What possibly could be said further about Herbalife (
)? It has been dissected in every conceivable way, statistically,
analytically, and legally. Yes, except for the one issue that has
the most profound and long-term meaning to the consuming public and
Before stating and describing that one meaningful aspect and in
order to put it in context, let us acknowledge the one aspect of
the Herbalife saga that is of the
significance to the consuming public and the nation. This would be
whether or not Carl Icahn and George Soros ever win their big bet
against William Ackman. The fates of these parties have less
meaning in the
Herbalife question than those of
's Walter White and his brother in law, Hank Schrader, had to our
daily lives. The fates of Walter and Hank gripped the nation's
imagination but, alas, were only fiction, mere entertainment. So
too, Bill, Carl and George are Super-Hero figurines, as far as they
relate to the true meaning of Herbalife for Main Street America and
many other countries.
The true significance of the Herbalife controversy involves a
, that dwarfs the piddling one-billion at stake in their wager. The
true meaning of the Herbalife inquiry is a
matter affecting governments and tens of millions of ordinary
people who never heard of Ackman, Icahn and Soros. We will not
speak of them again in this essay except to reference the far
larger question in which they do play a role.
Don't Mention the "Industry"
Instead, let us speak now of
, beginning with a plain and obvious fact about Herbalife. It is
that Herbalife is
multi-level marketing ((
)). Anyone who has taken time to study this field called
"multi-level marketing," whether they are promoters or
whistle-blowers, will attest that Herbalife is
of the MLM business model, pay plan, marketing strategy,
distributor churn factors, and financial outcomes. Herbalife is a
long-time member of the Direct Selling Association (DSA), which
promotes and defends its MLM members,
one and all
, in court, on Capitol Hill and in the media. Anyone who takes time
to inquire will readily discern that Herbalife looks and operates
like hundreds of other multi-level marketing companies. Those other
companies would, in turn, verify and boast that they operate like
Herbalife, which, until all the recent controversy, was upheld as
of the MLM business model.
In every respect, no significant differences can be detected
between Herbalife and scores of other MLMs, large and small.
- 90-99% loss rate among distributors? Same for hundreds of
MLMs, according to their own income disclosures.
- Majority of commissions, per sale, go to those at the top of
the chain? Definitely. At Herbalife over 80% of all commissions
wind up in the hands of the top 1% of the sales chain. This is
mirrored in all MLMs with their hallmark pay formulas of special
bonuses and escalating commission rates accruing to the top ranks
and based on production volume of those below.
- Lack of verified retail sales and claims that contract
distributors can count as "end-users"? Yes. None of the MLMs
tracks or accounts for conventional retail sales and none pays
commissions for retail sales. Double-counting the distributors as
both salespeople and "customers" is the official position of the
- Rewards to recruiters paid on
made by new sales recruits? Of course. This is standard
- Unlimited recruiting? For sure. Indeed, the offer of
"unlimited income" based on a limitless font of new recruits is
feature of the business model. No other business can match
- Deceptive income claims? Overpriced, over-hyped product?
Targeting uninformed and financially strapped minorities to
invest in the pay plan? Check. Check. Check. The FTC, the SEC,
the BBB, and Postal Service all post consumer warnings about such
deceptions in the MLM world.
Yet, the rules of engagement and the media narrative in the
current Herbalife war require an absurd pretense that Herbalife is
somehow unique in its own field of multi-level marketing. The
public is asked to single out Herbalife as fundamentally different
from all its MLM peers, as a swindler, not a sales business.
Don't mention the MLM industry as a whole!
So, if Herbalife is a fraud, as Bill Ackman and many other
people on Wall Street are loudly charging, echoing previous class
action suits, a European court ruling, and the assessment of other
consumer groups, then logic and reality
that this charge must be leveled also at Herbalife's peers. No leap
of faith is required, but only a relinquishing of the false
narrative about the "outlaw" Herbalife. Just ask the DSA if
Herbalife is "different."
Could 15 Million Americans Be Wronged?
