Questions posed to Herbalife earlier this year by David Einhorn sent the stock price down quickly. Einhorn simply wanted to know about customers… actual consumers of the Herbalife products.
One has to assume Einhorn has done lots of research on multi-level marketing. And he knows the real deal. Herbalife’s customers are the distributors. Corporate doesn’t care much if the products get to a real customer after that. They’ve already made their sale and collected their money.
Multi-level marketing has very little to do with selling the product, and relies almost exclusively on continual recruitment of new distributors. But the product is important to make the MLMs not look like pure pyramid schemes. Continue reading
In March, the Federal Trade Commission entered an order against multi-level marketing company BurnLounge, prohibiting the company and its founders from making certain misrepresentation and requiring them to disclose certain things in the future. Over the last few months, the heat has been on Herbalife, after short seller David Einhorn asked some important questions on a conference call. (Don’t let HLF tell you the questions were elementary or not important. They are very important.)
There is no doubt that Herbalife has had much financial success over the years. It is the largest publicly traded MLM, and its stock price has increased greatly since 2007. But are there things to be worried about? If you know something about multilevel marketing, the answer is YES. Continue reading
Two weeks ago the big news was Herbalife’s earnings call, and questions asked by David Einhorn. Stephen Gandel, senior editor at Fortune Magazine wrote a great article on the Herbalife questions and their significance. I was quoted relative to the issues of distributors and recruiting:
It’s not clear Einhorn has already placed his bets against Herbalife, but it seems likely he would do so before tipping his hand, even slightly. Einhorn only asked three questions on the conference call, so it’s not clear why he thinks the company’s shares will fall. But Tracy Coenen, a forensic accountant, who has been following Herbalife for a few years, says that from Einhorn’s questions it appears he is concerned about Herbalife’s growth. Continue reading
This week, response briefs were due from the defendants in the case of Medifast v. Barry Minkow, Fraud Discovery Institute, Robert FitzPatrick, Tracy Coenen, and Sequence Inc. I was dismissed from Medifast’s SLAPP suit (see information on the lawsuit here), and my brief in the Medifast appeal can be found here. The brief of Minkow and Bob FitzPatrick was also filed this week, and sheds some light on the allegations that Take Shape For Life (TSFL) and Medifast are offering a pyramid scheme to distributors (called “health coaches”).
The entire brief filed on behalf of Minkow, FDI, and FitzPatrick is found here (10MB file). Below I highlight some of the most relevant (and most interesting) portions, particularly the bits regarding the allegations that Medifast’s multi-level marketing business is a pyramid scheme or endless chain recruitment scheme. Continue reading
Sam Antar, former CFO of Crazy Eddie, a massive fraud in the 1980s, has been following Green Mountain Coffee Roasters (GMCR) for a long time. He has pointed out red flags of fraud over and over, and the current problem is with the level of inventory. Sam has noted that the inventory of Green Mountain has grown to “toxic levels,” even when the company was beating revenue and earnings targets.
Here’s a recent interview in which Sam details the inventory issue at Green Mountain, along with a few other criticisms of management. Continue reading
Yesterday the stock of Herbalife (NYSE:HLF) dropped 20 percent when David Einhorn of Greenlight Capital began asking questions during the company’s earnings call. Herbalife is a multi-level marketing company which sells vitamins. The company describes itself:
We pursue our mission of “changing people’s lives” by providing a financially rewarding business opportunity to distributors and quality products to distributors and customers who seek a healthy lifestyle. We are one of the largest network marketing companies in the world with net sales of approximately $3.5 billion for the fiscal year ended December 31, 2011. As of December 31, 2011, we sold our products in 79 countries through a network of approximately 2.7 million independent distributors. Continue reading
On Friday, the market eagerly awaited the release of Groupon’s (GRPN)10-K, detailing results for the year ended December 31, 2011. Shares were up 3.84% during regular trading hours, but dropped as much as 8% (eventually settling at -5.93%) in after hours trading when the company announced its figures were not as good as reported in February.
Some news sites are billing this as a restatement, although it would appear to be more of a revision to the numbers, as the original numbers were simply cited in an earnings release and the financial statements weren’t actually issued until Friday. Continue reading
Last week, CFO Magazine published an article online about CFOs opposing the potential proposal by the Public Company Accounting Oversight Board (PCAOB) requiring companies to switch auditors every 5 to 10 years. More than 625 comment letters, many from CFOs, controllers, chief accounting officers, and audit committee chairs, have been submitted to PCAOB since the organization raised the issue of mandatory auditor rotation in August.
The PCAOB is suggesting that forcing companies to change auditors every few years will make the audits better. They say that a new accounting firm would equal a fresh set of eyes, and therefore a more skeptical audit. Continue reading
Karen Herzog, Milwaukee Journal Sentinel
When a former Milwaukee Area Technical College employee used her MATC credit card to pay for a car, a wedding trip, computers, home furnishings and other personal items totaling $259,000, the purchases went undetected until the college’s first internal audit in a decade.
The audit was requested by James Williams, vice president of finance, who was surprised when he arrived at MATC in July 2010 to find the college had not had an internal audit since 2001. He quickly sought a routine audit because a college with a $260 million budget should have one, Williams told the Journal Sentinel on Tuesday. Continue reading
We hear almost daily reports of companies engaging in accounting shenanigans to boost their apparent performance. As of late, companies like Diamond Foods (DMND), Green Mountain Coffee Roasters (GMCR) and Avon Products Inc. (AVP) are grabbing headlines for their alleged bad behavior.
Avon has been under the shadow of bribery allegations, in violation of the Foreign Corrupt Practices Act (FCPA), since at least 2008. The company has spent hundreds of millions of dollars conducting internal investigations, has lost at least four executives linked to bribery in China, and has been suffering from poor financial performance. And now it appears that Avon may have been aware of bribes being paid as far back as 2005, meaning the company’s problems may soon get even worse. Continue reading