# Epic takedown of Herbalife as a pyramid scheme scam **URL:** \ **Category:** Miscellaneous and Personal Stuff I Must Share\ **Created:** [December 23, 2012, 7:39pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949 "2012-12-23T19:39:07Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Wargamer](https://avatars.discourse-cdn.com/v4/letter/w/df705f/32.png) [@Wargamer](https://boards.straightdope.com/u/Wargamer)\ **Post date:** [January 8, 2013, 8:38pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/21 "2013-01-08T20:38:52Z")
“Shorting” a stock is a tactic used when you believe a stock is overvalued and is likely to go down in the future. Essentially, you borrow shares from your broker and sell them at the current price. Then, in the future, once the price of the stock has fallen, you buy them back and return them. For example: You think ABC Widget Co.'s stock, currently trading at 50, is due to fall. You sell 100 borrowed shares for 5000.00. Then in two weeks, ABC’s stock value has fallen to 40.00 per share, and you buy 100 shares at 4000.00. You’ve pocketed 1000.00 on the transaction. The danger of course is that you could get caught in a situation where ABC’s shares soar, and the broker calls for his shares back. Then you must buy the shares at the current price. So, if ABC went up to 60.00 per share, then you’d have to pay 6000.00, for a net loss of 1000.00 ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [January 8, 2013, 9:26pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/22 "2013-01-08T21:26:11Z")
In addition to what **Wargamer** says, there are a number of activist investors who, rather than looking for companies with solid fundamentals who they think will go up in value, look for companies which they think are severely overvalued, defrauding investors, misstating earnings, or engaging in other tomfoolery. These investors take short positions on those companies and then publish their findings hoping to drive the price down and also get other people looking into their accusations. ---
**Author:** ![Kaio](https://avatars.discourse-cdn.com/v4/letter/k/c68b51/32.png) [@Kaio](https://boards.straightdope.com/u/Kaio)\ **Post date:** [January 8, 2013, 10:39pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/23 "2013-01-08T22:39:30Z")
Yeah, do not get the stock market. I just can’t wrap my head around YOU selling SOMEONE ELSE’S property. How is that not theft? You pay back the loan with something that has less value. If you borrow something you sort of have an ethical obligation not to fuck around with it before giving it back. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [January 8, 2013, 10:41pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/24 "2013-01-08T22:41:10Z")
> [@Wargamer](#): > > The danger of course is that you could get caught in a situation where ABC’s shares soar, and the broker calls for his shares back. Then you must buy the shares at the current price. So, if ABC went up to 60.00 per share, then you’d have to pay 6000.00, for a net loss of 1000.00 A short squeeze [could be coming](http://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2013/01/02/HLF%20by%20Chapman%20Capital%2012-29-2012.pdf) here as well. The [more I read](http://www.businessinsider.com/ackman-would-lobby-congress-on-herbalife-2013-1) about this guy Ackman, the less I like about him. I am no fan of MLMs, including Herbalife, as they invariably waste a lot of people’s time and money. But I’m also not a fan of devious and greedy hedge fund managers. And it seems like Ackman’s strategy here is to take a massive short position and then make it pay off by actively trying to crush the company. At any rate, it does seem clear that Ackman’s presentation was a lot more impressive to people who don’t know anything about Herbalife specifically and just have a general dislike of all MLM schemes than it was to professionals whose business it is to analyze these things. See also: [Why Bill Ackman is targeting Herbalife](http://money.cnn.com/2013/01/08/investing/herbalife-ackman/) ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [January 9, 2013, 12:22am UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/25 "2013-01-09T00:22:23Z")
> [@Kaio](#): > > Yeah, do not get the stock market. I just can’t wrap my head around YOU selling SOMEONE ELSE’S property. How is that not theft? You pay back the loan with something that has less value. If you borrow something you sort of have an ethical obligation not to fuck around with it before giving it back. If I borrow a hundred dollars from you, spend it on some stock, and then the country experiences massive inflation causing the value of the dollar to decrease, and then I sell the stock for $500 and give you your hundred bucks back (with interest), have I done something wrong? When people loan money, they hope the value of that money doesn’t go down too much before they get it back. When people borrow money, they hope money gets cheaper to acquire because that makes paying it back easier. A short sale in the stock market is no different. The short seller borrows some shares of stock, spends them on some currency (dollars) and then hopes it will be cheaper to acquire the shares in the future to pay them back (with interest). Everybody involved in this transaction is a willing participant. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [January 9, 2013, 6:27pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/26 "2013-01-09T18:27:05Z")
