedge fund that exposed the Herbalife fraud) contrasts Herbalife’s public statements about the “business opportunity” with the statements made behind closed doors.

Herbalife claims to offer “the best business opportunity on the face of the earth.” But the reality is that it is an opportunity in which you are almost guaranteed to fail, with 96% of distributors making less than half of what is earned by employees making minimum wage (per the video). Despite Herbalife executives and high level distributors publicly repeating how lots of money can be made, the numbers really look like this (according to the video): Continue reading

Herbalife False Health Claims

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Multi-level marketing companies that advertise shakes and potions designed to help you lose weight and get healthier are generally all guilty of the same offense: Distributors making false health claims.  The products are generally terrible for losing weight and maintaining the weight loss. And the health benefits are nothing more than one could get from eating well and taking a simple multivitamin.

Nonetheless, people involved in MLMs routinely claim these potions cure things like ADHD, arthritis, high cholesterol, lupus, asthma, migraines, cancer, fibromyalgia, and more. The most disturbing part of this is when the distributors encourage people to stop taking medications that are critical to their health. This advice is simply dangerous.

Today Bill Ackman released a video demonstrating that Herbalife distributors are violating U.S. law by making false and deceptive claims about the Herbalife products. How do they get away with this? The company likely would contend that there is nothing illegal about distributors giving personal testimonials about the results they received from the products.  Good luck with that defense. Continue reading