The following is perhaps the most thoughtful mainstream article to be published about the recent dodgy FTC 'Herbalife' deal. It appeared in the LA Times July 18th.
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FTC moves against Herbalife, but leaves a question: Why is this company still allowed in business?
The legal complaint and settlement with Herbalife unveiled Friday by the Federal Trade Commission answers several questions about the Los Angeles-based nutritional supplement marketing company, but leaves the most important question wide open.
The answered questions involve Herbalife’s business model. The FTC says in its complaint, filed Friday in Los Angeles Federal Court: Yes, Herbalife’s business model is deceitful. Yes, the company has misrepresented itself as a nutritional supplements company, when what it’s really selling are business opportunities, the value of which it has consistently and grossly exaggerated. And yes, it’s a ripoff; or to put it in the FTC’s language: “Consumers have suffered and will continue to suffer substantial monetary loss as a result of [Herbalife’s] violations of Section 5(a) of the FTC Act.”
That section outlaws “unfair or deceptive acts or practices in or affecting commerce.”
The FTC’s findings about Herbalife, in other words, couldn’t be clearer. The agency extracted a $200-million settlement from the company, along with a promise to straighten up and fly right. (The sum is a pittance, compared to Herbalife’s revenue and profits.)
“Herbalife is going to have to start operating legitimately,” FTC Chair Edith Ramirez said Friday, “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.”
So here’s the unanswered question: Why is the FTC allowing Herbalife to remain in business? The answer, sadly enough, looks to be money. Reading between the lines, Herbalife has become too rich to shut down.
It’s not as though the agency is powerless to act against pyramid schemes, which is what Herbalife has been alleged to be. Last August, the FTC shut down Vemma Nutrition Company, a Phoenix multilevel marketing outfit it said was targeting college students and recent college graduates. The agency froze Vemma’s financial accounts and got it placed in receivership.
The FTC alleged in its lawsuit that Vemma’s business model “depends upon recruiting individuals to participate in Vemma as Affiliates and encouraging them to purchase Vemma products in connection with such participation, rather than selling products to ultimate-user consumers.”
Here’s how the FTC described Herbalife’s model: “[Herbalife’s] compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product.” The FTC said that Herbalife’s “program does not offer participants a viable retail-based opportunity.”
Is there a material difference between these two assertions? Not that we can tell. Yet the FTC called Vemma “an unlawful pyramid” and Herbalife merely as a “multi-level marketing company.”
The details in the FTC’s complaint against Herbalife are damning. It enticed individuals to sign up as “distributors” of its products by plying them with testimonials from previous recruits who talked about transforming themselves from near-bankrupts to earners of six figures or more a year hawking Herbalife inventory. Its promotional material bristled with “pictures of big houses, fancy cars, cash, and boats.”
In truth, the FTC observed, the vast majority of Herbalife distributors don’t make “anything approaching full-time or even part-time minimum wage.” Of the more than 680,000 distributors counted by Herbalife in 2014, only 205, or 0.03%, earned more than $600,000. And they earned most of their money by recruiting new distributors, not by selling product.
In 2013, shortly after hedge fund manager Bill Ackman launched a painstakingly detailed attack on Herbalife’s business model, paired with a $1-billion short bet on the company’s stock, Herbalife changed its pitch. Rather than promoting itself as a business opportunity for the little guy, Herbalife began asserting that some three-fourths of its distributors weren’t in it for the career, but merely to get a chance to buy Herbalife products at a distributor’s discount. The FTC didn’t fall for it. It says that many recruits start out as wanna-be business successes, but fail, and that more than 75% of Herbalife’s products are bought by people “clearly pursuing a business opportunity.” Just not a good one. (Ackman has been proved mostly right about Herbalife, though he’s lost as much as $500 million on his short bet, according to some observers; he was counting on the company’s stock falling to zero, but it closed Monday at $64.78.)
One striking difference between Vemma and Herbalife is size: Vemma was collecting about $200 million a year in revenue when the FTC went after it. Herbalife, which has been treated indulgently by government regulators almost since its founding in 1980, last year reported profit of $339 million on net sales of $4.5 billion.
That sort of wealth buys a lot of influence. Enough to keep the words “pyramid scheme” out of a federal regulator’s lawsuit, for example.
