Robert FitzPatrick reviews Ted Braun's 'Herbalife (HLF)' documentary, 'Betting on Zero.'

New Documentary Takes Herbalife 'Fraud Thesis' To Main Street In Gripping Drama And Living Color

Summary

Hollywood is doing a better job explaining institutionalized fraud than the business media has. A new film of this genre focuses on Herbalife. Every Herbalife investor may be affected.

Ted Braun

As in the film, The Big Short, Ted Braun's new film on Herbalife, Betting on Zero, presents quixotic whistle-blowers exposing the fallacy of official views and revealing terrible truths.

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The claims of the film's protagonists that Herbalife perpetrates mass deception were dramatized right at the theater with Herbalife flyers warning movie-goers not to believe their own eyes and ears.

Though offering a comprehensive view, the film focuses on one naked fact: Herbalife promises millions of people income opportunity but delivers zero.

"Pyramid Scheme" analysis is superseded by revelation of monumental "Income Opportunity" fraud. The movie penetrates the walls of deception to street level reality. Extreme consequences may follow.

Ordinarily, it would be totally out of place in this forum to offer a "movie review" as a financial analysis of a publicly traded company. But in the case of Herbalife (NYSE:HLF) it is not only appropriate; it is necessary. Hollywood, it turns out, is doing a better job of reporting on this company and on other uncomfortable financial truths than WSJ, New York Times, Fortune or Reutersare.

A powerful new documentary film, directed by Ted Braun, entitled Betting on Zero, has just premiered at the famed Tribeca Film Festival in New York City. This movie offers a clear and comprehensive view of Herbalife. It potentially affects every Herbalife investor. The film could also influence the FTC and SEC in exercising oversight of all "multi-level marketing", MLM, enterprises. It may awaken more Latino leaders whose communities are inundated by Herbalife's and other MLMs' pay-to-play promises of the Sueño Americano for millions of immigrants.

Beyond its own cinematic merits which won the film a coveted spot in the Tribeca festival and then generated sold out performances, Betting on Zero's importance is heightened as part of a genre of very popular films. These movies are exposing institutionalized financial fraud, epic regulatory failure and Wall Street's troubling role in the hollowing out of the middle class and contributing to Main Street misery. They include Wolf of Wall Street, Enron: The Smartest Guys in the Room, Boiler Room, Madoff, Margin Call, and The Big Short, among others.

Like the acclaimed film The Big Short, Betting on Zero translates financial issues that have been cynically and confusingly depicted in the business press only as Wall Street tribal warfare or legalistic and political matters into a fascinating and vivid picture of systematic fraud. It goes further to capture the devastating impact on ordinary people. Herbalife chose not to participate in the film and therefore escaped direct questioning, but its official messaging and promotions were woven throughout the film and Herbalife's public defenses against fraud charges were generously included.

In this film, as also in The Big Short, a quixotic set of unlikely and generally unconnected individuals make extraordinary and alarming claims of unconscionable deception and financial harm perpetrated on a massive scale, in this case by Herbalife and other MLMs, that are willfully ignored by regulators and ineptly missed by the media. The most prominent whistle-blower in the drama is William Ackman of Pershing Square Capital whose billion-dollar short "bet" against Herbalife's stock value and his wonky fraud thesis on its business model set the stage.

The rich and famous Ackman and any of the other, largely unknown, figures in the film who explain or attest to the realities of pyramid fraud - market researcher (Christine Richard), consumer educator (me), university professor (William Keep), private attorney (Douglas Brooks), Latino community activist (Julie Contreras), and the struggling immigrant families and fledgling entrepreneurs who were victimized - all face the same societal scorn and skepticism as crackpots or self-promoters when asserting the evidence of MLM fraud, its massive scale and political protection from law enforcement.

The loneliness of delivering the terrible news - that Herbalife's miracle solution for the unemployed, low paid, undocumented, or economically abandoned is a complete sham - is vividly illustrated in the film by the small band of Latino protestors bravely shouting, Herbalife afuera (Herbalife out), in front of one of Herbalife's opulent "extravaganzas" attended by thousands, many of them fellow Latinos.

Opponents and whistle-blowers of any "blame the victim" racket such as Herbalife's must first withstand the scheme's most destructive force, which is greater even than its financial slaughter - manipulating the recruits into the debilitating belief that they themselves brought on their own failure and financial loss and that anyone who says otherwise is either misguided and bad-intentioned. Millions who are lured into Herbalife and then churned out and replaced after losing money are told to eschew the dreaded identity ofvictim, which might raise questions of calculated deception, their own vulnerability, or even lead to protests. Instead, they are persuaded to accept Herbalife's own explanation that all who "fail" in the business do not try or their failure was only in not sufficiently trying. Such is the evil brilliance of the pyramid scheme when disguised as a "sales" business with commodity products serving as transfer currency, that everyone is or could have been a winner, while 100% who join each year actually lose.

