BREAKING NEWS: Herbalife confirmed it is under investigation by FTC

In a webcast, Herbalife confirmed that it is indeed under investigation by FTC.

http://www.marketwatch.com/story/federal-probe-is-latest-twist-in-herbalife-saga-2014-03-12

BREAKING NEWS: FTC responds to Senator Markey's Letter... with nothing

FTC just made public their response to Senator Markey's letter regarding Herbalife and its investigation.

They took 3 pages to get to the point, which can be roughly summarized as

"We're looking into it, and we can't answer your questions without giving ourselves away. Stay tuned."

Here's Kevin "The MLM Attorney" Thompson of Thompson-Burton discussing the response.

http://thompsonburton.com/mlmattorney/2014/03/01/ftc-responds-to-senator-markeys-letter/

Bad Propaganda: Avon was NOT a sterling example of MLM success

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Avon logo  (Photo credit: Wikipedia)

When trolling for new members, the recruiters for MLM often cite Avon, Amway, and until recently, Herbalife as sterling examples of network marketing. But are they really?

Since Amway is a private company, I have no stock data to show you, and Herbalife prices are crazy because some hedge fund managers are having an ego trip by playing with HLF stock. That's not a good indicator of the confidence in the company.

But Avon, that company had been around for over 100 years. How did it do?

If you enter AVP into Google, you'd find that Avon had been in STEADY DECLINE for the last ten years... since it adopted MLM. That's right, Avon did NOT adopt multi-level marketing until 2005. And it had been FAILING every year.

Avon Products, as of 18-FEB-2014

The stock chart is clear: for the last 10 years, S&P 500 had gone up 71%, while Avon stock price had gone DOWN 52%.

And one of the MAJOR change during that decade is Avon adopting MLM in 2005.

Please recall that MLM was started in 1979 when Amway survived an FTC challenge in court.

It took 25 years for Avon to go MLM, after MLM was created, and 100+ years AFTER the company was founded.

And it had done steadily WORSE every year, ever since.

Think about that. What do the stockholders know that we don't?

(And why would MLM defenders cite Herbalife's stock price rise since Ackman's challenge as proof that MLM is thriving, while ignoring Avon's price drop?)

MLM Absurdities: MLM may be a Cult... revisited. Why Do Herbalifers get Tattoos?

Previously, MLM Skeptic has discussed how often MLM resembles a cult (of money/greed), where members are to worship their upline and their company, any dissent is stamped out with shame, any defectors ridiculed and denounced, any critics ignored.

Today we will discuss a different part of cult behavior... identifying marks... such as tattoos.

Michael Burton
showing off his Herbalife
tattoo at an Herbalife event
in Serbia 2012

Tattoos used to belong to the realm of gangs and religious cults. It is only in recent years that the more elaborate tattoos have made the transition to "fine art".

Think about it. Tattoos are semi-permanent. It's on your body. It is intensely personal. It is extremely difficult to remove (often costs thousands of dollars), so you are REALLY showing your commitment if you choose to get one.

No wonder gangs often have gang tattoos, so much so, law enforcement have gang tattoo databases to readily identify gang affiliations.

And religious cults often have tattoos, special signs or greetings, and such.

But tattoos for a company? Really?

Back in 2013, a real estate company in New York offered 15% pay raise if its employees get a company tattoo. Owner said he was inspired by one employee who got a tattoo just for the heck of it, and the owner offered him a raise, and from there he decided to go for broke.

Putting a company tattoo on yourself just for the heck of it? That takes some dedication... Or mental illness.

Meet Michael Burton... member of (cult of) Herbalife.

Here's Michael Burton, showing off his Herbalife tattoo. He said he used to be a flabby used car salesman and went backrupt, so he went into Herbalife (at insistence of his in-laws) and became so fit, he competed in those fitness competitions.

Then he went bankrupt. And he owes tons of people money. And he has almost nothing left. Except his passion for Herbalife and his Herbalife tattoo.

