More on Herbalife's Official Rebuttal to Ackman's Herbalife Slam

Bill Ackman in December made a long presentation claiming that Herbalife is a pyramid scheme.

On 10-JAN-2013 Herbalife made a formal press conference issuing rebuttals to Ackman's points. I am working off summary as published on Seeking Alpha so any misinterpretation would be mine, as I'm not working from the source material itself.

Ackman Assertion: There is no R&D spend and Herbalife's products are commodities that sell at high prices.

Herbalife Reply: Dietary supplements are classified as food, not drugs, and thus cannot be expensed as R&D. R&D expense is thus consistent with the peer group of GNC and NBTY. 

MY COMMENTARY: Why can't R&D be applied to dietary supplements? This sounds like rather specious reasoning. I need to get to the source material on this. GNC and NBTY manufacture stuff with existing ingredients. Does Herbalife claim any custom formulations with higher effectiveness? If so, then it cannot really be compared with GNC or NBTY, can it? 

Herbalife Reply (continued): Further, Herbalife spent $44 million in 2012 on product development, scientific affairs, quality sourcing ("seed to feed" program), product safety, etc. which was not classified as R&D so Ackman missed it.

MY COMMENTARY: Product development is NOT R&D? Quality sourcing and product safety is just QC, isn't it? Can those really be counted as R&D in the first place? 

Herbalife Reply (continued): Further, Ackman compared pricing per 200 calorie serving and found the price was almost double the nearest competitors, however pricing should be compared per serving at SRP, and Herbalife is priced right in the median. 

MY COMMENTARY: How often is the product actually SOLD at suggested retail price? 

Analyzing Loeb's rebuttal to Ackman's Slam of Herbalife

Herbalife product brochure Cover
GR Greece Ellas Ellada
(Photo credit: www.goherb.eu)

Yesterday we reported on SEC opening an investigation into Herbalife. Now we learned that Dan Loeb has basically placed a $300 million bet against Bill Ackman on Herbalife. Ackman believes that Herbalife is a pyramid scheme, Loeb believes the exact opposite: it's a "classic compounder", in Wall Street-speak, i.e. high growth company.

Instead of checking each and every point that Ackman and Loeb had made, I'll just go over Loeb's rebuttal. It can be read in full here:

https://thompsonburton.box.com/shared/i58pby20vijey3n3g2ad  (Thanks to "The MLM Attorney" Kevin Thompson's hosting )

Here's an excerpt from it, which is most of the counter argument.

The short seller’s lengthy argument against the Company can be boiled down to three principal smoking guns: the first, a claim that Herbalife has been operating an “illegal pyramid scheme” under the nose of the Federal Trade Commission for the past 32 years; the second, that Herbalife’s loyal customer and distributor base has been exploited and harmed despite the low number of consumer complaints and generous company return policies; and the third, a claim that Herbalife’s products are commodities sold at inflated prices not supported by sufficient levels of advertising or R&D.

Taken in reverse order, the third claim misses an essential truth that invalidates the indictment. No one believes Starbucks is a scam because you can buy a cheaper cup of coffee at your local bodega. A key contributor to Herbalife’s growth has been its distributor-led “Nutrition Clubs”, where consumers can purchase single servings of the Company’s signature beverages. The short seller’s assertion ignores the significant value customers place on every consumer brand and its community “experience” – whether at a Herbalife Nutrition Club, a Starbucks, or a corner bar. The markup is merited by community and brand identity, not by the commodity itself.

This counter-argument somewhat sidestepped Ackman's actual point... Ackman did not say Herbalife did not advertise. In fact, several of the slides shows Herbalife ads, as Herbalife sponsors David Beckham, Formula One cars, and more. However, is it enough? Ackman's presentation actually compared Advertising and R&D budget as quoted from Herbalife's balance sheets to companies of similar size and industry (as well as those NOT in the same industry), and Herbalife STILL fell short. Furthermore, what good is brand recognition if this stuff is NOT sold at retail? It's almost as if Loeb just constructed a strawman argument and defeated it.

However, I do acknowledge that this is a good argument... that it *could* be argued that the product is NOT overpriced... or it *is* overpriced but it's NORMAL for the nutra-ceutical industry. It is needed to support the margins to do MLM payout.

Strangely, this seems to be the best argument, as the next two are weaker.