Which brings us to the issue that really does have profound and
long-term meaning to the consuming public and the nation and to all
Herbalife shareholders. Each year, millions of people in the USA,
15 million according to the DSA, are investing in the MLM business
proposition, essentially the same one that Herbalife offers. They
are brought to ecstatic jubilation by MLM promoters in huge
auditoriums. They are sent forth to recruit their closest friends
and relatives into the business proposition they have invested in -
the same one that Herbalife offers. They are told it is their
financial salvation, a safe haven from Recession, their pathway out
, dead-end jobs, unemployment and the terrors of foreclosure.
Exactly this same message is delivered and this same spectacle
is produced at each and every MLM. Close your eyes and you could be
at an HOM (Herbalife Opportunity Meeting), or an "extravaganza" of
a hundred other MLMs. The viability of the MLM "income opportunity"
is now a fervent belief and a desperate hope for millions and
millions of people, even though it is well documented that just 1%
ever make a sustainable profit. In all these MLM companies, those
99% that never achieve their dreams and whose investments in fees,
time and purchases get transferred to the "winners" are made to
understand that their "failure" is their "own fault."
Could these millions of Americans be getting fleeced? Are they
hopelessly chasing a calculated lie? Are we talking about a $30
, made in the USA, with Herbalife being only an $800 million slice?
If this is possible, then the fraud is
, reaching more than 65 other counties, and most of the scams are
waving an American flag signifying an American export.
Recently, an international coalition of consumer activists,
internet bloggers, entrepreneurs and professionals filed a Petition
requesting that the Federal Trade Commission ((
)) investigate, not just Herbalife, but the entire multi-level
marketing industry for fraudulent and deceptive practices. The
filing was reported by
Reuters, NY Post, Financial Times, Los Angeles Times
and others. The coalition includes members from India, China,
Ukraine, Finland, Canada, Britain and Austria. The petition was
filed by attorney Douglas M. Brooks, himself a member of the
coalition, who has successfully litigated a number of class actions
against MLM firms, including Herbalife and Nu Skin (
). I signed on as president of the 12-year old consumer group,
Pyramid Scheme Alert
. None of the signers are players in Herbalife's stock battles or
were compensated for participating in the campaign.
The formal petition was accompanied by a spread sheet of over
1,000 consumers who signed an online request for an FTC
investigation of the entire MLM industry. Many of those online
signers offered tragic accounts of their encounters with MLM. They
referenced over 50 different MLM firms.
The Coalition's petition went to the core issue - the MLM value
proposition - which the Coalition describes as a false income offer
based on the classic chain-letter trick. The petition states,
"Any MLM program which permits unlimited recruiting and rewards
distributors with commissions paid on the purchases of other
distributors should be deemed to be a pyramid scheme without the
need for further analysis."
The Petition points out what many Wall Street analysts are
working hard not to acknowledge while also trying to conduct a
serious inquiry into Herbalife. It is that the MLM business
the "endless chain." Each investor makes money from new investors
who do the same,
, and if the recruiting of new investors stops, the entire
operation falls down. All the rest - the levels of retail sales,
the price of the products, the shipping costs, etc. - are details.
The endless chain is a fraud,
. It cannot deliver what it promises.
But, wait, multi-level marketing is "direct selling" you say?
Yes, it is
direct selling. In the 1960s, pioneers of what is now called
"multi-level marketing," took the treasured American identity of
the resolute and always optimistic Yankee Peddler and created a
new, made-in-America business model. Here's how it works:
- In the obsolete direct selling model, salespeople were
recruited to sell products to end-user customers. In the
direct selling model, the
are the end-user customers.
- In the old model, the chance to
sell the products
was the profit opportunity. In the new model, the profit
opportunity is the chance to sell
the profit opportunity
- In the old model the salespeople sold products to get paid.
In the new model, salespeople
products to get paid.