But he's hardly the only one with Herbalife tattoos.

BREAKING NEWS: Canada launches formal probe into Herbalife

According to New York Post, Canada's Competition Bureau has launched a formal inquiry into whether Herbalife operates as a pyramid scheme there.

CCB has no comment.

It is unknown if this had anything to do with Shawn Dahl's side business, which was a clone of his mother-in-law's business that was closed in Canada as a pyramid scheme.

http://nypost.com/2014/01/28/canadian-regulator-probing-herbalife/

MLM Basics: Why Had Network Marketing Lost Its Love of Retail?

Modern network marketing companies lost their love of retail, and thus its primary purpose.

According to the law and their implied purpose, a network marketing company's purpose is to retail stuff through their affiliates (IBOs, distributors, counselors, salespeople... whatever). However, few if any of modern MLM's verify that the products they sold to their affiliates are actually retailed. Almost all network marketing companies merely require a signed "promise" from the affiliates that they promise to honor the Amway Safeguard Rule #1 "Retail Customer Rule". And without retail, the common affiliates's only income would be to recruit additional affiliates (who also do not retail, since retail is hard). If you extrapolate this out, you have a bunch of salesepeople who sold stuff to themselves, while recruiting yet more people like that. That would make it a pyramid scheme.

The Omnitrition Case and Lack of True Retail

In the Webster vs. Omnitrition case, Webster, an affiliate of Omnitrition, sued Omnitrition of being a pyramid scheme. The company responded by asking the court for a summary judgment, i.e. "Court, please tell me (and whoever sued me) I am NOT a pyramid scheme! I use Amway Safeguard Rules! I can't be!" After looking at the evidence,  the court ruled that if the company (Omnitrition) does not audit actual retail, then the company cannot use this "signed promise" to prove they are not a pyramid scheme. Omnitrition then immediately settled the lawsuit with Webster, as they apparently find paying off Webster, et al. to be easier than actually auditing their retail.

Yet dozen years after Omnitrition case, no major network marketing company that I know of, audits retail.

The implication is mindblowing: virtually all major network marketing companies in the US are in danger of being declared a pyramid scheme, despite their claimed adoption of Amway Safeguard Rules that supposedly separated network marketing from pyramid schemes, because they do NOT audit retail.

When Herbalife was first accused by Bill Ackman to be a pyramid scheme at the end of 2012, Herbalife cannot cite how many retail customers it has. Even now in 2014, Herbalife is STILL citing the retail number it EXTRAPOLATED from surveys it conducted in 2013. Herbalife cited a lot of ancillary numbers, like "amount of products directly shipped to non distributors" (31% IIRC), but it has NO RETAIL NUMBERS.

Herbalife classified their ranks by amount of downlines they have (no downline, single level downline, multi-level downlines), and claimed those with no downline are "customers", and those with single level downline are retailers.

THIS MAKES NO SENSE. By definition, EVERY distributor, no matter if they have downline or not, ARE RETAILERS, if the company was following the Amway Safeguard Rules!

Herbalife also produced survey results in 2013 that claimed 44% of its distributors have NO INTENTION OF RETAIL PROFIT, and 73% PRIMARILY JOINED FOR 25% DISCOUNT.

Why would a company NOT encourage retail, which is at the heart of network marketing?

Because lack of retail enrich those at the very top of the company and the company itself, with minimal effort and expenses needed all the way around (company or affiliate).

Wall Street Runs on Greed... And Conspiracies (so Don't Trust Them)

English: Wall Street sign
on Wall Street
(Photo credit: Wikipedia)

Previously, MLM Skeptic had pointed out the futility of using stock price as a measure of the company's "legitimacy". Wall Street will drive the stock prices higher as long as the company remains profitable, no matter how many people it screwed over.

