Wednesday, 18 March 2015

California Judge rules losing-investors should have realized 'Herbalife(HLF)' shares were not safe.

More than half a century of quantifiable evidence, proves beyond all reasonable doubt that what has become popularly known as 'Network,' or 'Multi-Level, Marketing' is nothing more than an absurd, cultic, economic pseudo-science, and that the impressive-sounding made-up term 'MLM,' is, therefore, part of an extensive, thought-stopping, non-traditional jargon which has been developed, and constantly-repeated, by the instigators, and associates, of various, copy-cat, major, and minor, ongoing organized crime groups (hiding behind labyrinths of legally-registered corporate structures) to shut-down the critical, and evaluative, faculties of victims, and of casual observers, in order to perpetrate, and dissimulate, a series of blame-the-victim closed-market swindles or pyramid scams (dressed up as 'legitimate direct selling income opportunites'), and related advance-fee frauds (dressed up as 'legitimate training and motivation, self-betterment, programs, leads,' etc.).


Apparently in ignorance of the above irrefutable, fully-deconstructed analysis, May 9th 2014, Pomerantz LLP announced the filing of a class action lawsuit against 'Herbalife Ltd.' and certain of its officers. The class action was filed in United States District Court, Central District of California and docketed under 2:14-cv-02850, on behalf of a class consisting of all persons or entities who purchased or otherwise acquired securities of 'Herbalife' between May 4, 2010 and April 11, 2014 both dates inclusive (the 'Class Period'). This class action sought to recover damages against 'Herbalife' and certain of its officers and directors as a result of alleged violations of the federal securities laws pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
In a shareholder alert document which appeared (due to its elementary grammatical errors) to have been put together by a bunch of lazy school kids, Pomerantz LLP described 'Herbalife' as:
 'a network marketing company that sells weight management, nutritional supplement and personal care products. The Company sells its products globally through a network of independent distributors, which are typically individuals with little marketing expertise that were induced by the Company to purchase the Company's products in the hope that they would be able to resell the product to other consumers or distributors. Herbalife also sells literature and promotional materials to these distributors. '
The Complaint alleged that throughout the Class Period, Defendants made materially false and misleading statements regarding the Company's business, operational and compliance policies. Specifically, Defendants made false and/or misleading statements and/or failed to disclose that: (i) the Company's operations were based on a pyramid scheme whereby its distributors generate revenue by recruiting other distributors rather than selling 'Herbalife's' diet and nutritional products to the general public; (ii) the Company engaged in deceptive trade practices where it unduly pressured its members to purchase more products to resell as one of its 'distributors'; and (iii) as a result of the above, the Company's financial statements were materially false and misleading at all relevant times.

The complaint put forward no original research or fully-deconstructed analysis; instead it relied on the jargon-laced facts that:

ODecember 19th 2012, CNBC reported that Bill Ackman, Founder and Chief Executive Officer of Pershing Square Capital Management, L.P. considers 'Herbalife' to be a pyramid scheme after spending a year researching the Company's fundamentals.  On this news, 'Herbalife' stock declined $5.16 per share, or over 12%, to close at $37.34 per share on December 19, 2012.
On December 20, 2012, Ackman conducted a presentation concerning 'Herbalife' at the Sohn Investment Conference where he affirmed his conclusion that 'Herbalife' is a pyramid scheme as its 'distributors' make more money by recruiting other 'distributors' than selling the Company's products to the general public.  Specifically, Ackman alleged that since the founding of the Company, approximately 1.9 million 'distributors' have failed to make any money from selling 'Herbalife' products, costing them a net loss of $3.8 billion.  On this news, 'Herbalife' stock declined an additional $10.07 per share, or over 27%, over the next two trading sessions, to close at $27.27 per share on December 21, 2012.
On January 9, 2013, the New York Times reported that the Securities and Exchange Commission had opened an investigation into the Company. 
On January 23, 2014, U.S. Senator Edward J. Markey of Massachusetts sent letters to federal regulators, including the SEC and the FTC, urging them to investigate 'Herbalife.' Mr. Markey also sent a letter to 'Herbalife's' CEO, Michael O. Johnson, asking several questions about the company's 'business,' including pointed requests that reflected the concerns raised by Ackman  in December 2012. Some of the questions asked in the letter to 'Herbalife' include: (1) "How much profit (net earnings after expenses) can the average 'distributor' expect to make from retailing to non-'distributors' (i.e., people who are not directly involved in 'Herbalife' themselves)?"; and (2) "What's the correct number of sales outside the network as a percentage of total sales" for each of the last five years and information on these sales measured by product, quantity and dollars. 
Senator Markey urged both the FTC and SEC to examine whether 'Herbalife was a legitimate multilevel marketing Company,' whose revenues are ultimately generated by sales to the general public; or whether 'Herbalife' was a pyramid scheme, whose revenues were dependent on continuous recruitment of other 'distributors,' which were ultimately left sustaining substantial losses on their purchases of the Company's weight loss products.  To highlight evidence that 'Herbalife' may indeed operate as a pyramid scheme, Senator Markey pointed to instances where residents of Massachusetts suffered crushing financial setbacks as a result of the Company's marketing practices.   On this news, 'Herbalife' stock declined $7.61 per share, or over 10%, to close at $65.92 per share on January 23, 2014.
On April 11, 2014, the Financial Times reported that the United States Department of Justice and Federal Bureau of Investigation had opened a criminal probe of 'Herbalife.'  On this news, shares of 'Herbalife' spiraled downward from $59.84 to $51.48, more than 13%. 

