When we first looked at pyramid scheme law, we set out to get away from the personalisation of the debate about the legitimacy of a multi-level marketing business selling protein shakes around the world. Bill Ackman versus Carl Ichan and George Soros is ultimately a sideshow while government agencies conduct investigations into Herbalife.
Still, inevitably perhaps, the debate has become personalised, and the “Herbalife is a pyramid scheme” camp is sometimes presented as an organised campaign where short selling hedge fund Pershing Square pulls all the strings.
Hence a new blog from Quoth the Raven, a frequent writer on the topic of multi-level marketing who has abandoned his anonymity to leave no room for innuendo. Meet Chris Irons, a working class Philadelphian, a Liverpool FC fan, and a blogging finance guy who did his own work and happened to come to the same conclusion as a famous and successful fund manager. Read more
If it wants to, the Federal Government will throw you in jail. Thousands of statutes exist, unknowable yet capriciously enforceable by prosectors armed with discretion and minimum sentencing guidelines. Years of prison time for packing lobsters in the wrong sort of box is just one of the most famous cautionary tales of such power.
Yet, in half a century since pyramid schemes were identified as a menace, the US government has neglected to pass a specific anti-pyramid scheme statute. If the Federal Trade Commission wants to shut down a company, it has to build a civil case from scratch to show both pyramid behaviour and consumer harm.
So how, why and if the FTC chooses to build such a case will effectively demarcate the law. Which is why, once the Commission’s ongoing investigation of Herbalife is concluded, it is essential the government says something about what does, and does not, constitute a pyramid scheme. Read more
Just over a year since we learned the Federal Trade Commission was investigating the multi-level marketing company and Herbalife shares have rebounded by a third in heavy trading this month.
What’s up? Lets consider a few of the candidate theories.
In case you wondering, two years after Bill Ackman stood up in New York and announced that his hedge fund, Pershing Square, would pit itself against Herbalife, a Los Angeles based nutritional shake marketing scheme, Bill & co are still very much at work trying to right alleged injustice for fun and profit.
(Try this summary of the story so far if it passed you by).
The latest foray is a video prepared by Pershing on claims for the healing power of Herbalife products by salespeople. We got an exclusive preview, and you can watch it below the jump, but the real target audience is the Food and Drug Administration and California attorney general Kamala Harris. Read more
Reuters reports the involvement of a Herbalife director in a long running corruption case in Brazil, something that has not been disclosed in company filings since Pedro Cardoso joined the board in 2009.
Prosecutors in Brazil charged current Herbalife board member Pedro Cardoso with money laundering in 2008 for allegedly participating in an embezzlement scheme a decade earlier that siphoned 26.7 million Brazilian reais ($10.4 million) from the state government in Espirito Santo.
The 8th Criminal Court of Vitoria ordered bailiffs to serve him with a subpoena in 2010, but they did not locate him and the case remains open, according to court filings and a court source.
According to the U.S. Securities and Exchange Commission’s rules on disclosure, companies must report legal proceedings that are material to evaluating the integrity of a director.
Herbalife, the nutritional shake-based multi-level marketing company, will report earnings after the close on Monday.
As ever, the details of the numbers are largely beside the point given the existential nature of multiple government probes into the company’s business practices.
Herbalife says it is legitimate and expects to be exonerated; critics disagree. Still, there has been some recent noise around legal settlements, so it seems like a good moment to reflect on what has changed in the seven months since we learnt that the Federal Trade Commission is investigating. Read more
The SEC has been busy turning over rocks related to one of the highest profile short seller battles in recent years.
On Tuesday, the regulator announced insider trading charges related to the announcement of Mr Ackman’s $1bn bet against Herbalife in December 2012. Nothing to do with Pershing Square, however. Instead it concerns two individuals, one of whom happened to share a room with a former Pershing analyst, and a rather more mundane amount of cash.
The Securities and Exchange Commission today announced charges against two individuals for insider trading on a prominent hedge fund manager’s announcement that his hedge fund had formed a negative view of Herbalife Ltd. and taken a $1 billion short position in its securities.
The current share price of $49, down more than a third so far this year, is not one of those big numbers for Herbaflie. However John Hempton, has spotted some numbers that he thinks could make a difference.
The manager of Bronte Capital, one of the most prominent bulls on the stock, has outlined the number of meals he thinks Herbalife sells in a year. From that he has extrapolated the number of customers it needs to eat them. Hey presto, it is far too many for the pyramid scheme allegation to stick, he argues.