However, Wall Street also runs on fear. Merely mention of Senator Markey's letter to SEC and FTC asking for an investigation into Herbalife dropped its stock price down more than 10% in a day.

And this fear had turned some stock analysts into conspiracy theorists, looking for someone to blame, and who better than the ultimate stock market boogeyman, and Herbalife "nemesis" Bill Ackman?

Brian Bolan published an essay on Zachs that claimed not only is Herbalife a good bet, he outright accused Senator Markey of colluding (perhaps unwittingly) with Bill Ackman to drive down Herbalife stock price to help with Ackman's epic short that started back at the end of 2012!

MLM Absurdities: How Scam Evolve Around MLMs and Pseudo-MLM Scams

Previously, MLM Skeptic have pointed out that many so-called "legitimate" MLMs have scams revolving around them in what's known as "lead generation" companies. They work by sending out teases to large number of people by selling them bogus "business starter kits", then sell the info of these people who bought a kit to affiliates desperate to sign people up. Company benefits twice. (Read full details on the Verge)

Herbalife had realized this and in 2013 have disallowed the use of most lead generations companies, esp. those ran or have close ties to its own affiliates. According to its own affiliate agreement, affiliates are prohibited from selling leads to each other, but these lead generations companies had NOT been scrutinized... UNTIL Ackman raised the pyramid scheme allegations.

While the Herbalife situation is rather unique, in that Shawn Dahl's company is a clone of his mother-in-laws pyramid operation outlawed in Canada (also for Herbalife), the phenomenon of creating potentially ILLEGAL business around supposedly legitimate companies is hardly unique to Herbalife.

Let us explore the underbelly of network marketing... You will learn about:

• How "fake" lead generation really works
• How "sales aid" companies perpetuate the "tool scam"
• How top affiliates get rich from training other affiliates
• How feeder matrix schemes feed pyramid schemes
• How fake ad posting requirements in Ponzi schemes spawn ad posting companies

Let's get started... First stop... How "fake" lead generation really works...

BREAKING NEWS: Herbalife may also be under investigation in China

When reports of NuSkin representative's alleged misconduct surfaced in Chinese media back in June and July 2013 in China it received little western media attention. However, when the Chinese Communist Party media People's Daily repeated the allegations, and called for local authorities to investigate and stamp out pyramid schemes and pyramid selling, western media noticed, and NuSkin stock took a dive, and Herbalife stock also took a dive because it's already under attack in the US. 

Turns out, Herbalife may be under more direct threat than people realized, as NYPost managed to find a report in August 2013 in First Financial Daily (of China) that Herbalife reps in China encouraged front-loading and thus is in violation of anti-pyramid-selling laws in China, among other potential law-breaking.  Quoting from the report... 

Recently, First Financial Daily discovered through private investigation that, while Herbalife is fast growing in the China market, its sales model is suspicious in five respects: collection of "recruitment fees" in disguised form, suspected exaggeration of  product effects, possible windfall profit derived from products, fast growing clubs absent of strict supervision and control, and product purchase overly dependent on sales representatives or potential sales representatives…… A series of issues have deviated the direct selling model of this company, and have contradicted with certain provisions in the "Regulations on the Prohibition of Pyramid Selling" promulgated and implemented by the State Council in 2005. As a result, suspicion has been brought up that Herbalife's sales model is a pyramid scheme. 

The specific offense mentioned first in the report is reps are required to buy $2000 USD worth of Herbalife products to join. They're told that 1) it's easy to sell, 2) it demonstrates that they are serious about this opportunity, and 3) there are plenty of people who want to join and only limited positions available.

There's a lot more.

Bad Argument: The Wall Street Legitimacy Myth

One of the favorite arguments by proponents of network marketing is "Look at how big Amway is! And Herbalife! And Mary Kay! And Avon! And ______! Their stock prices keep going up! If they were a scam Wall Street would have never invested in them!"

