All good multi-level marketing companies have one thing in common: They fail to disclose enough information to allow consumers and regulators to determine if they are in the business of recruiting or selling products. They disclose just enough facts and figures to make it appear that they are being transparent. But they hide enough information that no one could ever determine definitively if they are running pyramid schemes.

MLMs cleverly avoid the pyramid scheme issue by making it impossible to determine the level of retail sales of products to consumers.  The companies effectively use the technique of plausible deniability: They purposely do not track retail sales, so when the business model is challenged with the assertion that few retail sales occur (and therefore they are recruiting schemes), executives can claim that they know no such thing!

Usana Watchdog has released a report on Usana Health Sciences, challenging the company’s failure to reveal meaningful facts and figures that would allow consumers and law enforcement to determine whether the company is running an illegal pyramid scheme.

Defenders of multi-level marketing (MLM) are often heard saying that it’s a legitimate business method! Even government regulators say MLM is legitimate. And it is true that state and federal governments in the United States generally allow multi-level marketing companies to operate with little oversight. This is despite the fact that structurally and operationally, MLMs are nothing more than pyramid schemes.

Oh sure, the MLMs are careful to use lots of window dressing that makes it appear they don’t violate anti-pyramiding laws. There are even lawyers who whore themselves out to tell owners of MLMs how to “stay legal.” And of course, the massive lobbying on behalf of “direct sellers” and multi-level marketing companies ensures that current laws against pyramid schemes will not be enforced, and that no new laws impeding MLMs will be enacted.

Yesterday the Chicago Tribune ran a piece on multi-level marketing, specifically referring to Herbalife and Fortune Hi Tech Marketing. Typical positive MLM talking points were cited:

Today the New York Post reported that Herbalife (HLF) is under investigation by the Federal Trade Commission (FTC), and that has sent the stock price down more than 10%. The newspaper bases this story on a Freedom of Information request done by the newspaper. It says, regarding consumer complaints received by the FTC:

The FTC redacted some sections, saying it didn’t have to divulge “information obtained by the commission in a law enforcement investigation, whether through compulsory process, or voluntarily …”

With yesterday’s shutdown of Fortune Hi Tech Marketing, consumers have been asking if Herbalife is a similar operation. Last year Herbalife’s business model was called into question by David Einhorn, and then the company was accused of being a pyramid scheme by Bill Ackman.

Naturally, Herbalife denied being a pyramid scheme. Management has repeatedly said that Herbalife is all about selling products, and that the products are indeed selling, so it couldn’t possibly be a pyramid scheme. But according to this (start at 2:00 mark), no one really knows how much product is being sold to actual consumers. To be clear: Herbalife does not track retail sales.

I previously compared Herbalife and BurnLounge, a company shut down by FTC because it was a pyramid scheme. (BurnLounge is currently appealing, but that is a story for another day.) Today we compare Herbalife and FHTM:

At yesterday’s big Herbalife investor day, the company paraded around Anne T. Coughlan, a marketing professor at Northwestern University, who proudly proclaimed that Herbalife is not a pyramid scheme. No, it is a legitimate multi-level marketing company.

In July, Coughlan published this paper on Herbalife, concluding that Herbalife is squeaky clean. Let’s be clear. Herbalife paid Coughlan to publish this paper. The paper notes:

This document was prepared with the financial and data support of Herbalife
Ltd.

Herb Greenberg, a stocks commentator for CNBC did a ten-month investigation of multi-level marketing company Herbalife. Its conclusion is this 20 minute documentary, and the timing couldn’t be better. Herbalife has been accused of being a pyramid scheme again, this time by Bill Ackman of Pershing Square.

Despite the fact that CEO Michael Johnson claims he’s never heard of Herbalife being referred to as a scam, there are plenty of people who will tell you different. This documentary is a very, very good piece and well worth the time to watch.

Herbalife CEO Michael Johnson says he’s never heard anyone refer to HLF as a scam in the last ten years. Funny, but it seems the internet has heard such things. So much that Herbalife distributors write articles and produce videos that attempt to rank well in Google for the search phrase “herbalife scam.” If their pro-Herbalife  information is all that shows up when a potential distributor is searching for the truth about the company, the “negative” side will never be seen.

Thanks for this video, Salty Droid!

As we patiently wait for Herbalife’s “analyst and investor meeting” on January 10 to address the pyramid scheme allegations made by short seller Bill Ackman, there is plenty of good discussion of HLF around the world wide web.

Kid Dynamite said Bill Ackman is wrong about Herbalife, citing that:

• HLF  is not a pyramid scheme because commissions are paid based on sales of products, not recruitment (Wrong. Commissions are paid largely based on required minimum purchases of products by recruits.)
• Herbalife has not committed accounting fraud in reporting their product sales. (I’m not so sure about that. The numbers as reported are deliberately and materially misleading.)

Some multi-level marketing (MLM) companies release income disclosures or earnings disclosures. These documents theoretically provide insight into how much distributors earn in commissions or overrides.

However, the disclosures are generally worthless. What is more important than the information in these documents? The information that is not disclosed in the documents.

Multilevel marketing companies purposely omit important information that would allow potential distributors or investors to have real insight into these plans.

A recent filing in the Medifast appeal (the case in which Medifast sued me and others, and lost miserably) raises some interesting questions about whether Take Shape For Life (TSFL) is an endless chain recruitment scheme. From that filing:

A. Medifast’s Evidence Does Not Prima Facie Show That FitzPatrick’s “Endless Chain” Statement is Provably False

Medifast’s reply again does not demonstrate that FitzPatrick’s endless-chain statement is false. Because Medifast has alleged libel, it must make a prima facie showing that challenged statements are untrue. Masson v. New Yorker Magazine, Inc., 501 U.S. 496, 516 (1991). Courts also evaluate whether an average reader would consider the statement to be fact or protected opinion. Carver v. Bonds, 135 Cal.App.4th 328, 344 (2005).