There may be something to it, but it would be a surprise revelation at this stage of the debate, and a few assumptions demand some closer interrogation first. Read more
So, Bill Ackman cried on Tuesday at the end of a presentation the showman investor had said will define his career. He remains committed as ever to what he first trailed as “the patriotic short”. For better or worse the reputation of his hedge fund, Pershing Square, will be hard to disentangle from this campaign to shut down Herbalife, the multi-level marketing company he has said is a fraud.
What did we learn, then, in 250 slides over the course of three hours?
Actually quite a lot about the way a pyramid scheme targeting the very poor can work. Read more
Judging by the share price reaction to his Herbalife presentation, Bill Ackman delivered a “death blow” not to the company but to many investors who followed him in shorting the stock.
Not so Whitney Tilson, Buffett-watcher, value investor, friend of Ackman and now one of Herbalife’s biggest bears.
In fact, Tilson says he is more confident in his short now than before he settled in for the three-and-a-half hour event. Read more
Bill Ackman’s presentation in December 2012 was an attempt to simultaneously teach the world what a pyramid scheme looks like and explain why he thinks Herbalife is a such a diabolic endeavour. What he delivered on Tuesday in New York was very different.
In a presentation targeted squarely at his critics, Mr Ackman attempted to explain how Herbalife works in practice. Drawing on work by undercover teams in several countries, he made the case for how the company has adapted the pyramid scheme model to draw in recruits from the world’s poor. Read more
Pershing Square, the hedge fund dedicated to the destruction of Herbalife for truth, justice and a tidy profit, will hold a presentation on the subject of Nutrition Clubs run by the multi-level marketing company shortly on Tuesday.
In advance of that Herbalife has released a summary of its own research, a report prepared by a former FTC advisor on the company’s business model. Walter H. A. Vandaele of Navigant Economics:
assessed whether Herbalife’s operations appropriately are classified as a beneficial, legitimate Multi-Level Marketing (“MLM”) firm.
Spoiler: it is legitimate. Read more
Bill Ackman, who will be making a new Herbalife presentation on Tuesday at 10am EST in New York, has given CNBC a small taste in advance. Well, by taste we mean he predicts ithe company’s rapid and imminent exposure as a fraud.
When it comes to assessing pyramid schemes, the word primarily comes up a lot. As in, the rewards must primarily come from recruitment to deem a multl-level marketing company a pyramid.
The word was there again in the 9th Circuit Court decision on BurnLounge — one we have already looked at in what may be far too much detail — and the judgement referenced a paper written in 2002 which gets into that question of the dividing line between legitimacy and criminality in more depth. Read more
The US Court of Appeals in San Francisco on Monday upheld a district court ruling that BurnLounge was a pyramid scheme. A closely watched case — the first appeal court judgement on pyramid law in almost two decades — the judgement affirmed the existing case law and paves the way for the Federal Trade Commission to clarify the way it interprets that law.
However, the court didn’t need to answer one of the most contentious legal questions to resolve the case, so it didn’t. It also said that there is no basis in the case law to assume a simple definition of what constitutes a customer, a blow for those in favour of a clear cut pyramid rule that leaves room to argue the status quo is fine.
So, the ruling can be seen as positive for Herbalife (which has claimed validation), even if it is far from conclusive. What it emphasises is that proving a pyramid case remains fact specific, where legitimacy turns on the structure of a multi-level compensation plan and the motivations of those involved. The FTC investigation into Herbalife, which rumbles on with the company’s co-operation, remains the best chance of resolving whether widespread industry practices are legitimate. Read more
It’s not just ABC News which has cameras. Bill Ackman’s Pershing Square will unveil a documentary on Friday, with interviews of individuals and families who tried out the Herbalife multilevel marketing plan.
That’s Herbalife President Des Walsh, telling ABC News that he is appalled at the behaviour of distributors who were captured on hidden cameras making bold claims for the health benefits of his company’s products (like curing brain cancer, for instance).
He was interviewed as part of an investigation by ABC, including an interview with a whistleblower who didn’t disclose at the time that Bill Ackman had agreed to pay up to $3.6m in bespoke unemployment insurance.
Which has prompted Herbalife to get a bit of retaliation in at the short seller behind Pershing Square, asking: Read more
John Hempton is fed up with with our focus on internal consumption as one of the key legal aspects to the debate about Herbalife’s business model.
The Bronte Capital hedge fund manager returns to the argument that both good and bad consumption of Herbalife’s diet shakes by its own army of distributors is possible.
I have spoken to several Herbalife customers and they are mostly signed up as distributors and they do not intend to sell product.
Carl Icahn, the largest shareholder in Herbalife with a 16.8 per cent stake, will soon have five seats around the boardroom table, according to the company:
Herbalife will nominate three designees of the Icahn Parties, Hunter C. Gary, Jesse A. Lynn and James L. Nelson, for election to Herbalife’s board of directors at its 2014 Annual General Meeting of Shareholders, currently scheduled for April 29, 2014 (“the Annual Meeting”).