Dale Fischer District Judge.jpg
Judge Fischer

California federal judge, Dale Susan Fischer, has now dismissed this short-sighted shareholder class-action suit, arguing that 

'there was no evidence the ('Herbalife'company had made disclosures to investors that caused its shares to fall.'

Judge Fischer rejected the plaintiffs' argument that the Dec. 2012 presentation from Bill Ackman's Pershing Square Capital calling 'Herbalife' a pyramid scheme was a corrective disclosure.

 'The [amended complaint] and plaintiffs’ related arguments are insufficient to compel the conclusion that the Pershing presentation was based on previously unavailable information or that the information could not be understood absent of expert analysis.'


Reuters subsequently reported  - Herbalife Ltd (HLF) won the dismissal of a lawsuit that claimed the maker of weight-loss and nutritional products fraudulently portrayed itself as a legitimate company, and that shareholders lost money because it was actually an illegal pyramid scheme.
U.S. District Judge Dale Fischer in Los Angeles said that shareholders led by two pension funds did not show that questions raised about Herbalife's business by hedge fund manager William Ackman and various investigators showed that the company had fraudulently inflated its stock price.

Ackman and his Pershing Square Capital Management LP have campaigned against Herbalife since December 2012, when they revealed a $1 billion bet against the Los Angeles-based company. Herbalife has long denied it is a pyramid scheme.

Herbalife shares were up 9.4 percent at $37.68 on Wednesday afternoon after rising as much as 14 percent earlier in the session. They remain well below their January 2014 peak above $83.

Fischer on Monday rejected claims in the proposed class action that news about concerns from Massachusetts Senator Edward Markey, a Federal Trade Commission probe, weak quarterly results, and even questions raised by Ackman and hedge fund manager David Einhorn were "corrective disclosures" that revealed Herbalife's fraud.

"Just as black swans may exist, there may theoretically be some form of opinion that is factual or revelatory in nature such that it qualifies as a corrective disclosure," Fischer wrote in a footnote. "Such an opinion would need to reveal to the market something previously hidden or actively concealed. That is not this case."

The lead plaintiffs are the Oklahoma Firefighters Pension and Retirement System and the City of Atlanta Firefighters’ Pension Fund. Their lawyer, Maya Saxena, on Wednesday said the plaintiffs are considering whether to amend their complaint.
Herbalife said it welcomed Fischer's decision.

"We are confident in the strong fundamentals of our business model and remain committed to helping people and communities improve their nutrition," it said.
Critics have said Herbalife misleads distributors about how much they can earn, and that its success depends more on recruiting distributors than selling products.

Ackman told CNBC last week that federal investigators examining possible manipulation of Herbalife's stock price have subpoenaed people hired by a consulting group working for Pershing.

Another federal judge in Los Angeles will on May 11 consider final approval of Herbalife's $15 million settlement with distributors who said the company misled them.

The case is In re: Herbalife Ltd Securities Litigation, U.S. District Court, Central District of California, No. 14-02850.

(Reporting by Jonathan Stempel in New York)


Based on the limited complaint with which she was presented, Judge Fischer was not able to recognize 'Herbalife' as being one part of an ongoing criminogenic phenomenon of historic significance. Contrary to how the 'Herbalife' Ministry of Truth has attempted to spin this news, when translated into to plain English, Judge Fischer has not ruled that Bill Ackman's analysis of 'Herbalife' as the legally-registered corporate-front for a criminal enterprise, was inaccurate. She has evidently ruled that, in her opinion, anyone (including advisers to pension funds) who was so reckless as to have bought 'Herbalife' shares between May 4th 2010 and April 11th 2014, only has themselves to blame, because Bill Ackman's analysis proved that there was sufficient information publicly available in order for anyone to apply common-sense and deduce that 'Herbalife' shares were probably not a wise investment.

