On December 23, I wrote that I agree with Bill Ackman, head of hedge fund Pershing Square, that Herbalife is ripe for investigation. I believe that not because of his presentation, which made some excellent points, but because of the lack of scientific evidence that Herbalife's products have any advantage over generic products, and a thorough reading of a Belgian court decision that discusses its evidence that suggests Herbalife is a pyramid scheme. Herbalife is appealing that decision.
Mr. Ackman has publicly stated he believes Herbalife is a pyramid scheme that bleeds a demographic dry and then moves on to either a new country or a new demographic within the same country. Herbalife's demographic of choice in the United States at the moment seems to be the Hispanic community. Apparent earnings growth is at the expense of duped low income people that lose their "investment" when they are unable to recruit additional duped distributors as the base of the pyramid quickly fills up. Bill Ackman believes the company's share price has significant downside, perhaps even zero, but his disclaimers also note that he may cover his short at any time, which would eliminate his bet altogether.
Mr. Loeb and his advisors disagree with this assessment and point to the cash flows and multi-year earnings growth generated by Herbalife and its apparent low valuation to historic P/E ratios, among other things. He notes that management historically returned net income to shareholders in the form of dividends and share buy-backs.
Well yes, but Charlie returned "net income" to "investors" too -- until he ran out of money taken in from new "participants" to return!
I agree that there is a real issue with the products, in general. But that's not really actionable from a legal perspective, only from a market one. Apple, for example, makes plenty of money selling $700 phones that do nothing different than a $200 device from someone else. They are cosmetically different of course, and are "different" in other ways, but both send and receive calls, text messages, pictures, and browse the Internet, plus storing and playing music.
The question with regard to so-called "MLM" businesses in terms of where enforcement action is concerned should be whether people are deceived as to the likely business outcome of being an "associate" or "distributor."
This belies one of the problems; Herbalife was reported to say that "90% of its product is eventually sold to customers outside of its distribution network", which if true would strongly imply that distributors are in fact distributors. But then it came out that this was a "misquote" and that is more-representative of the percentage of product internally consumed by "distributors."
Well, that's a different matter. If the latter is true then there's a problem in that someone who sells through a small percentage of the product they buy but consumes virtually all of it isn't a "distributor" in fact, no matter what you may call them.
I think we start here with an analysis of the distribution chain and where the product actually goes. The company seems to think there's a "privacy" issue here, but that's bunk -- this is a publicly-traded company that is marketing itself to investors on the representations it makes about the products it sells and how they're distributed and sold.
You can't have this both ways -- if you want to be a public company then your public reporting has to be transparent and complete in all material respects. When the entire premise of your business model is your distribution system, which you use as a differentiating factor to explain why people would choose your products as superior over much less expensive other alternatives from which you have not distinguished scientifically, you cannot then hide behind "well, there's a guy behind the curtain over there and we can't let you look under his kimono."
The way I see it the reason you don't want me to look is that I might discover that the "guy" over there in that kimono is in fact female.
Disclosure: The author has no position in the company at the present time, but if it's a pyramid scheme then it, like all other similar schemes, is inevitably a short-to-zero.
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