Messrs. Gary and Lynn are employees of Icahn Enterprises L.P., and will be nominated for election to the Class I directorships currently held by Carole Black and Michael Levitt, whose three-year terms end at the Annual Meeting.
While waiting for the next installment in the Herbalife saga, which may include some changes to the board, there is a judgement pending from the Ninth Circuit Court of Appeals which should be on the radar of Herbalife watchers: the FTC vs Burnlounge.
The reason is partly that we think the Federal Trade Commission will wait for a decision by the court before amending its guidance to the multi-level marketing industry on a key legal standard that could affect Herbalife’s legitimacy — the issue of so-called “internal consumption”.
But there is also the dim but tantalising possibility of a mixed decision or defeat for the FTC, which might open up a route for the US Supreme Court to eventually lay down some solid pyramid scheme law. Read more
After we got in touch with the company to tell them we were writing this story, they halted trading and put out a statement confirming the investigation.
The Federal Trade Commission has opened a formal investigation into Herbalife, the multi-level marketing company that hedge fund manager Bill Ackman has called a pyramid scheme, according to people familiar with the situation.
The probe comes after a year of intense scrutiny of the Los Angeles based group, which sells nutritional shakes and supplements through and to a network of millions of independent distributors in more than 80 countries worldwide. Read more
The latest dossier from Pershing Square has landed, and this time the Herbalife short campaign would like to draw your attention to a Dallas-based marketer of the nutritional-shake business opportunity.
Dan Waldron is a 30 year Herbalife veteran. He is affiliated with several businesses that have ties to Herbalife and has the broad smile of a self-made man when he poses for photographs with Michael Johnson and Des Walsh, chief executive and president of the multi-level marketing group.
More on Mr Waldron in a moment, but we thought it might be useful to explain where Pershing are going with all this. In addition to the lobbying battle, Bill Ackman and co are attempting to show a pattern of bad behaviour by senior members of the Herbalife hierarchy that might interest the US authorities. Read more
The Journal of Historical Research in Marketing, Volume 6, Issue 4 will not hit the shelves of your lending library until November, but Professor Bill Keep has helpfully posted his forthcoming article on the TCNJ School of Business website.
Essential reading for anyone interested in Herbalife, it is undersold by the title — Multilevel Marketing and Pyramid Schemes in the United States: An Historical Analysis. A bit of false modesty there, as it addresses head on the problems at the heart of a business model built around a narrow and potentially flawed idea of legality.
Note also that the paper’s co-author, Peter Vander Nat has been involved in all the recent prosecutions of pyramid schemes bought by the Federal Trade Commission, which has lauded him as “arguably the country’s preeminent expert on pyramids”. Read more
So the company has responded to a missive from Massachusetts’ junior senator, Edward J Markey, and Valuewalk has got its hands on a copy (click to read the letter in full).
Jacob Wolinsky has already looked at Herbalife’s claims that it doesn’t target Latinos or the poor (short version, there are several conference call transcripts that suggest otherwise), so we’ll take a look at some other things that Herbalife said and, more importantly, didn’t say. Read more
OK, endgame might be premature, this Herbalife saga has plenty of life in it yet. But after more than a year of debate, and with stirrings of interest on Capitol Hill, we want to offer some conclusions and an actual solid prediction in this, the first of three posts.
The second will look at how the multi-level marketing industry walked its legal position out onto sand, and the third will deal directly with Herbalife’s claims of legitimacy. But this one is about the Federal Trade Commission and that forecast: we think the regulator, at some point this year, will rewrite its guidance to the industry on the way it analyses pyramid schemes.
Why it will, and the significance of such a move, is going to take a bit of explaining. Read more
Pershing Square has launched a new line of attack on Herbalife with a study of Shawn Dahl, until last year one of the top businessmen in the California based multi-level nutritional shake marketing scheme.
We won’t comment either way on Pershing’s allegations — Mr Dahl and the company he represented, Online Business Systems, have never taken up our invitations to discuss their operations, and any allegations should be treated as such. Instead, let’s have a quick look at the idea of whether it is possible to have a bad apple within an otherwise kosher marketing scheme. Read more
If you go back to the very first post in our Living the Herbalife series, you’ll play spot the difference between two remarkably similar but corporately distinct websites from 2004.
That went with an FT story about how involvement in pyramid scheme was no impediment to continued participation in the Herbalife business opportunity, and the role of Shaun Dahl, until last year one of the top distributors in the nutritional shake multi-level marketing scheme.
Fast forward, and the New York Post reports movement: Read more
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: Read more