Senator Edward J. Markey (D-Mass):
Herbalife may be a purveyor of health and wellness products, but some of its distributors are suffering serious economic ill-health as a result of their involvement in the company. I have serious questions about the business practices of Herbalife and their impact on my constituents, and I look forward to receiving responses to my inquiries.
Herbalife share price:
The Senator has actually written three letters, one to Herbalife, one to the Securities and Exchange Commission, and one to the Federal Trade Commission, and reading them we begin to understand the market reaction.
It is not just that they come from a Senator, which is a whole different level of power and influence to a congressperson (no offense, Representative Sanchez).
It is that while other letters have been rather broad, asking the FTC to look at unspecified complaints about Herbalife, these show a detailed understanding of the legal issues surrounding multi-level marketing, alleged pyramid schemes and Herbalife in particular.
Point by point, with reference to Herbalife’s 10K disclosures, the case law and one specific instance of a Norton, Massachusetts family who allegedly lost $130,000, the letter to the FTC gets at the key issues we have written about repeatedly in this series of posts.
For instance, the key aspect of legitimacy concerns who exactly is buying Herbalife products.
In effect, the main difference is whether sales are aimed inward at other members of a company or outward to the general public.
But the Senator has also done a good job in being very specific about what he wants from the FTC.
He does not accuse Herbalife of wrongdoing, and the company has said over and over that it is legitimate. What he writes is:
I take no position on the merits of these allegations. However, out of concern that Herbalife’s business practices may be having an impact on my constituents in Massachusetts, I request that you investigate the company’s business practices yourself to confirm that the company is acting in accordance with consumer protection laws under the authority of the Commission. Specifically, I encourage you to examine whether false and deceptive claims are being made about either the efficacy of Herbalife’s products, or the business opportunities available to Herbalife distributors.
I request that you respond to these questions by February 28, 2014.
A deadline for the FTC to break its silence on Herbalife, perhaps? (Although, as we’ll show in another post, the FTC did say a few interesting things about multi-level marketing last year).
Over to you, Chairwoman Ramirez.
But don’t stop there, the Senator has also got some pointed questions for the SEC, which read rather along the lines of: is your agency really paying enough attention to alleged pyramid schemes?
As well as a request to investigate Herbalife, he asks that the SEC tell him about compensation systems at multi- level marketing systems more generally. From the letter:
These get to issues about the way business models throughout much of the multi-level marketing industry are structured.
On the question of sales to people outside the system (what we might call real customers), industry lawyers have said that many companies would fail what we see as a key legal test within the case law: that a majority of sales be to real customers, not a company’s own salespeople called distributors. We suspect complex remuneration schemes referenced by the Senator here are common, also.
And he has a third question on Herbalife specifically:
Have you investigated the fact that Herbalife’s statements changed materially over time about the percentage of sales outside the network?
(For details of how those responses changed, and why the answer matters, see our story here).
The SEC also gets the same February 28 deadline.
As for Herbalife, well the senator has basically asked all the questions that we would if we were in his place and were trying to work out if this company is legitimate, as it says, or not.
It is like a sensible and focused version of the 35 pages of questions that Pershing Square suggested that someone put to Herbalife. For instance, the Senator would like to know what the churn rate is for all new recruits, a number Herbalife stopped disclosing years ago, we imagine because high levels of churn are a possible sign of a potential pyramid scheme.
He would also like to know how many new recruits there were at the start of 2007, 2009 and 2012, and how many of those remain at each level of the compensation system now – we presume to get a sense of how much the reality of the Herbalife income opportunity matches up to its marketing material.
We’ll be surprised if Herbalife answers all of them with the level of detail asked for, such as a breakdown of retail sales outside the network by product, quantity and dollar value. But do consider our breath bated for the response.
Update: A Herbalife spokesperson told us:
“We received the letter from Senator Markey this morning and look forward to an opportunity to introduce the company to him and address his concerns at his earliest convenience.”
Roll on March.