Herbalife has not been shy about putting its connections on public display. For years it boasted of its close connections with UCLA Medical School, which as we reported in 2013it exploited to give its nutritional shakes and other products the veneer of scientific credibility. The company kept medical school faculty members on its payroll and promoted its ostensibly altruistic contributions toward the school’s Mark Hughes Cellular and Molecular Nutrition Lab at the medical school's Center for Human Nutrition. Herbalife contributed $1.5 million in cash, equipment and software to the lab from 2002 to 2013. (The lab is named after Herbalife's founder, who died in 2000 after a four-day drinking binge — not the greatest advertisement for the healthful, active living Herbalife claims to promote.)
The FTC’s complaint implies that the luminaries who have been trotted out by Herbalife to attest to its integrity should hang their heads in shame. Among them is former Secretary of State Madeleine Albright, who seems to have sold her soul to lobby for Herbalife internationally.
“I wouldn’t be here if I weren’t proud to be associated with Herbalife,” Albright told a company gathering in Europe in 2013, “and Herbalife wouldn’t be operating in more than 80 countries if it weren’t satisfying customers wherever it goes.” (See video.) Albright touted Herbalife as a paragon of “corporate responsibility and community service,” and as an “ethics-driven company.”
What does she think now? We queried Albright’s consulting firm, Albright Stonebridge Group, but haven’t received an answer.
In addition to the $200-million penalty the FTC extracted from Herbalife, it’s forcing the company to restructure its marketing pitch, its distributor compensation, and its treatment of the lowest level of aspirants. Herbalife will have to knock off the intimations that joining up will result in a “lavish lifestyle” and drop the images of opulent mansions and personal helicopters that beckoned to the unwary. It will have to connect the compensation of top-tier agents — those tiny few who make big money from lower-level distributors — to retail sales, not to potentially bogus purchases, especially by the distributors themselves. Recruits will be allowed to get their money back from purchases of products or distributor promotional packages for up to a year.
Will this hurt Herbalife? It’s questionable. Some say that forcing the company to make its money from actually selling its nutritional supplements to retail buyers will be its death knell, since a small percentage of the product actually goes to such customers.
It’s also possible that Herbalife will cry all the way to the bank. The stock market treated the $200-million settlement as a triumph for the company, sending its shares up nearly 10% Friday after the FTC settlement; they also gained about 9% in May, after the company disclosed the pending penalty in a quarterly report. The company already has pointed out that the FTC settlement applies only to its activities in the U.S., and those account for only 20% of its net sales. So it’s free to continue its old model in the rest of the world.
Its chairman and chief executive, Michael O. Johnson, said in a release that the FTC settlement, along with a second deal with the state of Illinois, “are an acknowledgment that our business model is sound.” If that’s not thumbing his nose at government regulators, what is it?
I can't say this is terribly surprising after the decision for Amway to settle in 2010. I believe Bill Ackman has not had a problem with his current beating, and has a positive outlook on the future of his position in Herbalife stock.
ReplyDeleteThe one thing that really sucks is the lack of legislation being updated. Even if Herbalife toppled over, there would still be plenty of other MLM's for these guys to join and continue their successes. As it stands, the FTC only attacks one of these at a time which is completely ineffective in stopping the source of the issue, and now they are just settling because they can't continue to fund the process...
I also don't see any improvements in this field if Trump is elected president. That guy has no respect for low level wage earners, and he has endorsed MLM in the past. It would seem that as long as there is a Republican party, there will be plenty of lobbying and deregulating for MLM and the supplement industries.
John Doe - What you are actually telling me is that you believe the USA to a morally bankrupt de facto kleptocracy where wealthy 'MLM Prosperity/ Gospel' racketeers have become above the law.
DeleteI agree with your initial analysis, but I don't agree that laws need to be changed in the USA concerning criminogenic groups like 'Amway' and 'HLF.' They merely need to be enforced by persons of a high moral and intellectual calibre, but these laws should have been enforced many years ago.
The laws which have not been enforced are those which define and prohibit fraud, corruption, obstruction of justice, etc., along with the RICO Act 1970 which defines and prohibits combinations of fraud, corruption, obstruction of justice, etc. and which together form an overall pattern of ongoing major racketeering activity.
Trump himself should have been long since been jailed for his acceptance of stolen millions from the 'ACN /MLM' racket. That said if Trump sincerely believed 'ACN' to be an entirely lawful business when he took the cash, he is too stupid to making the coffee in the White House, let alone sitting in the Oval Office with his finger on the nuclear trigger.
Any former law enforcement agent accepting lucrative employment from groups like HLF should have done so under the threat of prosecution under RICO, because they are quite obviously being bribed with stolen money.
Madeleine Albright and Pamela Jones-Harbour should be top of the list for RICO prosecution.
It's the USA that should actually be on trial here.
