Tuesday, 2 August 2016

New York Times begins to eat humble pie over 'Herbalife (HLF)'


Bill Ackman, near right, at a Senate hearing in April. He has accused Herbalife, a nutritional supplement company, of defrauding its customers. CreditDrew Angerer for The New York Times

Bill Ackman, the activist investor, has been painted as a loser in his yearslong quest to shut down Herbalife, the nutritional supplement company that he bet against, contending it defrauded customers and was a pyramid scheme.
Two weeks ago, Herbalife paid $200 million to settle a case brought by the Federal Trade Commission. Herbalife’s stock rose after the settlement, which showed that investors took the development as little more than a slap on the wrist.
On Wall Street, Mr. Ackman’s rivals snickered. The headlines have been withering: “Herbalife Settles Pyramid Scheme Case With Regulator, in Blow to Pershing’s Ackman,” Reuters wrote. “Herbalife Scores Huge Victory in Its Bill Ackman Battle With F.T.C. Settlement,” Forbes said. And on and on.
And yet there’s something grossly wrong with this assessment.
Whether you like or hate Mr. Ackman — my column in November was as critical as any about some of his escapades — the F.T.C.’s complaint is a vindication of Mr. Ackman’s claims.
Yes, Mr. Ackman has lost a ton of money for his investors on his bet against Herbalife. But with the F.T.C. settlement, he has won a moral victory that could very well help hundreds of thousands of Herbalife’s defrauded customers, who are mainly low-income immigrants who would most likely not have had any legal recourse had Mr. Ackman not loudly called the company into question.
I have to admit I didn’t fully appreciate the magnitude of Mr. Ackman’s accomplishment until I watched a new documentary about his battle with Herbalife: “Betting on Zero.” The movie premiered at the Tribeca Film Festival in April; its title is drawn from Mr. Ackman’s prediction that the company’s stock would one day be worth nothing.
The film, directed by Theodore Braun, is remarkably poignant and is in negotiations for a distributor; it is being screened this Saturday in East Hampton. At the end of the movie, during the credits, Mr. Braun shows Edith Ramirez, head of the F.T.C., at a news conference last month 
Herbalife, she said, was responsible for “deceiving hundreds of thousands of hopeful people.” She described “the dream portrayed by Herbalife” as an illusion. She went on to say that “the vast majority of Herbalife distributors found they could make little or no money selling Herbalife products.”
Worse still, Ms. Ramirez said, her agency had determined that “people who leased space and opened a nutrition club and worked long hours made no money or lost money.” And, she concluded: “The small minority of Herbalife distributors who did make a lot of money were paid by Herbalife not for selling the company’s products, but for buying the products themselves and then successfully recruiting large networks of others to do the same.”
In other words, she described pretty much exactly what Mr. Ackman has been saying for the last three years.
According to Mr. Ackman in 2014, “These people work really hard, and unfortunately, they don’t realize that they’ve been defrauded.”
Herbalife repeatedly said that was a lie. “These accusations are provably false,” Herbalife’s chief financial officer, John G. DeSimone, told The New York Times in 2014.

And here we are today, and they were true.
“If it were not for Bill, I don’t think the F.T.C. would have launched an investigation,” Mr. Braun, the director, said. “Bill is unquestionably the catalyst.”
Herbalife refused to participate in the film, though Mr. Braun said he met and spoke privately with Herbalife’s chief executive, Michael O. Johnson, for several hours.
Ever since the film — which ends by seemingly sympathizing with Mr. Ackman — was first screened, Herbalife has been on a crusade against the movie. It bought the domain name “bettingonzero.com” so that when the movie’s title was searched in Google, people would stumble upon a website decrying Mr. Ackman. The site questions whether the movie was financed by Mr. Ackman — a question I asked both Mr. Braun and Mr. Ackman. Both said it wasn’t, and Mr. Braun said he hadn’t met Mr. Ackman until 2013 when he approached him about the film.
The website also noted that the producer of “Betting on Zero” and Bill Ackman were on the same crew team in college. According to Mr. Braun, one of the producers, Devin Adair, “overlapped” with Mr. Ackman at Harvard, but said that they were not friends and hadn’t talked in decades. Ms. Adair was the coxswain for one of the crew boats; Mr. Ackman rowed on a different boat.
Mr. Braun — who previously made “Darfur Now,” a documentary about genocide in the Darfur region of Sudan that was produced by the actor Don Cheadle, among others — said that when he first began researching the battle between Mr. Ackman and Herbalife, he wasn’t sure who was on the right side. He said he wanted to produce a film that explored “the place of money in America.”
The battle has been portrayed as either a pitched fight between a narcissistic, know-it-all investor seeking to bankrupt a company for profit (that’s Herbalife’s view) or as a crusading moralist trying to right a wrong. It may be a combination of both.
“This is an ‘Emperor Wears No Clothes’ story,” Mr. Braun said, explaining that the charm of that fairy tale “is it’s told by the sweet little boy.” The message, he noted, is harder to accept when “the messenger is a tough hedge fund manager.”
And while there have long been moral questions about the very concept of “shorting” — betting against a company’s stock — it is hard not to look at this particular situation as an example of an investor acting as a check on the market.
Admittedly, there were questions about Mr. Ackman’s tactics. He spent more than $50 million on his campaign, lobbying regulators and members of Congress to look into Herbalife’s practices. But if Mr. Ackman didn’t do it, who would? Complaints about Herbalife have been made for years, but it wasn’t until Mr. Ackman very loudly got involved that the government stepped in.
There are those who worry that Mr. Ackman’s involvement in Herbalife means the oligarchs have taken over — that billionaires have become de facto regulators. It is a valid concern. And the billionaires may not always be on the right side. (Mr. Ackman has been involved in some investments, like Valeant Pharmaceuticals and J. C. Penney, that didn’t go his way.)
But, in this instance, he won a victory that will have real benefits for many people.
And yet on Wall Street, his victory is considered hollow because he has so far lost money on his bet against Herbalife.
“Truth, candor and transparency are at odds with the measuring stick that Wall Street applies,” Mr. Braun said.
For now, Herbalife is heralding the settlement as a victory that will allow it to move on with its business. But Mr. Braun says that if the company genuinely changes its business model to conform with the settlement, “I can’t imagine a way for them to be profitable.”
“I don’t think this is over,” he added.

