Tuesday, 3 May 2016

Charlie Munger, and perhaps Warren Buffett, says 'Herbalife (HLF)' is a fraud

Three years ago, I published an article (re posted below) explaining Warren-Buffett's alarming connections with 'MLM income opportunity' cultic racketeering, and his even more-alarming refusal to face reality. 



See original image
Berkshire Hathaway Vice-President, Charlie Munger.

http://blogs.wsj.com/moneybeat/2016/05/02/munger-throws-ackman-an-herbalife-bone/


Recently, I began to receive hundreds of page visits to this article from 2013, because Warren Buffett's closest associate and investment partner, Charlie Munger (an attorney), has finally made a public statement concerning 'Herbalife.'

http://www.forbes.com/profile/charles-munger/

https://en.wikipedia.org/wiki/Charlie_Munger




  
https://www.youtube.com/watch?v=yxMZM_63Fpk

At 1 minute 40 seconds in this interview clip, the Vice-President of Berkshire Hathaway, Charlie Munger, now says that Bill Ackman is 'totally right' (in judging 'Herbalife' to be the effectively-valueless, legally-registered, corporate front for a fraud). Presumably, Warren Buffett (who was sat right next to Charlie Munger) concurs with his friend's (legally-qualified) opinion?

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In almost all business matters, I would not be so presumptuous as to claim more experience than Warren Buffett. However, the pernicious fairy story entitled 'MLM Income Opportunity' (which I have been studying for many years), has precious little to do with 'business' (in the traditional sense of the word) and, unfortunately, Warren Buffett still has lots of green reasons at risk preventing him from facing this reality.




Warren Buffett (b. 1930) is an agnostic businessman from Omaha, Nebraska, who reportedly is worth $58.5 billions, but who likes to portray himself as just an average guy living modestly on his $100 000 annual salary as chairman and CEO of  'Berkshire Hathaway.'



Warren Buffett



As a little boy (aged just 6), Buffett (the son of a Republican Representative) already displayed a marked aptitude for making, but not spending, money. He went door to door peddling: chewing gum (at a 2 cents profit per pack), Coca Cola (at 5 cents per bottle, making a profit of 5 cents on a 25 cent pack of 6 bottles) and weekly magazines. 

However, young Buffett was not acting entirely independently, because his wholesale supplier was, in fact, his grandfather, Ernest P. Buffett, who owned a long-established grocery store in Omaha. During his high school years, Warren Buffett continued to make money in his holidays and spare time by delivering newspapers, selling golf balls and stamps, and from various other traditional commercial enterprises.









When Buffett filed his first income tax return in 1944 (aged just 13), he deducted $35 for the expenses of a bicycle and a watch - by claiming that these were items he needed to operate his paper round. 





In 1947, Buffett (aged 17) and a young associate, Donald Danly, started a company called 'Wilson Coin Operated Machines.' They bought a secondhand pinball machine for $25 which they installed in the local barber's shop. Their initial investment immediately generated a steady net-profit of $50 per week. Within a few months, Buffett and Danly had bought, and installed, a total of 3 secondhand pinball machines in barber's shops, but, in 1948, the pair sold 'Wilson Coin Operated Machines' for $1200.




Today, Warren Buffett is generally recognised as one of the most-influential people in the world. He has recently been treated (successfully) for prostate cancer. He has pledged to give away 99% of his personal fortune to philanthropic causes. 


How many times have I read thoughtless comments insisting  that 'Multi-Level Marketing' can't be a fraud because Warren Buffett owns an 'MLM' company? In fact, I once received a particularly absurd comment from a deluded 'Amway' adherent who was completely convinced that Warren Buffett owns at least 10 'MLM' companies and that he recommends 'MLM' as 'the best way for anyone to become a millionaire.'