SEC Opens Investigation into Herbalife

Herbalife product brochure
Cover RU Russian Federation
(Photo credit: www.goherb.eu)

The hedge fund manager's allegation that Herbalife is merely a pyramid scheme has now reached a new crescendo when SEC decided to open an investigation into the allegations, according to FOX business news.

While this is only starting, this adds pressure on Herbalife, which already faced verdict of "pyramid scheme" in Europe.

William Ackman, in December 2012, had made a case with 300+ panels presentation, that Herbalife is a pyramid scheme, not MLM. Herbalife responded by "we are contemplating legal action".

While there's no way to know which way is SEC going to rule, as it'll be months before any results come out, this will add pressure on Herbalife to either open its books and show things it may not want to show, or lead to further airing of dirty laundry and further taint the reputation of MLM.

Signs of Work-at-home Scams

Every day more Work-at-Home Scams appear. Most are just rehash of old scams, albeit slightly updated for the Internet age. However, they still share some basic characteristics:


Scams *cost* you money, instead of paying you money

They always have an excuse... it's for supplies, it's for lessons, it's for a special insider info, it's to see if you're serious, blah blah blah. You WORK FOR MONEY. You're NOT in the business of PAYING money to earn money. That's called an "investment". If you are asked to pay money to earn money, run away!


Scams usually do High-Pressure Pitch, Time-Limited Offer, Buy Now!

Scams want your money now. The more you think about it, the less likely scam is like to succeed, thus scams will always make their stuff look good, then use high pressure sales tactics on you with "time limited bonus" and such, to force you to commit now, which makes no sense in a business. Why is this thing time-sensitive any way? Scams and fads are time-sensitive. A real opportunity is not. Avoid the hardsell and artificial time pressure!

Penny Auction Zeek Rewards mentioned in Top Ten Scams of Idaho

Can you "win" iPad for $25? Only when hundreds of others lose dozens or hundreds.
Image via CrunchBase

According to columnist Robb Hicken, penny auctions is the most insidious scam of 2012, and Zeek Rewards is specifically mentioned.

1. Penny auctions: The online penny auction Zeek Rewards was shut down this year as a Ponzi scheme. TIPS: Pay attention to details in signup, annual fees, minimum bidding requirements, maximum prizes and refund details.

Read more here: http://www.idahostatesman.com/2012/12/31/2396820/the-top-10-scams-of-2012-in-the.html#storylink=cpy

Technically Mr. Hicken's tips will only help if you're simply bidding, not being an income-opportunity affiliate (which is a whole different "ball of wax", so to speak, but it's not a bad place to start.

What's worse, the whole penny auction industry itself is misleading.

Another MLM Bites the Dust: MPB Today Owner Jailed

http://openclipart.org/clipart/people/magnifying_glass_01.svg License: PublicDomain Keywords: people Author: AbiClipart Title: Magnifying Glass (Photo credit: Wikipedia)

Gary A Calhorn, owner of MPB Today, an alleged MLM dealing with discounts and groceries, is apparently under arrest and facing both state and Federal fraud charges, according to report on PatrickPretty.com

Apparently, the biz closed back in July when a grand jury allowed the forfeiture case to proceed against various properties and corporate entities held by Calhorn. And he was arrested last month on racketeering charges by Florida. Forfeiture case seem to be linked to "access device fraud", which usually means credit/debit card terminals and possibly identify theft. There are also references to wire fraud and conspiracy, both are Federal crimes.

More Zeek Hilarity: Woman claims she know more about Securities than SEC

Sometimes, people just behave so idiotically  you wonder if they were taking drugs or had a mental breakdown, but they are clearly lucid.

Many such examples exist for the Zeek Rewards Ponzi. 

In an article published 20-DEC-2012 in The Dispatch of North Carolina, one Zeek affiliate Basinger, who was employed as "Law Firm Administrator" (i.e. head secretarial staff) claim that she knows what securities are, and SECURITIES EXCHANGE COMMISSION does not. 

Basinger strongly disagrees with the SEC's action.

"Zeek Rewards wasn't a Ponzi," Basinger said. "I think this whole thing is a big misunderstanding. I bought bids that were given away to people participating in the penny auction. I never bought a security — I know what those are."

Wait.... WHAT?!?!?!

She knows what securities are, and SEC does not.