- In the traditional model, most commissions, per sale, went to
who made the sale
. In the new model, most commissions, per sale, go to the
recruit the salespeople
A sales model in which salespeople buy products, but don't
actually sell them, and instead are offered rewards if they recruit
other salespeople to do the same, with each level of the chain
promoting the opportunity to extend the chain - forever - and most
of the total rewards are routed to the
of the sales channel? Can anyone reading this article call this a
Heart of Darkness
But now we have come to heart of darkness about this Herbalife
controversy. It is not just that Latinos and other low income
people are being duped. That is an ugly symptom. The terrible
possibility, which the Ackman-Icahn-Soros duel raises but
assiduously avoids acknowledging, is that of an "endless chain"
, far larger than Herbalife, rolling across the country, spreading
worldwide, masquerading as "direct selling." The scenario that no
one wants to speak about is a vast financial manipulation analogous
to our recent housing catastrophe in which, not the dream of home
are being exploited to build a huge financial pyramid - toxic
securities sold to
Quoting the Petition filed with the FTC by the new Consumer
"The MLM industry has taken advantage of the confusion over
what constitutes a pyramid scheme, and the lack of any pre-sale
disclosure requirement, to become a multi-billion dollar behemoth
in which the vast majority of participants lose their investments
and eventually drop out, while a tiny percentage of distributors at
the top of the chain become very wealthy."
This reality would mean not one, but hundreds of companies
operating on the basis of deception that renders a free and fair
. It would point to many companies' profits
upon a utopian message of "unlimited" wealth that is shamelessly,
. This is a reality few want to examine for its veracity.
Denial and avoidance of this possible reality might have been a
feasible defense against the uncomfortable facts raised by Ackman
and others, but then there was this year's unsettling FTC
prosecution of the large MLM,
Fortune High Tech Marketing
. FHTM basked in legitimacy as it swept across America for more
than 10 years, pulling in over 500,000 households, and $30 million
a month, only later to be shut down by the FTC as a pyramid fraud.
That prosecution raises the harrowing question of how many other
FHTM-type swindles are out there,
and being treated by regulators and the business media as
Adding to the weight of that question was the California
Attorney General's prosecution of the MLM,
Your Travel Biz.com (YTB)
, a member of the Direct Selling Association, with over 200,000
"salespeople." No action had ever been taken against YTB by the FTC
or any other state Attorney General. YTB had become one of the
country's largest travel agencies. It was in a marketing
partnership with the Kansas City Chiefs football team. As a
publicly traded stock, the SEC had not found cause for any
investigation of YTB. More than 280,000 shares of its stock were
traded every day and it was selling (prior to the prosecution) for
over 100 times earnings. When the full force of the prosecution
took effect, the stock went to zero.
Dare Not Said
If Herbalife is really a fraud - not a business - it would mean
fraudulent business model
used by many companies is being embraced by thousands of Wall
Street shareholders, endorsed by celebrities and sports stars and
supported by many politicians who accept MLM campaign
contributions, just as it played out with YTB.
If Herbalife is a fraud, and is also an icon of multi-level
marketing, then does it not raise the question that owners and
executives of other MLM frauds serve on Chamber of Commerce boards
and with financial contributions are influencing Congress and by
extension, the FTC? Are other MLM frauds being aided by the US
Dept. of Commerce to expand to other countries, given tax subsidies
to open headquarters or distribution centers by state legislatures
and listed on major stock exchanges? These are the unavoidable and
valid questions inherent in the Herbalife controversy even if the
main participants dare not say them.
It has now become recognized that Bernard Madoff's Ponzi was not
really such a secret on Wall Street. Some earlier investors smelled
a rat but did not want to stop receiving their predictable 12%
annual returns. Others knew it
had to be
a fraud, but remained silent out of loyalty or fear. And the SEC,
when presented with careful research and indisputable math from a
dedicated whistle-blower, apparently let Madoff's philanthropy,
celebrity, and financial star power intimidate them into
And, as we now know all too well, when the
housing/mortgage/banking bubble expanded beyond all possibility of
sustainability, many business leaders and investors chose to play
along rather than dare to tell the terrible truth. Who wants to be
accused of bringing down the whole house of cards?
In the case of Herbalife, even Bill Ackman is apparently trying
to slip only one key card out from the flimsy and contrived
structure called multi-level marketing, but it is unavoidable that
as Herbalife goes, so too the entire MLM "industry."
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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