A more recent version would cite Herbalife as an example, such as "Herbalife a pyramid scheme? Wall Street don't see it that way! Herbalife stock has MORE THAN DOUBLED in price since Ackman's accusation!"

While it is true that price for Herbalife stock (HLF) has indeed rose from 25's to 60's in 2013 (Ackman's accusation was in late 2012) one must question... Are the two even related to each other...  i.e. "price of stock" vs. "morality / criminality"?

Perhaps John Hempton of Bronte Capital put it best when reacting to Ackman's accusation in January 2013:

I agreed with Bill Ackman that Herbalife is mostly about ripping off distributors and people at the end of the chain. The product is more than twice as expensive as competitor shakes. I called Herbalife "scumbags". 

But they are highly cash flow positive scumbags and they will use the cash flow to buy back shares. Over the past five years the share count has gone from 140 million to 108 million and will fall further. 

They are scumbags then - but they are scumbags working for stock market investors.

In other words, as long as the stock prices keep going up, Wall Street wouldn't give a f*** about the company being scumbags.

MLM Absurdities: Once a Woo Peddler, Always a Woo Peddler?

Penta Water: proven woo on multiple contients (Photo credit: Wikipedia)

I was just reading a review of "Nature's Sunshine" nutritional supplement MLM on Oz's BehindMLM when I spotted a name I never thought I'd see again: Penta Water.

For those of you who don't know, Penta Water is woo... it claims to be ultrapure water that somehow is "better" for you, with some buzzwords like "improved cell survivability" and other random junk jargon, coupled with WTF? claims like "using these in medical tests improves test accuracy"... But they'll gladly sell you bottles of it for you to drink (at a premium, of course, at prices higher than even Evian water). It was so bull****, the British ad supervisory agency shut them down for making false claims.  It's so notorious, it has its own Wikipedia page.

James Randi (Photo credit: Wikipedia)

And in the US, it attracted the attention of no less than James Randi, probably the best known skeptic in the world, and the entire skeptic community in debunking their bull****. James Randi has long offered a prize of $1 million dollars of any evidence of paranormal supernatural, or occult occurances, abilities, or products... under proper observing conditions (i.e. reproducible). To date it had NOT been claimed even once. Penta Water was at one time announced that they will try for the prize, then wiffle-waffled, then tried t
o stipulate that they want to use their machine, which JREF said fine, as long as you can detect 37 out of 50 random users that drank your Penta Water. Then after a while, Penta Water stopped responding altogether, claiming it can't find a representative to oversee the test.

And the head of Penta Water was Gregory L. Probert.

Apparently, Mr. Probert had been pushing woo for a while, as he's now head of "Nature's Sunshine", after Penta Water went... down the drain (so to speak).

MLM Absurdities: What is Herbalife Doing in Cambodia?

Back in November 2013, Herbalife announced it is entering Cambodia with its flagship products: nutritional shake, personalized protein powder, and herbal tea concentrate, having previously entered Vietnam.

The question here is... what is Herbalife doing there? Is there a need for Herbalife products in Cambodia (or Vietnam)?

According to Herbalife, Formula 1, personalized protein powder, and herbal tea concentrate are all a part of its weight management product line.

Does Cambodia and Vietnam have a population overweight problem? No. In fact, they have an UNDERweight problem.

Just what *are* your odds in Herbalife? (With bonus Kiyosaki debunking)

Apparently some Herbalife distributors were spreading this on Facebook

(following picture courtesy of SaltyDroid)

Notice the graph says "Rich Kid Smart Kid?" We'll get back to that.

Let's assume that the odds are accurate... for the Herbalife portion... But there's something SERIOUSLY not mentioned in the odds... That the odds are NOT evenly distributed, like you'd been lead to assume.

That's right... Some people have far better odds in Herbalife than the average distributor.

The relatives of those already in "President's Club" have much better odds. It's an insider's game, not "equal opportunity" like you'd been lead to believe.

