This morning Herbalife (NYSE: HLF) was charged criminally for paying bribes to Chinese officials. The action is related to criminal liability under FCPA (U.S. Foreign Corrupt Practices Act).
The company disclosed in an SEC filing today:
- Herbalife violated the books and records and internal controls provisions of the FCPA
- The company will pay $123 million as a settlement with the SEC and DOJ, and this amount has been included in current liabilities on the June 30, 2020 financial statemetns
- If the company doesn’t have any other violations for 3 years, this deferred charge will be dismissed
Herbalife disclosed in May that it had entered into a settlement agreement with the government. Today’s court proceedings make it official.
It’s fun to see pyramid schemes being held to account, even if it doesn’t happen often enough.
Last 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
This week New York State Senator Jeff Klein and Public Advocate Letitia James issued a scathing report on multi-level marketing company Herbalife (NYSE: HLF). The report, The Amercian Scheme: Herbalife’s Pyramid ‘Shake’down, is based on complaints filed by 56 Herbalife victims. It definitively calls the company a pyramid scheme and highlights the company’s deceptive practices.
The key findings include:
- Since 2004, only 56 Herbalife victims in New York have been brave enough to file complaints against the company. Most victims are afraid of betraying family, friends, and neighbors.
- The 56 victims that have filed complaints reported nearly $1 million in financial losses ranging from $90 to $100,000. The average amount loss was approximately $20,000.
- Over 60 percent of new members make initial investments larger than the required $60 to $100 for the new member kit. The average initial investment is $1,800, but some are as high as $10,000.
- Herbalife distributors purport that supervisors can make as much as $20,000 in monthly income.
- Of 56 complaints analyzed, only eight victims received a check directly from Herbalife for their royalty claims. The average amount was $100.
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