 
 


It is a matter of public record that Warren Buffett's company, 'Berkshire Hathaway,' owns a kitsch, but apparently innocent'party plan direct sales' company known as 'The Pampered Chef (PC)' which has sold the public (mainly women) a so-called 'MLM income opportunity.'  However (as far as I am aware), 'The Pampered Chef' has not exhibited the universal identifying characteristics of a cult. Recently, the corporate officers of 'The Pampered Chef' were boasting annual sales of $400 millions via a sales-force of 60 000 persons. 



Even if the above, precisely-worded, passage of the 'MLM Income Opportunity' fairy story was entirely accurate, 'Pampered Chef' would still be a far-from-ethical enterprise, in that its officers have been deliberately withholding key-information from the public in order to continue to exploit large numbers of non-salaried commission agents whilst, at the same time, requiring these ill-informed people to exploit their own ill-informed friends and relatives.

In theory:

participants in 'The Pampered Chef MLM Income Opportunity'  (i.e. persons who have signed a take-it-or-leave-it annually-renewable, contract in which they were arbitrarily-defined as  'Independent Consultants', and who have paid the $155 fixed price for the so-called  'Business Starter Kit'), can choose to make money via:

regularly organising 'Cooking Parties' at which they can sell banal products (kitchen appliances, utensils, etc.) to their friends, neighbours, relatives, etc., for a straight percentage profit (20-31%).
or: 

an escalating system of percentage commission payments on the sales of further 'Independent Consultants' whom they have recruited, and on the sales of the recruits of their recruits, etc., ad infinitum.

In practise: 

'Pampered Chef' participants are obliged to invest their time and to pay all the considerable, allied, operational expenses, but exactly how much of their own resources this will inevitably involve, is not disclosed to new recruits.

most participants are generally able to organise one or two 'Cooking Parties' and use their existing relationships (based on love and trust) to sell some 'Pampered Chef' products to a few supportive friends and relatives, but no participant could be reasonably expected to generate a significant, and sustainable, net-income by paying to organise these kitsch sales meetings time after time, for many years.

no common-sense limit has been set on the number of 'Pampered Chef' participants operating in any given area, whilst the participants are clearly offered incentives to be their own best customers and to recruit any other customers as competitors. 

equivalent, or better quality, products to those offered by 'Pampered Chef' can be easily bought in all-manner of traditional retail outlets and On line.

all any free-thinking person (so desiring) has to do to obtain unused 'Pampered Chef' products, is go to the Internet, where there is always an unwanted mountain of the stuff going begging. (We are talking about many thousands of items listed on popular auction-Sites like e-bay each day, and at a substantial discount compared to their original fixed-price).


http://www.ebay.com/csc/i.html?_lncat=0&_sacat=0&_from=R40&_nkw=pampered+chef&LH_Complete=1&rt=nc






Thus, it seems that just as in 'Amway', 'Herbalife' , 'NuSkin', etc., a significant number of so-called 'MLM customers' have not been buying products from 'The Pampered Chef' in order to use them. On the contrary, the products might as well not have existed, because they appear to have been the classic 'MLM' wampum; the real function of which has been to launder unlawful investment payments made on the false-expectation of future reward.




http://blogs.wsj.com/moneybeat/2013/05/06/herbalife-makes-cameo-during-berkshire-hathaway-weekend/

Finally, the vital question of what distinguishes lawful direct selling from an unlawful pyramid scheme, was raised last weekend in public at 'Berkshire Hathaway's' annual shareholder meeting. 




Warren Buffett was asked by a concerned 'Berkshire Hathaway' shareholder if Bill Ackman’s $1.2 billions short-selling bet that 'Herbalife' is an effectively-valueless company hiding a cruel fraud, will have a detrimental effect on 'The Pampered Chef?,' and if Warren Buffett considers Bill Ackman's analysis of 'Herbalife' as a fraud, to be accurate?