Are Latinos Defending Herbalife Making Sense?

Rafael Fantauzzi is head of NPRC (National Puerto Rico Coalition) and recently he penned a piece for Fox Business Latino, where he basically claimed that Herbalife is merely misunderstood. You can read his piece here, as I may have misunderstood his message, but I doubt it:

http://latino.foxnews.com/latino/opinion/2013/11/04/herbalife-successful-business-model-for-latinos-or-predatory-pyramid-scheme/

Is he making any sense? My answer to that is absolutely not.

His primary praise for Herbalife is heavy involvement of the Latino community. To quote him:

Herbalife has succeeded at something that quite a few companies, and the Federal government for that manner, have failed, and that is to achieve real Hispanic inclusion. Hispanics make up at least 60 percent of Herbalife’s direct selling workforce – better known as distributors.

Okay, what's the next thing Fantauzzi said however, is a bit more controversial:

The big problem I see is that the critics of Herbalife and multi-level marketing companies are confusing business ventures with a welfare program. They assume that everyone must have equal outcomes, not just equal opportunity.

He then went on claiming that Herbalife rewards hard work, and he can't denounce a company that is the embodiment of American dream.

Does his points actually make sense though? I say no. Let me explain why.

Minority Groups Calling for California AG to Investigate Herbalife: HLF CEO really irked

California Attorney General's Kamala Harris
 (Photo credit: Wikipedia)

Multiple minority groups, including black and latino minority civic groups mounted a demonstration outside an herbalife event in LA, calling for full investigation of Herbalife by California Attorney General Kamala Harris. (see right) on whether Herbalife is a pyramid scheme.  Protestors are waving signs that says "Stop Exploiting Us" and similar wording.

What's interesting is apparently Herbalife CEO Michael O. Johnson, normally a pretty calm individual, lost his cool, and went up to the protest organizer, and outright accused the organizer of believing in lies and should be ashamed of doing so.

Herbalife spokeswoman later confirmed that a dialog did take place, but denies Johnson lost his cool.

Russian SEC Member Calls Herbalife a Pyramid Scheme

Herbalife (Photo credit: netodarkis)

Andrei Volgin, who claims to be a member of the Russian Securities Market Commission (their equivalent of the American SEC), just published an essay on SeekingAlpha, where he declared FLAT OUT that HERBALIFE IS A PYRAMID SCHEME. Not only he's joining Ackman in the short, he thinks it's perfectly ETHICAL thing to do.

You may or may not agree, but it's worth reading his points, and he brought up something I had thus far neglect to mention: the churn rate in MLM.

The "churn rate" of a MLM is the amount of distributors that does NOT choose to continue participating in the MLM. It is sometimes known as the "attrition rate" or "distributor turnover". (see wikipedia)  However, how does it affect whether the business is a pyramid scheme or not? That again, goes back to the matter of "self-consumption".

According to Herbalife's SEC 10-K filing of 2004:

For the latest twelve month re-qualification period ending January 2005, approximately 60 percent of our supervisors did not re-qualify and more than 90% of our distributors that are not supervisors turned over.

This was left in the footnote was one of the tables in the filing, NOT in the main body of text. (One wonders if Herbalife was hoping people will ignore it? But let's put that observation aside...) What does that MEAN? 

It means 60% of the people who were earning multi-level commissions ("supervisor") failed to KEEP earning such, by meeting "sales goals" (of 2500 points for 2 consecutive months, or 4000 points for a single month) just ONCE out of that 12 month period ending January 2005. In other words, 60% of people qualified for "supervisor" once in 2003 (bought at least $4000 of stuff), failed to requalify in 2004 (i.e. buy that much again). 

But here's the shocker: "more than 90% of our distributors that are not supervisors turned over." As it's the SAME SENTENCE, there's only one interpretation: over 90% of "distributors" (from 2003, did not qualify as supervisor with the big purchases) bought NO Herbalife product in 2004 (i.e. turned over). 

