Christine Richard attempts to explain how 'Herbalife (HLF)' racketeers continue to commit fraud by hiding key-data.

Statutory Warning

More than half a century of quantifiable evidence, proves beyond all reasonable doubt that:

• what has become popularly-known as 'Multi-Level Marketing' (aka 'Network Marketing') is nothing more than an absurd, cultic, economic pseudo-science.

• 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 organised 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 rigged-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, recruitment leads, lead generation systems,' etc.).
• Apart from an insignificant minority of exemplary shills who pretend that anyone can achieve success, the hidden overall net-loss/churn rate for participation in so-called 'MLM income opportunities,' has always  been effectively 100%.

David Brear (copyright 2018)

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Instead Of Providing A Reality Check, Herbalife's New Official Compensation Disclosure Falsely Indicates That Most Distributors Make Money

By Christine Richard

Summary

Thanks to the FTC Order, Herbalife is now in a position to track and disclose alleged retail sales profits in its official statement of average compensation disclosure.

It can also now remove all those people who sign up just to purchase products at a discount, a group the company has long said distorts reported average compensation.

The new disclosure suggests that nearly 90% of distributors earned some income in a “typical” month.

To create that impression, however, Herbalife had to take 170,000 distributors off its disclosure document.

That's a violation of the FTC order, which says income disclosures must be "non-misleading."

Every day, Herbalife Ltd. (HLF) recruiters pitch the business opportunity across the US, describing how Herbalife allowed them to quit jobs and stay home with their children, boasting of financial freedom and showing photos from Herbalife-sponsored vacations in exotic locations around the world. Such pitches are prone to exaggeration, of course, which is why Herbalife and other multi-level marketing companies are required to provide a reality check in the form of an official disclosure of average compensation.

Distributors are expected to post a statement like this when presenting their individual experiences as part of a promotion of the business opportunity:

"Income depicted is unique to the individual and is not typical. Achievements require skill & consistent work. For typical earnings, see Statement of Average Gross Compensation at Herbalife.com."

Here's where the company is legally required to throw some cold water on all the hype.

Shortcomings of the Disclosure

Herbalife's disclosure of average compensation has long been a battleground between the company's supporters and its critics. Critics claimed that Herbalife so thoroughly parsed distributors before adding them to the disclosure statement that the company made it impossible for a reader to determine the average experience of distributors. Skeptics also pointed out that Herbalife failed to provide expenses in its income disclosure, effectively equating revenues with profits.

Meanwhile, Herbalife argued that critics took advantage of some of the shortcomings in its data collection to exaggerate the distributor failure rate. For example, because Herbalife never distinguished between its distributors and the vast number of individuals it said signed up with the company to get a discount on the products, critics blended the two, claiming thousands of people weren't being paid by Herbalife even as they had no interest in making money.

Herbalife also argued that because it didn't track retail sales by its distributors, it couldn't add this crucial element of earnings to the table. That limited disclosed compensation to commissions earned by distributors on their downline's purchases. Retail sales - the foundation of the entire business opportunity, according to the company - were missing from any analysis of compensation.

All of this has been remedied by the Federal Trade Commission (FTC) Consent Order imposed on Herbalife's business in July 2016. Herbalife is now required to distinguish between distributors and discount consumers, classifying the latter as preferred members. It's also required to track retail sales and to collect information that would allow it to show just how much in retail sales profits its distributors are claiming to earn.

The only item still missing from the table is expenses, and that works in Herbalife's favor.

The New and Improved Table

With this in mind, we turn to the new and improved, post-FTC settlement average compensation disclosure for Herbalife distributors in the U.S. The substance of the disclosure is contained in a section that asks: "How much can I earn in a typical month?"

Herbalife's presentation of the data for a single month is a departure from previous years' disclosures, which covered a 12-month period. Because Herbalife implemented a number of FTC-mandated changes to its business beginning in May 2017, the company isn't able to present full-year data yet.

Should that matter? Probably not, because Herbalife is very much a month-by-month business. A distributor's advancement and compensation depend on meeting various monthly volume point thresholds, which encourages more consistent purchasing. Therefore, we can assume those earning compensation in a "typical" month are largely the same distributors who are earning in subsequent months.

Back to the company's response: "In a typical month from June to September 2017, about 45,000 U.S. distributors ordered products for resale from Herbalife, and about 40,000 of them earned money from their sales and the sales of those they sponsored." (The FTC Order has also required Herbalife distributors to distinguish between products they buy for their own consumption and products they buy hoping to retail.)

The disclosure table provides a breakdown of distributor earnings for those who bought products they hoped to retail.

At first glance, it appears that the vast majority of distributors earn money. For most, the amount is small, but it's at least something; 50% of first-year distributors, for example, earned less than $95 per month - before expenses - while 50% of those who had been with Herbalife for more than a year earned less than $305.

Yet, readers are told that 40,000 out of 45,000 distributors, or 89%, receive some compensation, in the form of retail sales profits and/or commissions on purchases by preferred members and distributors they've recruited.

Not bad if you have very modest expectations, but also not exactly true.

In order to imply that 89% of distributors received some compensation in a typical month, Herbalife needed to define as relevant only those distributors "who ordered products for resale" in that month. A reader might reasonably assume that's the lion's share of distributors, when, in fact, it's a small subset.

During the company's third quarter earnings call with Wall Street analysts on November 2, Herbalife President Des Walsh told analysts and investors:

"Today, we've got about 470,000 Preferred Members. We've got about roughly 215,000 Distributors. So, it's roughly a sort of a two-thirds, one-third ratio."

So, according to Walsh, one-third of all members or 215,000 people sign up with Herbalife for the stated purpose of making money. Yet, the disclosure only discusses the 45,000 distributors who purchased products for resale in a given month. That leaves 170,000 US distributors off the disclosure statement who didn't place an order, presumably because they didn't have any retail customers to sell to or perhaps had excess unsold inventory from a prior month.

Once again, Herbalife has managed to quantify success by simply removing failure from consideration; it's an old trick and a surprisingly bold one in the wake of the FTC settlement.

If all 215,000 distributors had been included in the table, Herbalife would have reported that just 19%, 40,000 out of 215,000 distributors, received any compensation in a typical month between June and September 2017. That's a disappointing outcome, given that Herbalife now has all the data at its disposal to add retail sales profits and to exclude discount consumers from its disclosure.

Not presenting these disappointing numbers to the public is a violation of the FTC Consent Order. Under the Order, the FTC bans Herbalife and its representatives from "making any representation, expressly or by implication, regarding the amount or level of income, including full-time or part-time income, that a participant can reasonably expect to earn unless the representation is non-misleading and, at the time such representation is made, Defendants possess and rely upon competent and reliable evidence sufficient to substantiate that the representation is true." (Subsection IV.B)

It's important to remember that the compensation disclosure document is not the work of overly enthusiastic distributors. It was created by Herbalife corporate to put overly enthusiastic distributor promotion into context. It's the fine print, and it's intended to contain the hard truth.

Potential recruits have to actively seek out this hard truth. They have to tune out the hype and override all the voices urging them to banish negativity and chase their dreams. Amidst the thumping music and cheering crowds at Herbalife recruitment events, they have to notice the scrolling disclosure statement at the bottom of the screen. They have to jot down the address and remember to follow-up with a visit to Herbalife's website.

Then, when they finally get there, the water is nowhere near as cold as it should be.

Christine Richard (copyright 2018)