More: [Loeb Counters Ackman’s Bet Against Herbalife](http://dealbook.nytimes.com/2013/01/09/loeb-counters-ackmans-bet-against-herbalife/) And: [Billionaire Dan Loeb’s Herbalife Bet Is Bad News For Bill Ackman](http://www.forbes.com/sites/nathanvardi/2013/01/09/billionaire-dan-loebs-herbalife-bet-is-bad-news-for-bill-ackman/) Also: [Ackman Braces for Legal Battle Over Herbalife](http://www.foxbusiness.com/investing/2013/01/08/ackman-braces-for-legal-battle-over-herbalife/) Petty interesting stuff, for those who are interested in this type of thing. > [@friedo](#): > > A short sale in the stock market is no different. The short seller borrows some shares of stock, spends them on some currency (dollars) and then hopes it will be cheaper to acquire the shares in the future to pay them back (with interest). > > Everybody involved in this transaction is a willing participant. I’m not sure if that’s true. My understanding is that brokerage firms can use shares owned by margin accountholders to back shorts. One thing I never got clear is who gets to vote in shareholder elections. It would seem that there should end up being more official shareholders than actual shares. ---
**Author:** ![Aji\_de\_Gallina](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/aji_de_gallina/32/260_2.png) [@Aji\_de\_Gallina](https://boards.straightdope.com/u/Aji_de_Gallina)\ **Post date:** [January 10, 2013, 11:57pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/27 "2013-01-10T23:57:46Z")
The system the Herbalife uses has been going on very successfuly for decades in the beauty sector in Peru and it is not a pyramid scheme. ---
**Author:** ![voltaire](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voltaire/32/313_2.png) [@voltaire](https://boards.straightdope.com/u/voltaire)\ **Post date:** [February 15, 2013, 11:39am UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/28 "2013-02-15T11:39:46Z")
> [@Fotheringay-Phipps](#): > > More: [Loeb Counters Ackman’s Bet Against Herbalife](http://dealbook.nytimes.com/2013/01/09/loeb-counters-ackmans-bet-against-herbalife/) And: [Billionaire Dan Loeb’s Herbalife Bet Is Bad News For Bill Ackman](http://www.forbes.com/sites/nathanvardi/2013/01/09/billionaire-dan-loebs-herbalife-bet-is-bad-news-for-bill-ackman/) > > Also: [Ackman Braces for Legal Battle Over Herbalife](http://www.foxbusiness.com/investing/2013/01/08/ackman-braces-for-legal-battle-over-herbalife/) > > Petty interesting stuff, for those who are interested in this type of thing. > > I’m not sure if that’s true. My understanding is that brokerage firms can use shares owned by margin accountholders to back shorts. > > One thing I never got clear is who gets to vote in shareholder elections. It would seem that there should end up being more official shareholders than actual shares. UPDATE: And now, activist investor and Bill Ackman’s nemesis, [Carl Icahn has joined in on that action](http://www.latimes.com/business/la-fi-icahn-herbalife-20130215,0,2701914.story). It’s a veritable clash of the titans! Looks like [the stock’s roller-coaster ride](http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1360928141762&chddm=18408&chls=IntervalBasedLine&q=NYSE%3AHLF&ntsp=0&fct=big&ei=Qx0eUbjMGIySlAPGMw) ain’t over by a long shot. This could get interesting, indeed! ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [August 13, 2013, 2:55pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/29 "2013-08-13T14:55:45Z")
[Update:](http://www.forbes.com/sites/nathanvardi/2013/08/09/billionaire-bill-ackman-takes-on-the-world/) > [@](#): > > This month Ackman has also waged a battle with the investment firm of George Soros, the famous billionaire investor, after the fact that Soros Fund Management had taken a big stake in Herbalife was leaked to CNBC. Ackman has been shorting 20 million shares of Herbalife all year, calling the diet shake seller a pyramid scheme that will be shut down by regulators, but the stock has soared by more than 100% this year and caused big problems for Pershing Square’s hedge fund, a trend that was made worse by the disclosure of the Soros investment. Ackman could still be right and win in the end. But I think two things are clear: [ul] [li]A lot of Very Smart People have seen all he has to say and are willing to bet hundreds of millions of dollars that he is wrong.[/li][li]To this point, he is himself hundreds of millions in the red on this venture.[/li][/ul] Broader point is that what can seem “epic” and convincing to the lay person can sometimes have less to it than meets the eye. And to my earlier point about Ackman’s sleazy tactics: > [@](#): > > Ackman has asked the Securities & Exchange Commission to investigate whether Soros Fund Management engaged in insider trading and worked with other investors to improperly leak out the Soros investment to the media and orchestrate a short squeeze against Pershing Square. Ackman leaked his complaint to the New York Post, which reported that Ackman’s complaint revolves around so-called ideas dinners during which hedge fund portfolio managers gather and discuss investment ideas. Ironically, Ackman has heavily promoted his short position against Herbalife in the media and, according to The Wall Street Journal, talked it up at an investor ideas dinner. ---
