I have researched multi-level marketing companies for nearly a decade. During that time, I came to the conclusion that the vast majority of participants fail. What does that mean? 99% or more lose money. Since the participants are largely getting in because of the “business opportunity” to “earn unlimited income” and find “financial freedom,” failing to turn a profit is indeed a failure.
A few weeks ago, a wonderful article on Herbalife was published on Seeking Alpha. It started out by discussing hedge fund manager John Hempton’s blind (and incorrect) defense of the Herbalife business model. In essence, he claims that since meal replacement shakes are sold, this is a legitimate business opportunity.
This is the defense that every MLM company uses. “We have a product. People buy it. Therefore we are not a pyramid scheme.” Continue reading
Former KPMG audit Partner Scott I. London brought great shame to the accounting profession this week by being charged with conspiracy to commit securities fraud through insider trading. After nearly 30 years with KPMG, London went down in flames after being caught passing insider information on audit clients of the Los Angeles office to his “friend,” Bryan Shaw.
Proving once again that there is no honor among thieves, Shaw got caught first, and then sold out his friend Scott to the Feds. He helped them get a gorgeous trail of evidence, including phone calls and photographs of the crime. Both are now charged with insider trading. Continue reading
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 …”
And The Post says that other complaints by consumers had notes referring to a “pending law enforcement action.” Continue reading
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. Continue reading
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! Continue reading
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.) Continue reading
One of the most common arguments used against those who deem multi-level marketing companies pyramid schemes, is that pyramid schemes collapse. Because Herbalife hasn’t collapsed, it must not be a pyramid scheme. Because the company has avoided total collapse for more than 30 years, it can’t possibly be a pyramid scheme. That is false, and I will demonstrate the falsity with the help of Bill Ackman.
Recruiting is the Name of the Game
A pyramid scheme has been defined as a scheme in which the participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers. Continue reading
This little gem is courtesy of Shortzilla, a Seeking Alpha contributor. In a 1986 Final Judgment and Permanent Injunction against Herbalife in California, the company agreed to the following:
B. defendants shall be in compliance with this Section 5, as long as a verification or documentation system they implement allows them, at any given point in time, to verify or: document to plaintiffs that any and all participants who receive commissions, bonuses, overrides and/or advancement from defendants in defendants marketing program, after entry of this judgment, are based on retail sales made by or through such participant(s) or others introduced directly or indirectly under participant(s). 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