Given his iconic status as the shrewdest investor in the world, and considering the irrefutable facts that:

the 'Herbalife' racketeers have steadfastly pretended that their business is based on selling products to thousands and thousands and thousands of 'end users,' 



    'Herbalife' and 'The Pampered Chef' have been linked via the so-called 'Direct Selling Association,' and via an extensive, and precisely-worded, thought-stopping 'commercial' jargon (including the term 'MLM'),

      the bosses of various other members of the so-called 'DSA' (which were subsequently closed-down by the FTC as pyramid frauds) also shared the same extensive, and precisely-worded, thought stopping 'commercial' jargon which they employed steadfastly to pretend that their 'businesses' were based on 'selling products' to thousands and thousands and thousands of 'end users,'


        Warren Buffett's strangely-familiar and precisely-worded, responses to his shareholder's questions, demonstrate a staggering lack of knowledge of what actually constitutes economically-viable (and therefore, lawful) direct selling, and reveals the considerable risk he has taken (in this state of blissful ignorance) with his shareholders' money. Self-evidently, when the 'Herbalife' racket is finally closed-down as a pyramid fraud, whomsoever is left holding 'The Pampered Chef,' will also be in deep trouble.

        Warren Buffett said:

        'I have never looked at a Herbalife annual report and I do not know about its operation... Pampered Chef’s business is based on selling to the end user, and we have thousands and thousands and thousands of parties every week where people who are actually going to use the product buy from somebody. We are not making the money by loading up people and then having them leave the sales force…That should be the distinguishing characteristic if I were regulating the industry.'


        Readers will observe that Warren Buffett very pointedly did not say that according to FTC guidelines, for any direct selling income opportunity to be lawful, it must involve its participants regularly retailing an overwhelming majority of products which they have bought from the sponsors (at least 70%) to the general public.

        Warren Buffett merely repeated part of the so-called 'Direct Selling Association's' effectively-meaningless'definition of direct selling,' i.e.  'selling to end users,' which has been specifically worded in such a vague way, that it can be taken to mean participants in 'MLM' schemes themselves. 







        WARREN BUFFET'S NAME HAS BEEN HABITUALLY USED TO COMMIT WIRE FRAUD, because, for decades, effectively 100% of so-called 'Multi-Level Marketing Distributors' have been unable regularly to retail a significant quantity of fixed-price products, and/or services, to the general public for a profit, and have failed to generate an overall net-income from their so-called 'home-based businesses.'  

         I have some common-sense questions for Warren Buffett:
        • What percentage of 'Pampered Chef ' recruits have actually remained with your company for more than: 1 year?  3 years?  5 years?
          • What has been the average annual drop-out rate for 'Pampered Chef' recruits?
          • Apart from the $155 'Business Starter-Kit,' what is the approximate amount of additional money that 'Pampered Chef' recruits have been required to find, to finance their first 12 months, non-salaried activities on behalf of your company.  
          • 'Pampered Chef's' corporate officers have recently claimed 'a sales-force of 60 000,' but since your company's instigation, how many different persons in total have bought their own 'Pampered Chef Independent Consultancy' from it, and, by extrapolation, what is the overall vanishing-rate for these so-called 'Businesses?'
          • What lawful, and/or ethical,  reason can you put forward to explain why the key-information contained in the answers to the above questions has been withheld by your company from prospective 'Pampered Chef' recruits?
          • Why is the Internet loaded with unused 'Pampered Chef ' inventory for sale?' 
          • Hand on heart, would you personally recommend joining any so-called 'MLM income opportunity' (including 'The Pampered Chef'), as a viable and ethical means for ordinary people to earn extra income?
          • Again, hand on heart, what would be your personal reaction if a member of your own family announced that he/she had signed up with 'Herbalife?'
          • When you made your public statements relating to 'Pampered Chef' and 'Herbalife' at the recent 'Berkshire Hathaway' shareholders' meeting, were you aware that numerous, unsecured, Micro-Finance loans have been made to immigrants, and other poor persons, in the USA, via the'Grameen Bank' (an institution which you were responsible for bringing to Omaha), in order that these vulnerable borrowers could start so-called 'MLM Businesses?'
            • Before you made your investment in 'The Pampered Chef', had you actually seen any quantifiable evidence proving that more than 70% of 'Pampered Chef's' claimed 'multi-million dollar sale's' have been authentic external retail sales to members of the general public (based on value and demand)?
            • Even if, as you claim, the (demonstrably-unethical) activities of the 'The Pampered Chef' are not (technically) unlawful in the USA, are you aware that, due to your acquisition of this member of the so-called 'Direct Selling Association,' your name and iconic status have been habitually-used by 'MLM Income Opportunity' racketeers, and their propagandists, in order to commit fraud and to obstruct justice all over the globe? 
            I look forward to the day when, if asked for his opinion of 'Herbalife' by a 'Berkshire Hathaway' shareholder, Warren Buffett replies:

            Based on my knowledge of the fundamental characteristic which identifies: Ponzi schemes, pyramid scams, money circulation games, chain letters, etc.  - namely, that all these frauds have no sustainable or significant source of revenue other than their own contributing participants - any so-called 'MLM direct selling income opportunity' in which the overwhelming majority of its declared annual revenue has not been derived from authentic retail sales to members of the general public (based on value and demand), but rather from the participants' purchases themselves (based on the false expectation of future reward), is a dissimulated closed-market employing endless-chain recruitment and, according to the FTC's own (70% retail) guidelines, fraudulent. Therefore, unless the corporate officers of 'Herbalife' can produce solid independent evidence that their so-called 'MLM direct selling income opportunity' really has had a significant and sustainable source of external revenue, no honest observer would be able to arrive at any other logical conclusion other than the bosses of 'Herbalife' are economic alchemists who, just like Charles Ponzi and Bernie Madoff, have been secretly peddling ill-informed people infinite shares of their own finite money.

            I sincerely hope that Warren Buffett's own view of himself, combined with his financial involvement with 'The Pampered Chef', will not prevent him from facing wider reality.


            David Brear (copyright 2016)

            8 comments:

            1. Robert FitzPatrick4 May 2016 at 12:25

              The FTC legality standard about 70% of product being sold to non-participants was invented by Amway to escape conviction during the 1975-79 prosecution. The “Amway rule” in which Amway IBOs are supposedly “required" to sell 70% of what they bought to actual customers was offered to the court to “prove" Amway is not a pyramid scheme and to prevent consumer losses resulting from “front-loading” or “inventory loading.” I have never understood how it was concluded by the court that the rule, if enforced (which it never was) would alter the inherently deceptive income promise, since income still comes from the “downline” and for the downline income to be real, the chain must be endless. If the rule were implemented, it would only mitigate losses but not alter the loss rates and would do nothing about the bogus income promise based on recruiting.

              The 70% “rule” could only operate in an imaginary, un-economic world, which the judge and most regulators and media people believe exists. For example, it would mean selling, approximately $2 of product to every one dollar of product that is not sold (to non-participants). Unless the average net profit is 50% on the retail sales (which it is not) it has to mean a net loss overall. E.g., buy and resell $100 at 50% net profit yields $50 profit while also buying another $50 of product that is not sold. Thus, out of $150 in total purchases, $100 is sold to retail customers (67%) of total), satisfying the rule, but on average, still yields a net loss.

              Putting the 70% “rule” into a larger business picture, with monthly purchases, it might mean buying $150 of goods a month and making $50 profit each month on the monthly turnover of $100. To make $50, you spend $150? Who would keep doing that? I suppose it is better than losing the entire $150 every month. And then there is the question that if $100 can really be sold, why would the company have to “require” it? And why would the seller stop selling at 70% of monthly purchases? This is not the real world, but many in government or the media have never sold anything in their lives, so anything is possible to them.

