Actionable news
0
All posts from Actionable news
Actionable news in HLF: HERBALIFE Ltd.,

Herbalife Will Have to Live Without Mansions and Private Jets

I don't know anything any more. Here's CNBC:

The Federal Trade Commission settled with Herbalife on Friday, effectively determining that the nutritional supplement marketer is not a pyramid scheme.

Here's Herbalife Chief Executive Officer Michael O. Johnson:

"The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms."

Here's the FTC's complaint against Herbalife, filed today with the settlement:

Most Herbalife participants earn little or no profit, or even lose money, from retailing Herbalife products.

In the absence of a viable retail-based business opportunity, recruiting, rather than retail sales, is the natural focus of successful participants in Defendants’ business opportunity.

Thus, participants’ wholesale purchases from Herbalife are primarily a payment to participate in a business opportunity that rewards recruiting at the expense of retail sales.

Pyramid schemes now come in so many forms that they may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure.

Here's a case that the FTC brought last year against Vemma, a multilevel marketing company that it shut down as an alleged pyramid scheme. From the Vemma complaint:

Defendants promote participation in Vemma, which has a compensation program based primarily on providing payments to participants for the recruitment of new participants, not on the retail sale of products or services, thereby resulting in a substantial percentage of participants losing money.

Defendants' promotion of this type of scheme, often referred to as a pyramid scheme, constitutes a deceptive act or practice in violation of Section 5(a) of the FTC Act.

Paying primarily for recruitment, with a substantial percentage of participants losing money, is the "type of scheme often referred to as a pyramid scheme," says the FTC. Herbalife pays primarily for recruitment, with a substantial percentage of participants losing money, says the FTC. The FTC couldn't have been clearer that it thinks that Herbalife is a pyramid scheme, without actually using the words "pyramid scheme."

But it didn't use the words "pyramid scheme"! And it didn't shut down Herbalife like it did Vemma. Instead it agreed to a settlement in which Herbalife will pay $200 million to the FTC and make a bunch of changes to its disclosure and business model. For those accustomed to the "neither admit nor deny" settlements in the financial industry, it's fun to see a settlement where the two sides so openly and vehemently disagree. The FTC thinks that Herbalife is ... well ... arbitrarily close to being a pyramid scheme, anyway. Herbalife thinks that its business model is fine, and "believes that many of the allegations made by the FTC are factually incorrect." They'll split the difference and call it $200 million.

The basic thesis of the complaint is that Herbalife is primarily in the business of selling business opportunities to gullible customers on false premises, and it works out poorly for those customers:

The overwhelming majority of Herbalife Distributors who pursue the business opportunity do not make anything approaching full-time or even part-time minimum wage because the promised retail sales to customers simply are not there.

And:

Analysis of Defendants’ own Distributor purchase data shows that, even under favorable assumptions about Distributors’ market reach and sales price, the overwhelming majority of Herbalife Distributors who pursue the business opportunity make little or no money from retail sales. Under these assumptions, and assuming no costs other than an individual’s total payments to Herbalife, half of Distributors whom the Defendants designate as “Sales Leaders” average less than $5 per month in net profit from retail alone, and half of these Distributors lose money.

But while the actual business opportunity is bad, Herbalife tells potential recruits that it is very good indeed. The complaint is full of quotes from Herbalife presentations that wildly oversell the business opportunity:

[H]ow many of you would like to make at least a million dollars a year in income? I gotta tell ya, every extra million dollars, I find, comes in handy. OK? You know? Then you get 2 million, 5 million, you know, and with the increases of 20%, 25%—

Even now, you can put into your mind—like, if you made a hundred thousand dollars last year, and your income went up proportionately, an extra twenty thousand dollars? That’s pretty cool, huh? Couple thousand a month? You make five hundred thousand dollars, would an extra hundred thousand dollars come in handy? And we’re gonna go through how to make it happen.

And:

I can remember when I was new, and I didn’t know anything, I didn’t know anybody, didn’t have any sales or marketing experience, I didn’t know, how was I ever gonna get successful? ...

And make no mistake about it, ’cause it happened for me, I’m living proof that it can happen, and all the people down here in this floor here, and the people behind you, all of us are, you know—I’m a multi-millionaire, but, you know, all of us are getting groomed to become multi-millionaires. That is an awesome opportunity.

Now, you can take advantage of it, or you may only want to make sixty thousand, a hundred thousand, a couple hundred thousand.

Again: The normal profit is more like $5 a month. "Notwithstanding Defendants’ express and implied representations that Herbalife offers a retail-based business opportunity," says the FTC, "in truth the only way to achieve wealth from the Herbalife business opportunity is to recruit other Distributors" -- again, basically the definition of a pyramid scheme.

Nobody exactly denies this; it's hard to explain away the presentations, or to claim that everyone who tries hard enough to sell Herbalife shakes becomes rich. (Herbalife does compare its business to Uber and Airbnb, as an "opportunity to generate supplemental income with low barriers to entry and the flexibility to work on their own terms.") Instead, the core

is that most of the people who sign up to be Herbalife "distributors" and don't make money mostly aren't trying to make money. Instead, they just want the diet shakes, and the most efficient way to get the diet shakes is to sign up to be a Herbalife member, which gets you both discounts on the shakes and a social support network for your dieting. So people are just signing up to be members to get a bulk discount, but due to an accident of history, Herbalife refers to its members...


More