Herbalife attempted this very same Orwellian maneuver on those who dared to view the sold-out film. At the theater entrance a group (not known if they were Herbalife devotees or paid workers) passed out official Herbalife flyers advising movie-goers that anything they might see or learn with their own eyes and ears is invalid and should be ignored. The action provided those entering Betting on Zero an enhanced theater experience, better than 3D. They got to directly experience Herbalife's kill-the-messenger mind-games and its self-proclaimed exemption from factual reality.

The flyer discredited the entire film out of hand as having been funded by William Ackman himself or at least his surrogate! What of evidence for this? What about Director Ted Braun's statement to the contrary? The flyer stated, "It is now known that the producer and Ackman were on the same crew team(no explanation of what a crew team is) during college." (crew team during college?) In the next sentence it asks, "Why did the director fail to disclose that there is a financial connection between the producer and Ackman" (what financial connection?). Even more incredibly, it asks, "Why did the film's five Tribeca showings sell out so quickly? Is an interested billionaire behind the ticket sales?" (no evidence offered for raising that incriminating question and no answer given). The flyer then referred to attorney Douglas Brooks and Latina community leader Julie Contreras as "actors."

Completing the bizarro world reversal of reality, Herbalife's flyer directed the readers "for more information" (where the very same statements are repeated) to a website entitled, "Betting On Zero: From the Cutting Room Floor", which Herbalife owns! (You can see the Herbalife flyer here.)

Beyond escaping Herbalife New Speak, the great challenge that Ted Braun faced in his film was to describe and explain a layered, sophisticated and disguised "long con" (think The Sting) while also grounding the narrative and analysis in the every-day lives of real people. The film met this challenge masterfully with a mixture of on-camera professional explanations, touching testimonies and documented experiences of victims told in their own words, often in Spanish.

These people's heartfelt and unrehearsed reactions and accounts of deception and loss jarringly contrast with the slick and scripted spin of Herbalife officials and the plastic company images of cheesy luxury and get-rich gratification.

• The shocking yet rather clinical data showing virtual 100% loss rates among the millions of Herbalife's new recruits each year were brought to life in the sad experience of those lured into doomed "nutrition club" investments involving thousands of lost dollars, often borrowed. The selling of bogus Nutrition Clubs are explained in the film as just the newest twist on the Herbalife long-con to replace the earlier exposed and debunked trap that Herbalife had utilized for years involving upliners selling high priced "leads" to their newest marks as part of a large-scale recruiting campaign, abetted by AM talk radio hosts such as Hannity and Rush Limbaugh.
• More clearly than any "exponential" chart could show, the ruthlessness of Herbalife's "endless chain" trickery and its disruptive effects on personal relationships were revealed in the film by a young entrepreneur living in an economically abandoned part of the country and believing Herbalife's claims of financial salvation. After investing and working diligently on his "nutrition clubs", he said he realized the model could never be profitable from product sales but only by "duplicating", recruiting new investors whose losing investments would financially redeem his own losing investment. He decided he could not in good conscience lead others, whom he would likely know personally, into that position, though the business model dictated it.

Analysis of Herbalife's income data showing that virtually all consumers, joining and investing in Herbalife each year, suffer financial losses that are often crushing in scale has been presented various times in Seeking Alpha. Yet, the devastating truth in the data has somehow been deflected perhaps by the sheer enormity of the implications. How could a scam of this scale be allowed to exist? Why has not the FTC or the FBI acted? Why are the details of a "pyramid scheme" being debated, when the harm of naked income opportunity fraud is already documented?

Though it does succinctly and clearly explain what a pyramid scheme is, the film avoids the morass of basing analysis of Herbalife's legality on any narrow or technical definition. Rather, it repeatedly directs the viewer to one astonishing and overarching fact. Herbalife sells an income promise that does not exist. Herbalife makes a straight-faced proposition to millions of people that if they join its income plan, which includes paying fees and buying volumes of its commodity products, "anyone who tries" can and will gain sustainable profits. They do not. They cannot. Millions upon millions, year after year, take Herbalife's "bet" and get zero, just as Herbalife's smiling officials knew perfectly well that they would.

You may call this a pyramid scheme if that is what it looks like to you. Or, if you prefer, call it snake oil, flim-flam, long con, closed market swindle, grifting or Bunco, or say it is perfectly legal "multi-level marketing" if you wish. Whatever it is called, the movie reveals the simple fact that a payment is solicited and obtained by Herbalife based on a promise that is not fulfilled. The promised net income is not delivered. Over and over again, year after year, this deception is perpetrated on millions upon millions. It is the very definition of the Big Lie.

Betting on Zero allowed billionaire Bill Ackman to say explicitly that Herbalife is the "big lie." Yet with perhaps even more power and impact it also enabled a Latino carpenter who had lost all his savings in Herbalife to say the same thing his own way. I and other analysts also say it briefly in the film in our various ways. With these assertions, explanations and analyses, the film's graphic imagery reveals and explains the trickery of the "endless chain", and the illusions of exponential expansion. MLM's protection racket of political influence-buying is also shown, which may explain the years of regulatory silence while the scam grew to global dimensions.

In the end, the real significance of Betting on Zero is that, finally, the terrible truth has been presented in a medium in which the message may penetrate the protective wall of deception. The consequences may be extreme.

Robert FitzPatrick (copyright 2016)