Just an ordinary joe - Checking out the internet.
What’s wrong with nutrition / diet shakes?
Nothing.
What is wrong with setting up your business and selling nutrition / diet shakes to your friends, family, and local community?
Nothing.
Can you see anything wrong with the testimonials from these guys?
Nope is my honest answer.
Does it look like Herbalife provides great products, and really helps people?
Yes.
So what is all the fuss about?
Bill Ackman’s Pershing Square Capital Management believes Herbalife is operating an illegal pyramid scheme, and will, sooner rather than later, be investigated by the US FTC and shut down. He prepared an almighty eighty page PowerPoint presentation to justify his argument, and setup a website with further material to back up his case:
Pershing Capital’s Facts About Herbalife
…and confirmed that Pershing Capital has a significant short position.
After the presentation on the 19th December 2012, Herbalife’s stock predictably plummeted. But then things didn’t go as planned.
Stating that a $6.54 billion company founded thirty two years ago, that makes good profits, and has grown consistently, was in fact a pyramid scheme, and nobody has noticed! – was too much for a few hedge fund managers, and they smelt blood…
The pack, lead by Ackman’s arch enemy Carl Icahn, latterly followed by George Soros, placed long positions on Herbalife, along with a few others hedge funds, creating what’s called a short squeeze for Ackman’s Herbalife position. Currently Ackman is running (as of 23rd August 2013) a $300,000,000 loss on the short position.
Ackman’s balls must be hurting at this point – but they’re not – because Ackman seemingly has balls of brass; still convinced he’s right, and that Herbalife will go down.
Herb Greenberg of CNBC is in alignment with the idea of Herbalife being a pyramid scheme…
But did Herb Greenberg just dig up a couple of distributors who didn’t cut the mustard, and now it’s all sour grapes due to their failure?… and for the great majority of Herbalife distributors, life is good, and the company, and their relationship with the company is excellent?
I’m not sure.
There seems to have been controversy for a long while.
Several years ago Mike Cockerham, who runs an early blog, Cockeyed.com, got tired of crappy looking ‘Work at Home’ and ‘Lose Weight Now, Ask Me How’ fly posters littering his home town, and wrote a rather long piece about it.
At the end he received a few emails…
Some examples of Herbalife ‘bad luck’ stories
You’d have to have a heart of stone not to feel for these people who had bad experiences with Herbalife. In the world of finance – a heart of stone helps – or perhaps, it’s just that if a company’s high level financials are sound, then that’s all you need to make an investment decision.
And Herbalife’s financials are solid from the perspective of most analysts, even if slight issues with an auditor have occurred.
But, the ‘bad luck’ stories linked to above include: spending so much money on the Herbalife opportunity that children can no longer have a university education paid for, or that couples get divorced, and similar.
Again these stories could just be the minority and represent sour grapes… from one email:
“As a Herbalife distributor you are treated as a sow hog with everyone looking for a nipple to latch onto. And after they have gotten all they possibly can from you, they lose interest in you real quick.“
…and, from another, on a more neutral note:
“It is clear to me that only those who have the money to invest and a go-getter personality will be successful.”
The most disturbing thing to consider in this set of ‘bad luck’ stories is the amounts of money lost. Bear in mind that people looking for work are often on their uppers to begin with.
The amounts of money stated as lost, by a single distributor varied from $39 to $200,000! $200,000 lost by one person on a ‘work at home’ business selling nutrition shakes!
But from a Herbalife perspective, $200,000 will make a tidy profit for the distributors in the ‘levels’ above that distributor: hence some Herbalife distributors have such big smiles on their faces.
Or not?
Are the ‘bad luck’ stories simply atypical bad luck stories, plus are really insignificant in a six billion dollar company, and not indicative of the typical Herbalife distributor experience, or are the ‘bad luck’ stories actually representative of Herbalife today, and indicate a large number of ‘consumers’ globally who have been sucked into a pyramid scheme, and then taken for all they are worth?
That’s the thorny question that has to be grasped and answered by the FTC. The FTC has an obligation to protect the consumer, and shut down criminal and fraudulent organizations including pyramid schemes, but also the FTC has a responsibility to operate with care, and not destroy good companies, that provide good products, and sustain the livelihoods of thousands of people around the globe.