David Brear (copyright 2015)


  1. Ultimately, federal regulators are at fault for permitting Herbalife to be sold on Main St. and Wall St.

  2. Anonymous - Ultimately the USA is at fault for allowing this absurd lie entitled 'MLM Income Opportunity,' to infiltrate traditional culture, and spread around the world, to a degree where the truth has become almost unthinkable.

    The USA should have long-since become an international laughing stock, because of its chronic failure (as a nation) to recognise, let alone prevent, 'MLM income opportunity' cultism. The USA should also have been held to account financially, for allowing its home grown racketeers to thieve from millions of citizens of dozens of countries around the globe.

    It doesn't surprise me in the least that this latest US federal Judge hasn't accepted what really lurks behind hundreds of counterfeit 'direct selling' companies, like 'Herbalife,' because legalistically cultism does not exist, and cultism is designed to be beyond ordinary understanding.

    Even the staff of Pomerantz LLP, repeated the thought-stopping jargon term, 'legimate MLM company,' in their complaint, and qualified this absurd fairy story by saying that it meant 'a company with revenues that ultimately generated from sales to the general public.'

    In reality , no so-called 'MLM' company has ever produced independent quantifiable evidence to prove that its declared revenue has ultimately derived lawfully in the overwhelming majority, from regular retail sales of goods, and/or services, directly to the general public (based on value and demand).

    Indeed, it takes a leap of blind faith to think that such a lawful enterprise exists, but the dunces with diplomas at Pomerantz LLP evidently seem to have taken that leap..

    For decades, a growing number of legally-registered US-based corporate structures (arbitrarily-defined by their instigators as 'MLM companies') have been dissimulating closed-market swindles in which billions of dollars of losing investment payments (based on the false expectation of future reward) have been laundered as 'sales' (based on value and demand).

    In return for these billions of dollars of losing investment payments, countless millions of victims have been given goods, and/or services, which were effectively unsaleable on the open-market.

    When oh when, is someone going to be allowed to explain this shameful state of affairs to a Judge?

  3. The FTC messed up in 1979 when they let Amway off the hook. That in turn, allowed many MLM companies to copycat Amway's plan and remain legal, even though in practice, they were running pyramid schemes.

    1. Joecool - I would contend that the way the 'Amway' mob avoided being held to account in 1979 (by pretending to a naive, and/or corrupt, federal judge to have ended price-fixing and to have introduced 'rules' which prohibited a closed-market swindle or pyramid scheme) constituted obstruction of justice in order to continue to commit fraud. As such the tactics pursued by the 'Amway' mob, and their attorneys, during the 1970s, formed part of an overall pattern of ongoing major racketeering activity as defined by the US federal Racketeer Influenced and Corrupt Organizations Act, 1970.

      As you rightly point out, these tactics have been copied by numerous 'MLM income opportunity' racketeers and their own attorneys.

  4. Judge Fischer wote a footnoote:

    "Just as black swans may exist, there may theoretically be some form of opinion that is factual or revelatory in nature such that it qualifies as a corrective disclosure," Fischer wrote in a footnote. "Such an opinion would need to reveal to the market something previously hidden or actively concealed. That is not this case."

    What the hell does this mean David?

  5. Anonymous - Perhaps we are missing some cryptic secondary meaning here?, but the last place for ambiguous comments should be a judicial ruling. Taken at face value, the judge's footnote, and particularly her ornithological analogy, make very little sense. Black swans do most certainly exist. Perhaps the most famous keeper of black swans, was Winston Churchill.

    Some of the key information which the 'Herbalife' racketeers have deliberately withheld from regulators and investors, concerns:

    - the overall number of persons who have signed contracts with 'Herbalife' since the company's instigation.

    - the number of contractees of 'Herbalife' who have generated an overall net-profit from the so-called 'Herbalife income opportunity.'

    - the percentage of 'Herbalife's' overall declared revenue that has ultimately derived lawfully from regular retail sales of goods, and/or services, directly to the general public (based on value and demand).

    Judge Fischer's footnote seemed to be inviting the Plaintiff's attorney's to go away and come back with a much stronger complaint.

  6. Anonymous - Judge Fischer's, footnote, apparently refers to 'Black Swan Theory.'

    I must confess that this is a concept which I have never encountered. Having briefly looked at 'Black Swan Theory', I think that it is a fundamentally flawed, and extremely dangerous, theory which casts serious doubts over the thought processes of Judge Fischer. She seems to be suggesting that 'Herbalife's' instigation, the rise of the 'Herbalife' share price, Ackman's analysis of 'Herbalife' and the resulting collapse of the 'Herbalife' share price, were so-called 'Black Swan Events:'

    'Black swan events were introduced by Nassim Nicholas Taleb in his 2001 book Fooled By Randomness, which concerned financial events. His 2007 book The Black Swan extended the metaphor to events outside of financial markets. Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"—undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War I, dissolution of the Soviet Union, and the September 2001 attacks as examples of black swan events.'