David,
ReplyDeleteCan we call the United States anything other than a kleptocracy? We have two power hungry criminals running for presidency, an insatiable blood lust for war with countries who have resources we want, and a population being taxed more than ever as they put their head's in the sand.
I think you are correct that RICO is written well, and has produced many wonderful convictions to stop organized crime. However, it is more so designed for blue collar crime, and has a tougher time dealing with white collar crime as well political corruption. I suppose it would be more important to develop another branch for checks and balances, but at this point it won't really matter since the executive branch seems to hold all of the cards these days. The legislative and judicial branches are a joke, and call me a conspiracy theorist, but I still believe Scalia was whacked.
I'm not really sure how someone puts themselves on trial, but at this point I'm paying enough to see this happen.
John Doe - Personally, I would describe the USA as something worse than a kleptocracy. It's a kleptocracy posing as 'a democracy ruled by reason and law.'
DeleteMany Americans are fond of boasting that they are 'the most powerful nation on Earth,' when an increasing number of outside observers regard such persons as deluded.
It's one of the greatest ironies of history that the USA was supposedly created via a rebellion against rule by a remote regime based on the non-rational twin ritual beliefs that Britain was the powerful nation on Earth and its King was annointed by God.'
David,
ReplyDeleteinteresting times. At first blush, it would seem we are at a time of peak momentum for stopping HLF and other MLM frauds, at least here in the US...first we have the FTC decision itself, which is basically an indictment of HLF. then, this LA times article is the first time i have seen a major mainstream publication pull no punches with an MLM company. They usually try very hard to be 'objective' and end up including enough MLM-planted 'thought-stopping, pseudo-capitalist jargon' to leave the audience with reasonable doubt. so it seems like we are turning the corner to truth.
however, i am a bit concerned that the FTC did not simply cut HLFs throat. they clearly believe its a pyramid scheme. why not take it out immediately? why add in all of these new guidelines which amount to slow suffocation. You know more about MLM than anyone - are you not worried that they weasel their way out of the noose ? the industry has spent decades skirting around rules and regulations, so i am disappointed to simply see more regulation as the result.. do you think the FTC felt it was too risky to go straight to court? is there some reason that this agreement is the best result for the long term ?
Shakeoilsalesman - Over the years, there have been plenty of journalists who have been prevented from thinking deeply about 'MLM' cults, because their editors (and their editors' legal advisors) feared costly lawsuits and complaints to media regulators. There have been various journalists, researchers and even editors, who have witnessed nightmare 'MLM' personality transformations amongst their own friends and relatives. I am in contact with such persons at the moment.
ReplyDeleteThis week I was informed that very recently an important European television channel has hesitated in reporting parts of the 'MLM' phenomenon, because commissioning editors falsely believe that most viewers know 'MLM' is a scam and, therefore, it's not a news-worthy story.
The 'HLF' ruling will hopefully stimulate many more previously-lazy (and amoral) media minds (like it apparently has at the LA Times).
Unfortunately, the prime motivation of even honest legislators, regulators and prosecutors is no longer to enforce the law, but to protect confidence in financial markets. This has also been the prime motivation of the overwhelming majority of financial journalists and editors.
Groups like 'HLF' have been committing fraud on a titanic scale for decades right under the noses of US legislators, regulators, law enforcement agents, prosecutors, financial journalists, editors, etc. From my own conversations with US officials, I am of the opinion that Ackman forced the hand of senior FTC, SEC and FBI officials who jointly took the decision effectively to close-down the 'Herbalife' racket in a way which would not damage confidence in the honesty of the stock market and would not reflect badly on their own agencies.
Personally, I think that (with a lot of external prompting) the FTC has unscrewed the lid on the stinking 'MLM' can of worms to point where it now has to fall off.
David what a complete disgrace allowing this leech company to remain in "business" one minute longer. What about all the other MLM leeches? Are the FTC going to force them to employ independent observers to make sure they have retail sales and don't tell any more lies?
DeleteAnonymous - Dealing with 'MLM' mobs on a case by case basis has always been an utter waste of time. It also demonstrates that US regulators still don't fully-grasp the historically-significant nature of this criminogenic phenomenon.
DeleteIn effect, the FTC has attempted (only in the USA) to ban one major US-based 'MLM' cult from peddling the same pernicious Utopian fairy story which has been, and is still being, peddled by hundreds of essentially identical cultic groups all around the globe.
Your description of 'MLM' mobs as 'leeches' is highly appropriate, because if hundreds of leeches have attached themselves to a body and are sucking it dry, what's the point of trying to remove just one of them (albeit one of the biggest) without dealing with all the others?