The conclusion is simple: Herbalife has very few repeat customers, not enough to support the lowest rank of distributors. 

Which leads to another conclusion: only the people on the top are getting rich because they are attracting a new bunch of distributors every year who were told to buy a starter kit and TRY to sell it to over people (and failing, so they quit, and replaced by a new batch next year). 

Such is a sign of pyramid scheme: if you stop recruiting, you die. 

Alarms Raised at Colleges Over Pyramid Allegations of MLM Vemma

Vemma Product Photography and Ad
(Photo credit: themichaelminer)

Vemma is a potions company that two years ago created "Verve" energy drink and came up with a strategy to get college kids (and for a while, high school kids) to promote it as brand partners, which is just another fancy name for affiliate (i.e. consultant / distributor / member / whatever). However, they need to buy a case, then try to sell it.  And they're lured in with promise of "easy sell, everybody needs energy drinks" and rewards such as "free car" (with a lot of fine print).

Energy drinks are not what they cracked up to be, and Vemma reps are making a LOT of potentially misleading claims, like their Verve is "healthy" (and other energy drinks like Red Bull and Monster are not). It's been analyzed that they contain roughly the same amount of caffeine, the primary active ingredient, so any claim that Vemma's drinks are healthy(-ier?) is unfounded. Caffeine can kill people, and proliferation of energy drinks made that even more widespread.

Previously MLM Skeptic have covered the energy drink market, and found it to be in a world already saturated with conventionally marketed products (namely Red Bull, Rockstar, Monster, etc.) and thus viability is in doubt.

Now we find Verve pushers basically making up bull**** about how *their* drink is healthier than other drinks when it contains the same active ingredients, in the same portions and thus is just as dangerous.

But Vemma's Verve is doing something else: burning through participant's pocketbooks. And most participants are college kids (who have little enough money as is)

Bill Ackman Explains Why He STILL Expects Herbalife to Fail

According to Bill Ackman, all the current bullishness on Herbalife is from ONE guy's speculation that Herbalife will raise a bunch of corporate bonds at cheap interest rates, and use that money to buy back stocks, thus forcing the prices higher.

Ackman calculated the chances of that actually happening to be near zero. I don't have time or expertise to check his math and reasoning without further research, but I wouldn't dismiss his explanation without regard either.

Read why Ackman is still shorting Herbalife:

http://www.valuewalk.com/2013/10/bill-ackman-herbalife-j-c-penney/

Another High-Flying Herbalife Rep Crashed and Burned... Who's Next?

Michael Burton, another high-flying Herbalife salesman, who claimed to be pulling in 25K a month, and showed off his 6-pack abs, dramatic transformation from his days as overweight car salesman. Both of which he attributed to Herbalife. Even just last week at an Herbalife event in Germany he reported that things are going great. 

NYPost found a very different picture in the US. Burton, and his wife have actually declared bankruptcy over the summer, owing over 8 MILLION dollars, including 1 million to the IRS. Their total assets? Less than 75000 TOTAL, TOGETHER. House was already foreclosed, and less than $100 in the bank. 

Burton owed a LOT of money, several hundred thousand, to lead generator companies that was recently banned by Herbalife. Though in various statements, Burton stated that Herbalife had NOTHING to do with his financial problems. 

You really think Herbalife Sold That Much Stuff in Mexico? Maybe Not...

Turns out there's a new wrinkle to the "explosive growth" Herbalife enjoyed in Mexico and further south... According to indictment of one of the drug kingpins... Herbalife Account is used to launder money for the drug cartel!

http://www.nytimes.com/2012/01/09/world/americas/us-agents-aided-mexican-drug-trafficker-to-infiltrate-ring.html?pagewanted=all&_r=2&

Really really makes you wonder if that "60% sales by Latino distributors" is for real sales or not, doesn't it?