              The 70% standard does not change the “endless chain” promise, which is inherently deceptive. It does not prevent harm. But, many “party plan” MLMs like Pampered Chef likely would pass the 70% test, since “retail” selling in the setting of home parties is built into the model, even if the purchasers are friends and relative who are under obligation to buy something. I have not studied the party plan scenario as closely as I have the traditional MLMs but my impression is that people hold a few parties and then after running through their friends and family, quit. On balance they probably sold 70% but when costs and time are factored, it could not be called a “profit” and without recruiting, the business is dead-end.

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              1. I concur Robert. I wrote this article 3 years ago. I directed it at Warren Buffett himself, because I couldn't get a direct response from him. I wouldn't word it in exactly the same way today. In fact, I would not refer to the '70% rule,' because it's meaningless drivel. I only re-posted the article yesterday, because of Munger's intervention. Suddenly, I had hundreds of page visits to the original article, and that's what first alerted me to the latest twist in the 'Herbalife' tragicomedy. I didn't have time to write a new article and I wanted to respond to the situation immediately.

                Ironically, Warren Buffett started his business career as a 6 year old kid peddling packs of gum door-to-door for a tiny, but regular, profit. He was helped and encouraged by his kindly grocer grandpa and Congressman dad, not exploited by narcissistic charlatan racketeers. Ironically, most adults who fall for the 'MLM' fairy story have no more understanding of cultic racketeering than 6 year old kids

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            2. You're a liar Warren Buffett said nothing about HLF in the interview!

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              1. Anonymous - Take a deep breath and please try to ignore what you think I have written. Then re-read, and attempt to comprehend, what I have actually written. Also please take another look at the video clip of Charlie Munger and Warren Buffett being interviewed; particularly at 1 minute and 40 seconds.

                Without any prompting on the part of the interviewer, Charlie Munger says that Bill Ackman is 'totally right about Herbalife.'Although Warren Buffett didn't say anything, if you watch his facial expression at this moment, you will see that he obviously is in full-agreement with his friend's opinion.

                Strangely, the interviewer did not follow up Munger's condemnation of 'Herbalife'and she didn't ask Warren Buffett for his thoughts on the matter.

                This condemnation of 'Herbalife' by the two most-influencial investors in the world, should have been headline news in the financial media, but virtually nothing has appeared.

                Some of the obvious questions to ask Munger and Buffett, are

                Why, if you are so certain that 'Herbalife,' is a fraud have you not taken a short position against it?

                Do you believe that US regulators will finally act in defence of the public and close 'Herbalife' down?

                What is the difference between 'Herbalife' and 'Pampered Chef?'

                Since you are big supporters of Grameen Bank, but you accept that 'Herbalife' is a fraud, what are your thoughts on Grameen Bank lending money to poor Latinos in order to lose it in the 'Herbalife' fraud?

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            3. You know nothing the FTC is about to reach a settelment with HLF and the shares have jumped. http://fortune.com/2016/05/05/herbalifes-shares-soared-on-settlement-news/

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              1. Anonymous - In reality it has been reported by certain financial journalists that the bosses of 'Herbalife' say that they are about to cut a deal with the FTC, but no one else says that, so are you one of the Bosses of this racket?

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            4. Brilliant piece.The stock market is a such a funny animal. It's depressing to see wealth squeezed out of hardworking people and greedy pigs slurping it up. Any analyst who has a buy rating on a fraudulant company should be flipping burgers.The ftc fas clearly been corrupted.

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              1. Couchpilot - I don't think that the FTC has ever been the appropriate agency to be tasked with dealing with this form of cultic racketeering.

                'You can fool some of the people all of the time and all of the people some of the time, but you can't fool all of the people all of the time.'

                Evidently, the 'some people' who have been fooled all of the time are the constantly-shifting flock of amoral dunces with law diplomas temporarily holding down low-paid jobs at the FTC, before they move to much higher-salaries at 'MLM' front companies.

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