If the $20,000 or $200,000 loss is actually representative of the main revenue source for Herbalife, where the majority of the product gets chucked, and only a minority ever gets drunk, and only on camera, by sporting stars – then without a doubt, the company is the biggest and most dishonest almighty confidence scam.
But is it?
If Herbalife hires market research companies to find out who buys their product, because they don’t have the internal records themselves, then it is highly unlikely that Herbalife will have any knowledge of whether a distributor who spent $20,000 made a big profit, a small profit, or a greater than $20,000 loss, or indeed if one, a few, or a few hundred actually make losses in the $100,000 bracket. Note: Herbalife income statements for distributors are gross and *do not* include the business costs of those distributors – again, probably because Herbalife does not know them.
Ackman provides a more recent list of admittedly smaller value complaints to the Better Business Bureau. Herbalife states with regard to *every* complaint on this list that the consumer had been working with an independent distributor, and not with Herbalife, inferring that the issue is not Herbalife’s, but they will anyway assist with resolution – out of the goodness of their hearts? It sounds like Herbalife are trying to present themselves as a great company, but unfortunately have, through no fault of their own, recruited a few naughty distributors, who are nothing to do with them, and represent an insignificant percentage of all the distributors.
The FTC will of course (a) review Ackman’s allegations seriously, and (b) decide if it wants to risk destroying a company, which from a stock performance perspective at least, is a ‘good’ performer. Also, the FTC will need to determine the extent of Herbalife’s liability for the behaviour of independent distributors who are not employed by Herbalife.
And the FTC needs also to take into account that successful distributors setup their own limited companies: any lack of ethics employed by employees or agents of those companies could be said to have little to do with Herbalife itself. For example Global Online Systems run by Shawn Dahl… and indeed Herbalife recently distanced itself from the practices of Global Online Systems, at the same time including new restrictions on how distributors could operate. Net result: Shawn Dahl, a top distributor and member of the Herbalife Chairman’s Club, jumped ship, and joined a competing nutrition shake company (as reported by Dan McCrum in the Financial Times), that was still less stringent (story first covered by Michelle Celarier of the New York Post).
But there’s more. An MLM organisation becomes an illegal Pyramid scheme *if* the majority of the income is from recruiting new distributors, rather than retail sales. Michael Johnson, CEO of Herbalife states that 90% of it’s income is due to retail sales, but also states that ‘Some of our customers are called distributors… because they get a discount’ 2.33 minutes into this CNBC broadcast which somewhat muddies the waters!
Herbalife defends itself from much of the above here. From a Herbalife perspective, I hope that kicking off with ‘What do you do about unsavory business practices?” is not seen by the FTC as a case of “she doth protest too much”.
And what of the above? Well obviously Wall Street et al have been looking at the financials of Herbalife, and come to a very rosy conclusion: HLF analyst recommendations. Plus, Herbalife stock has climbed today, the 23rd of August 2013, by a good 1%.
… my conclusion is in the disclosure below.
Disclosure: with the huge amounts of spare cash sloshing around due to quantitative easing, some financiers have made huge amounts, and are prepared to risk it on some big boy and very speculative games. In spite of this, and in spite of not knowing really very much about the markets, I might be shorting HLF at some point after posting this article, and as a private investor. Herbalife has had bad stories circulating about it for years. Even if it is basically sound and it cleans up its act, it will probably make less money, and with key distributor’s jumping ship, and worse, it looks like it’s growth is over, and I’d be making a good investment decision. If the more stringent regulations that Herbalife is putting in place, actually strangle the income flow from the more successful and less ethical distributors, then its business will fail more quickly. If in fact it is deemed a pyramid scheme by the FTC, I’ll be happy not to have been part of the team that tried to keep it afloat.
Disclaimer: this post is not and in no way should be construed as investment advice. It constitutes personal opinions, some irony, and is an exercise of one individual who is not a finance professional trying to gain clarity for his own benefit, on how either one set or another set of professional hedge fund managers can be so very wrong. If you want to invest in the finance market please get professional advice, and the likelihood is that you will still lose more than you gained, but your financial advisers, brokers, and bankers will probably do o.k.
And for some broader, and better, coverage of Herbalife and the All American Pyramid Scheme - read this blog post by David Brear.