New York Times (copyright 2016)

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A far more-thoughtful analysis of the recent twists in the ongoing 'Herbalife' tragicomedy, is to be found in this short article by Robert FitzPatrick.


FTC rewrites rule book of prohibitions on Herbalife, MLM.

It should not surprise anyone who followed the FTC’s two-year inquiry into deception and unfair trade practices by the “multi-level marketing” company Herbalife that when the FTC’s findings of deception and imposition of prohibitions were announced in July they would be met by… deception.In an earlier essay in The Hill, I had alerted members of the newly formed “Direct Selling Caucus” in the House about “MLM” deception. Now, the FTC has verified it.
For many years, Herbalife was accused in class action lawsuits, by individual consumers in whistle-blower blogs and websites and recently by some on Wall Street of engaging in the Big Lie. Now that the FTC has announced its findings and conditions to allow Herbalife to stay in business, Herbalife is in Big Denial.
What else can it do? The FTC’s charges and settlement terms confiscate Herbalife’s tools of deception – illegal tools, according to the FTC – to generate future revenue. Publicly admitting the truth now is to signal mortal distress. To acknowledge the facts that are presented in the FTC documents requires Herbalife to repudiate past statements to investors, the media, and regulators. For three years Herbalife made unremitting claims, pious promises and absolute guarantees that the FTC would never find any wrongdoing.
If provable wrongdoings were not found, why would Herbalife agree to disgorge $200 million, enact fundamental changes to its structure, policies, and pay plan that it has used for 30 years, and agree to wear the equivalent of an electronic ankle monitor for the next seven years to ensure the changes are carried out?
To fact-check my account of reality against Herbalife’s paid consultants’ claims of FTC exoneration and business-as-usual, read the FTC’s actual charges of unfairness, deception, consumer harm, and illegality. Examine the sweeping prohibitions in the FTC Press Release, “Herbalife Will Restructure”,  the FTC Complaint against Herbalife,  the terms of the Permanent Injunction, and the direct statements of FTC Chairperson Edith Ramirez:
  • “The FTC also charged that the multi-level marketing company’s compensation structure was unfair…
  • This settlement will require Herbalife to fundamentally restructure its business…
  • Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices…
  • The small minority of distributors who do make a lot of money, according to the complaint, are compensated for recruiting new distributors, regardless of whether those recruits can sell the products they are encouraged to buy from Herbalife…
  • Defendants’ actions cause or are likely to cause substantial injury to consumers…”
Opinions may reasonably diverge about the justice of the FTC settlement, but not about its content. The facts are on the FTC website in plain English. The press release is in Spanish too. The FTC settlement has imposed special restrictions on Herbalife’s practice of misleading Latinos into investing savings in unprofitable “nutrition clubs” which constantly open and close in lower-income Latino neighborhoods.
The FTC Complaint lays out many restrictions but one in particular will most negatively affect Herbalife's revenues and recruiting. It ends the deceptive and abusive practice of inducing consumers to buy Herbalife products in order to access the fabled and promised rewards that turn out to be available only to a tiny few. The FTC described Herbalife’s “pay to play” practices:“Defendants’ compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product.”
Bold-faced denials and Orwellian reversals of reality cannot change what is about to happen to Herbalife and all other companies like it. The rule-book of legality has been rewritten by the FTC on what is called “MLM.” Anyone relying on reassurances of status quo needs to read the record.

Robert FitzPatrick (copyright 2016)

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