{"id":11001,"date":"2013-01-12T16:00:20","date_gmt":"2013-01-12T22:00:20","guid":{"rendered":"http:\/\/www.sequenceinc.com\/fraudfiles\/?p=11001"},"modified":"2013-01-12T16:06:28","modified_gmt":"2013-01-12T22:06:28","slug":"anne-coughlan-is-wrong-on-herbalife","status":"publish","type":"post","link":"https:\/\/www.sequenceinc.com\/fraudfiles\/anne-coughlan-is-wrong-on-herbalife\/","title":{"rendered":"Anne Coughlan is Wrong on Herbalife"},"content":{"rendered":"

\"herbalife\"<\/a>At yesterday’s big Herbalife investor day<\/a>, 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.<\/p>\n

In July, Coughlan published this paper on Herbalife<\/a>, concluding that Herbalife is squeaky clean. Let’s be clear. Herbalife paid Coughlan to publish this paper.<\/strong> The paper notes:<\/p>\n

This document was prepared with the financial and data support of Herbalife
\nLtd.<\/p><\/blockquote>\n

I don’t want anyone to be fooled. This wasn’t a professor who just decided to write about Herbalife out of the goodness of her heart. She was paid to do so.<\/p>\n

But lets talk about Coughlan’s conclusions. They’re wrong, and her paper is misleading, in my opinion. She did only a very limited analysis of Herbalife, one that was guaranteed<\/strong> to result in her concluding it was a legitimate MLM and not a pyramid scheme. Attorney Doug Brooks, one of the most knowledgeable people in the world on the topic of multi-level marketing, says that the analysis is superficial and full of misleading and inaccurate statements<\/a>.<\/p>\n

Let me be clear: Multi-level marketing companies have perfected the game of regulatory compliance. They know exactly what window dressing they need to appear to be legitimate. There are even attorneys<\/a> (clowns<\/a>?) who make their livings teaching MLMs how to make it appear that they are not violating laws prohibiting pyramid schemes.<\/p>\n

Inevitably then, the “criteria” that Coughlan examined would all indicate that Herbalife is legitimate!<\/p>\n

Ann T. Coughlan proves her theory with the following points in bold. My commentary follows:<\/p>\n

Compensation is based on sales and not on mere recruitment<\/strong> – What Coughlan fails to realize is that compensation is not based on “sales” in any way shape or form. It is based on distributor orders<\/strong> of products from Herbalife. Commissions are paid when those products are ordered, and there is no correlation whatsoever to sales to consumers. Herbalife has no idea whether those products are sold or not<\/a>.<\/p>\n

And the word “mere” is something Coughlan threw in herself. She cited two important cases in her endnotes:<\/p>\n

For example, The Webster v. Omnitrition case (Webster v. Omnitrition Intern., Inc. C.A.9 (Cal.), 1996) says that the \u201cSine qua non of [a] \u2018pyramid\u2019 scheme is [the] right to receive, in return for recruiting other participants into [the] product sales program, rewards unrelated to [the] sale of product to ultimate users.\u201d<\/p>\n

FTC v. BurnLounge (U.S. District Court, Central District of California, No. CV 07-3654-GW(FMOx), Statement of Decision, notes that \u201cInventory-loading pyramids are illegal not simply because there are wholesale purchasing requirements. They are illegal because the purchases are incentivized by commissions that result from recruiting others to join the scheme through similar purchases.\u201d<\/p><\/blockquote>\n

But you see that neither of these decisions hinges on “mere” recruitment.\u00a0 In the first, the problem is rewards unrelated to the sale of products to actual consumers. This is something many MLMs quietly run afoul of. Most MLMs pay commissions based on product orders<\/strong> by distributors, and the commissions have nothing<\/strong> to with any sale of products to ultimate consumers.<\/p>\n

In the second, we hear about product purchases that are incentivized by commissions paid for recruiting others who make similar purchases. Most MLMs run afoul of this as well, again very quietly. Since MLMs are generally careful not to pay commissions directly tied to the act of recruiting, the recruits are persuaded to make product purchases to trigger the payment of commission. Again, it doesn’t matter if those products are sold<\/strong>, just that they are purchased by distributors.<\/p>\n

And MLMs are even more clever when they require distributors to “qualify” to receive commissions. That is, the distributors can’t receive commission checks unless they have purchased a certain amount of product recently. MLMs are careful to say there is “no requirement” to purchase products, but the truth is that you don’t “qualify” to receive commissions unless you “choose” to purchase products.<\/p>\n

Low enrollment fees<\/strong> – Most multi-level marketing companies have low enrollment fees. That is a carefully planned part of the operation.\u00a0 A higher enrollment fee attracts attention from regulators. So they keep the fees low, and then offer separate “business builder” packages or product packages to extract more money out of distributors. A low enrollment fee proves nothing other than the MLM knows the types of things that can be red flags for regulators.<\/p>\n

Scientific and product investment to create and manufacture sellable products<\/strong> – While Coughlan claims that Herbalife invests significantly in research and development (and now Herablife claims this too, as of yesterday’s investor party), Herblife’s own SEC filings show this is a lie:<\/p>\n

The Company\u2019s research and development is performed by in-house staff and outside consultants. For all periods presented, research and development costs were expensed as incurred and were not material. <\/strong><\/p><\/blockquote>\n

Coughlan reports:<\/p>\n

In 2011, Herbalife spent about $25 million combined on research and development, technical operations, scientific affairs, quality assurance and quality control, product safety, and compliance efforts. Beyond this, an additional $11 million was spent on nutrition affairs, product licensing, and strategic sourcing.<\/p><\/blockquote>\n

Herbalife’s investor day presentation gave similar information, reporting that $44 million was spent in 2012 on “R&D, quality assurance, products safety, and compliance, among others.”<\/p>\n

You have to read these statements carefully. There is a whole lot of stuff thrown into this $36 million to $44 million. It\u00a0 includes all sorts of costs related to manufacturing as well. What does that prove? That they’re not manufacturing products in dirty plants? So the company spends about 1% of revenue on all things R&D and manufacturing, and this is supposed to be a “significant” investment?<\/p>\n

Bill Ackman’s point in his presentation<\/a> was that Herbalife claims to be a products company, but they do relatively little research and development. That hasn’t been debunked in the least.<\/p>\n

Coughlan goes on to say that the result of Herbalife’s research and investments is a sellable product! An illegal pyramid scheme wouldn’t care about having a product!<\/p>\n

Again, this is one way that multi-level marketing companies give themselves an air of legitimacy. They provide a legitimate product that can theoretically be retailed. They can say “no, no… it’s not about recruiting, it’s about retailing<\/a>.” But the truth is that the products are incidental to the scheme as a whole.<\/p>\n

Willingness to take back unsold product when a distributor resigns<\/strong> – Yes, Herbalife is benevolent because it has a product buy-back policy, and since almost no one participates in that program, it must mean that the quitters are all happy. What Coughlan doesn’t mention is that several state laws require buyback policies, so MLMs have these\u00a0 policies to ensure they can do business in all states.<\/p>\n

Coughlan theorizes that an illegal pyramid scheme would have a bogus product and would experience high rates of return.\u00a0 This whole line of thinking is wrong. In my years of researching MLM, I’ve found that most distributors don’t participate in the buyback program because of one or more of the following reasons:<\/p>\n