The Herbalife debate, shifted

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

Whitney Tilson now 12 percentage points more confident in Herbalife short

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

Ackman and the 100 Club

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

A Herbalife Pre-response

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

Imminent collapse of gigantic fraud promised (by short seller)

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.

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“Primarily” and pyramids [Update]

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

BurnLounge is a pyramid scheme, while 9th Circuit leaves Herbalife debate unresolved

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

Former Herbalifers on film

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.

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“A complete and absolute violation of our rules”

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

McCrum smackdown watch, Hempton edition

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.

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Changes at the Herbalife board

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.

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Keep an eye on the FTC vs Burnlounge

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

The FTC has opened an investigation into Herbalife [Update]

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

Meet Dan Waldron, Herbalife millionaire

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

Not just Herbalife, but an entire industry selling to itself

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

Herbalife is not going to answer your questions, senator, but be assured it is a good corporate citizen

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

The multi-level endgame, part one: the FTC

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

No bad apples on the Herbalife tree

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

Oh, Canada

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

A serious senator takes aim at Herbalife

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

Nu Skin’s China problem [Update]

Readers of what Google translate tells us is simplified Han may be able to work out why Nu Skin stock is having a bad day.

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Ten weird things about the Herbalife saga

That CNBC half hour doesn’t make the cut as there is nothing inherently weird about two showman billionaire rivals having a childish spat.

Besides, there are riches of weird, starting with:

1. The Herbalife Nobel Laureate for Medicine?

No dry academics here. Dr Louis Ignarro, a Nobel prize winner employed by Herbalife for his scientific advice, begins one of his books, Health is Wealth: 10 Power Nutrients That Increase Your Odds Of Living To 100, with the words:

You’ve been brainwashed. We are going to tell you the truth.

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No pyramid in the lowlands [Update]

Before Herbalife stock got a boost from the news that there were no material changes to its accounts under its new auditor, there was another positive development for the company this month in Belgium: an appeal court said that the company wasn’t a pyramid scheme after all.

Seeing as the original court judgement dated from 2004, the Brussels legal system probably isn’t the biggest indicator for Herbalife prospects. But we finally took a look at an English translation of the decision, and there are a few conclusions to draw. Read more

A few reasons to sell Herbalife

So Bill Ackman gave it one more concerted public shot. After spending a year of his life and half a billion or so of Pershing Square dollars shorting Herbalife, he might take a lower profile from now on.

Herbalife, meanwhile, has tried to turn the tables on the hedge fund, going active on the activist investor’s investors, according to Bloomberg. And a Belgian appeals court has reversed an early ruling that the company was pyramidical. So, victory to the bulls?

Not just yet. For a start, not everyone has got the message that Herbalife absolutely, positively, is not a pyramid scheme. Read more

Please welcome the Secretary of State for Herbalife

Yes, we said that the Herbalife sell case would be the next installment of our series on the company, but we interrupt that train of thought to bring you this fascinating piece of due diligence.

I went to see your health and scientific center, and the dedication of your scientists there and how they were thinking there about how they could create a product that actually did what it said it was supposed to do. And to make sure is it was absolutely dedicated to a scientific basis, that it understood what it is in peoples bodies that requires them to have certain nutrients, and I was very impressed, truly impressed.

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The Herbalife buy case

This could be a four word post – Bill Ackman is wrong – but for reasons that we’ll explain here and in the next post, the future for the Herbalife share price is now subject to questions about the multi-level marketing industry as a whole.

What we want to do then, is share some of the reasons that we’ve heard for why people have bought the stock of a company that the Pershing Square activist has said is going to zero, and we think still has some serious questions to answer about its business model. Read more

The FTC is standing in a shrinking circle of grey

Up until now the FTC has been the ghost in the machine as the debate about Herbalife’s business model has raged. Often invoked and implored, the direct seller’s share price has in many ways been a referendum on any ultimate action or inaction from the regulator.

However, the debate has expanded beyond Herbalife to look at practices across the whole direct sales industry, and pressure is rising on the FTC to pick a side.

Indeed, on Thursday a significant coalition of consumer activists, economists, lawyers, entrepreneurs and former participants in mutli-level marketing programmes will submit a petition to the Federal Trade Commission calling on it to take enforcement action and set new rules for the industry. Read more

Herbalife’s incredible Mexican business

There has been a lot of attention recently on Herbalife’s Californian business, where the company has received some criticism from within the Latino community.

Herbalife says that this is unfair, and that it would be delighted to help its critics understand the opportunity it provides to its many keen salespeople. What it might consider is a field trip to Mexico, where its nutritional shakes and direct sales model appear to be wildly popular.

Just how popular? Read more

Concerned Californians call on Attorney General to look at Herbalife [update]

Fancy that. We were only just discussing the powers available to the Californian authorities to look at Herbalife the other day. And then we woke up to this press release:

New coalition seeks AG Kamala Harris and Santa Cruz DA Bob Lee’s assistance to investigate Herbalife’s pyramid scheme targeting the Latino community. Read more

California approves this message, Herbalife edition

California has nurtured Herbalife for more than three decades. From Los Angeles, the multi-level nutritional-milkshake marketing and distribution scheme has spread to 75 countries worldwide.

Yet the state was not always friendly. In 1986 it won a permanent injunction against the company that is still in force, and we wonder if — following a more recent California court ruling — it might look at that injunction once again. Read more