    I'm now wondering whether, after completing her recent ruling, Judge Fischer sang three choruses of 'My Darling Clementine,' before falling down in a heap.

  7. David,

    It seems to me that Judge Fischer is splitting hairs. She isn't ruling that Herbalife is a pyramid scheme while saying that investors failed to perform 'due diligence' in recognizing that pyramid scheme allegations existed prior to Bill Ackman's Pershing Square report. Isn't she saying that investors should have known better?

    1. Exactly so quixtarisacult.

      Judge Fischer has ducked (or rather 'Black Swanned') probably the most important issue that will ever come into her court, but, in the end, can anyone blame her?.

      That said, Judge Fischer has probably done the right thing in refusing to allow this lawsuit to continue, because the Plaintiffs had no excuse for not realizing that 'Herbalife' shares were unsafe, but she has sent an ambiguous message to the world which must have offered great encouragement to 'MLM' racketeers.

      The Plaintiffs' attorneys apparently made no reference to the fact that 'Herbalife' (a demonstrably-criminal enterprise) was allowed to be capitalized on Wall St. and, therefore, effectively-authorized by agencies of the US federal government.

      In effect, Judge Fischer has also ruled that agencies of the US government failed to perform due diligence.

      Notice how this story was inaccurately reported (in certain publications) as 'a federal judge throwing out a lawsuit accusing Herbalife of being a pyramid scheme.' Implying that Judge Fischer had ruled that 'Herbalife' is not a pyramid scheme.

      The obvious, common-sense question to put to Judge Fischer now, is;

      Hand on heart Madame, what would be your personal reaction if a member of your own family , or a close friend, suddenly announced that he/she had signed up with 'Herbalife,' or with any one of hundreds of similar organizations offering the public so-called 'MLM income opportunities?'

      There is no way that Judge Fischer woud voluntarily give an honest answer to this question (publicly).

      Dale Susan Fischer is a federal judge who must have realized that the comic-book term 'MLM' has been fronting countless product-based pyramid schemes. However, she has sought, and found, a rational escape from saying so, because all Hell would have broken loose if she had.

      'Herbalife's' share price would almost certainly have collapsed and Judge Fischer would have found herself being attacked on all sides by hordes of fanatical 'MLM' adherents and propagandists screaming that she 'is another enemy of free-market capitalism and the American Way.'

    2. Are you saying that no American judge will rule 'Herbalife' is a pyramid scheme?

    3. Anonymous - What I'm saying is that the 'MLM' cancer has been maliciously disguised as 'free-market capitalism and the American Way,' in order to make the truth unthinkable to all casual observers (including judges, regulators, journalists, legislators, etc.). 'MLM' racketeers have pretended affintity with traditional American patriotic values, and this is how their updated version of the age-old totalitarian cancer has gnawed its way (largely-unrecognized) deep into the heart of the American republic.

      It is going to take an American leader, rather than a federal judge, of a very high moral and intellectual calibre to recognize the 'MLM' cancer for what it is, let alone take the decision to cut it out.

      In the final analysis, this largely-unrecognized, but nonetheless historically-significant criminogenic phenomenon (laughably referred to as 'MLM'), is a test of whether governement of the people by the people and for the people, has become government of cultic racketeers, by cultic racketeers for cultic racketeers.

    4. Thank-you for these insights.

  8. Judge Fisher obviously hasn't been exposed to the hundred's thousands of 'Distributors' sold on the upline marketing blurb and then lost thousands of dollars.

    Ok, ruling probably strictly correct on black & white letter of the law.

    Think though how much Facebook, Google and other internet companies are valued at. First hint of hostilities and NO INTERNET and no FB, Google.

    1. Anonymous - I'm not entirely sure what your point is.

      Judge Fischer refused to allow a lawsuit against 'Herblife' to continue on the not-unreasonable grounds that persons who have invested their own, and other people's, cash in 'Herbalife,' and who now realize that 'Herbalife' is the effectively-valueless front for a criminal enterprise, have only themselves to blame.

      Judge Fischer has offered no opinion as to whether she thinks that 'Herbalife' has been hiding a criminal enterprise. What she has ruled is that all the information has been publicly available for anyone to form their own opinion.

      I actually think that this lawsuit was ill-conceived in that the plaintiffs should have included the US regulatory agencies which have effectively given a green light to the 'Herbalife' racketeers. The argument being, if FTC and SEC agents have allowed 'Herbalife', why is it reasonable to expect investors to have spotted 'Herbalife' as as being the effectively valueless corporate front fo a criminal enterprise, when regulators didn't?

      This common-sense argument begs the common-sense question: What is the point of having regulators if they can't spot, let alone stop something as obviously fraudulent as so-called 'Multi Level Marketing?'