**Author:** ![Dr\_Doom](https://avatars.discourse-cdn.com/v4/letter/d/0ea827/32.png) [@Dr\_Doom](https://boards.straightdope.com/u/Dr_Doom)\ **Post date:** [August 13, 2013, 6:18pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/30 "2013-08-13T18:18:58Z")
Very interesting and informative thread. The apparent animus between these investment heavy-weights is like some kind of ultra-modern capitalist tribal warfare. 🆒 ---
**Author:** ![madsircool](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/madsircool/32/3432_2.png) [@madsircool](https://boards.straightdope.com/u/madsircool)\ **Post date:** [August 13, 2013, 6:43pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/31 "2013-08-13T18:43:12Z")
> [@Dr\_Doom](#): > > Very interesting and informative thread. > > The apparent animus between these investment heavy-weights is like some kind of ultra-modern capitalist tribal warfare. 🆒 But wait!! Arent all capitalists involved in some handrubbing gleeful conspiracy against the other 99%??? ---
**Author:** ![Irishman](https://avatars.discourse-cdn.com/v4/letter/i/b487fb/32.png) [@Irishman](https://boards.straightdope.com/u/Irishman)\ **Post date:** [August 13, 2013, 11:51pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/32 "2013-08-13T23:51:58Z")
I hadn’t seen this before, so this is my first look at all this. I know nothing about Ackmann, and his actions seem a bit sleazy to me. However, I look at that independently from the content of the presentation. I will note my own personal uneasiness with MLMs - the practice seems to be flirting with pyramid schemes. Legally, they are permissable if there is more revenue generated by product sales than by commissions, i.e. you sell more actual product than recruit people to work for you. Practically, there is a lot of manipulation to hide pyramid schemes. Reading this presentation is highly remeniscent of our lengthy thread here on Lyoness. Very similar descriptions of obfuscation to hide the real revenue stream. I read through the entire powerpoint. I was unable to play the webcast. Overall, I found it convincing. He takes multiple routes to justify the argument that Herbalife is a pyramid scheme, and I kept finding them convincing. Okay, some of the deep financial stuff late in the presentation started getting over my head, but there were several lines I found well-supported. Unfortunately, this doesn’t seem to be as convincing to other market analysts or the FTC. > [@Fotheringay-Phipps](#): > > [Interesting counterargument](http://blogs.barrons.com/focusonfunds/2013/01/04/herbalife-versus-ackman-mother-of-all-short-squeezes-possible-analyst-says/) > > Basic counterpoint boils down to the argument that the company is selling itself as something that it’s not, and that if analyzed relative to what it purports to be - which is what Ackman did - it would be correctly deemed a failure, but that what it actually is is itself a workable model. Wait, if evaluated against what it claims itself is, it would be a failure? The fact that it is successful at being something else does not protect against the fact that it is misrepresenting itself to it’s customers. I read through his rebuttal argument. To respond to a few of his points: > [@](#): > > Slide 11. “Has anyone ever purchased an Herbalife Product?” the slide shouts. It is (slide 12) “the only $2 billion brand nobody’s ever heard of.” To this we added in a previous note the words “in Chappaqua.” Perhaps where Mr. Ackman lives he never sees a car with the “Lose weight, ask me how” message across the rear window. I can tell Mr. Ackman that in my hometown, which is not quite Chappaqua, Herbalife is an iconic and widely recognized brand. If you watch soccer or live outside of Chappaqua, you likely know Herbalife. There seems to be some confusion here over how the term “brand” is being used. Ackmann is making a distinction between the distributor (i.e. Herbalife) and the products (e.g. Formula 1, Niteworks, etc). Slide 11 compares Herblife against Church & Dwight Co, Inc., for instance. and lists “Key Brands” as Arm & Hammer Baking Soda, Xtra, Nair, Trojan Condoms. It lists Energizer Holdings, Inc against Herbalife, and then lists brands as Energizer batteries, Schick, Playtex, Edge Shaving Gel, Bonana Boat suntan lotion. Perhaps Ackmann is misusing the word “brand”, but his comparison is not quite what Timothy Ramey is criticizing. If you look at slide 12 (the one Ramey cites) the brands listed include Oreo, Charmin, Crest, Gerber, Palmolive, Betty Crocker, Listerine, Clorox, and “Formula 1 Healthy Meal”. Which of those “brands” is not a household name? I suppose it is a fair criticism that the overall product “brand” is well known even if the names of the actual products are not. Ackmann addresses this, though, by pointing out that Herbalife spends “de minimus” dollars on product advertising. That’s not his description, that is taken from HerbaLife’s own responses to the SEC concerning their financials. From the powerpoint, page 25: > [@](#): > > Surprisingly for a CPG[Consumer Product Group] Company, Herbalife Advertises and Promotes its Corporate Name and Logo, But Not its Products > > “We generally do not target promotions or advertising at any particular product or brand. Our significant promotions are generally aimed at generating increased levels of recruiting and retention of distributors.” - Herbalife Annual Report 2005 There is Herbalife using “brand” in the same specific manner to refer to the products, not the company. And look, there is Herbalife stating right there in the clear their promotions are aimed at recruiting distributors, not selling products. Shouldn’t that be a giant red flag? > [@](#): > > Slide 16. Ackman sets the retail price per serving at $2.87, far above the competition. Except the serving size Ackman uses is 2.2x the normal serving size of two scoops of HLF powder. Divide the $2.87 serving cost by 2.2 and you come up with $1.30. Even this number is completely overstated in that it is based on the “retail” price that Ackman rejects in most of the rest of the presentation. Roughly 83% of Herbalife distributors are discount buyers who purchase the product for their own use at 75% of the retail price or about $1.09 per serving, at the low end of the range of slide 16 It might be a fair criticism that Ackmann uses 2.2 times the normal serving size. He states in his fine print that he is trying to compare apples to apples with respect to comparing Formula 1 versus equivalent products from other companies (Ensure, Slim-Fast, etc). He chose to use a 200 calorie serving size for Formula 1. The problem is that number of calories may not be the correct unit of comparison for this purpose. For example, Ensure is typically a higher calorie product than Slim-Fast – I know, because I have looked at their labels, and their purposes are different. Slim-Fast is a “weight loss” product, and is aimed at limiting calories. Ensure is a “nutrition supplement” and is sometimes used as food replacement for those who are unable to eat regular food. The cannister cites seems to be 250 calories per serving, and I’ve seen a version as high as 350 calories per serving marketed for those meal replacement situations. So using a calorie count as a basis of comparison seems inappropriate to me. A more appropriate method is to look at typical serving sizes for each product, i.e. 1 shake or whatever. However, I dispute the second half of Ramey’s rebuttal. The “retail” price he uses is Herbalife’s recommended retail price. It is the dollar amount that Herbalife _assumes_ each product costs for the basis of all their financial calculations, and a large part of the basis of their claims that they have higher revenue from product sales than from recruiting. It is very fair to use that number as the basis for price comparison between products. Besides, Ackmann also includes examples of two other products (multivitamin and Niteworks L-argenine), both of which also show considerable markups. And even if you include the customers who become distributors just for the discount, $1.09 per serving is not the low end, it’s the middle range, higher than $1.04 for Slim-Fast, 1.03 for Ensure, and .88 for Gen-Soy Shake. It’s only less than GNC Total Lean Lean Shake at $1.74 per serving. > [@](#): > > Slide 21 states “Herbalife’s Products are Commodities.” If he were to go on to say that all packaged food is a commodity we would agree, but Herbalife Formula One is no more a commodity than **Cheerios** is to\*\* General Mills\*\* ([GIS](http://quotes.barrons.com/gis)). His characterization lacks real understanding of how branded consumer products work. I’ll grant that brand name plays a role in product choice. Ackmann’s choice of the word “commodity” may again be somewhat incorrect. However, the point Ackmann was trying to make with that word is that Herbalife does not create unique products that nobody else sells, something protected by a patent for instance. Think of name brand drugs and the period before the generics can be sold. Rather, they make a “health shake” that has equivalents from many other companies; they make a multivitamin that is not substantially different than many other brands; they make an L-argenine supplement that is no different than many other L-argenine supplements available. These are items with equivalents from other brands, like cola. Maybe you like Coke, maybe you like Pepsi, maybe you will buy generic “cola”, but they’re all colas, and there are plenty to choose from. Actually, colas probably have more distinction than Herbalife’s products do - they actually have taste variance. > [@](#): > > Slides 28-40 are targeting the idea that there is no real R&D or proprietary science behind the Herbalife products. This betrays Ackman’s failure to understand the goal of R&D and particular “development” in the food sector. In the past 26 years we can only think of one product that was truly R&D driven in the food space – you may recall **Procter & Gamble** ([PG](http://quotes.barrons.com/pg)- $68.95) developed the synthetic fat **Olestra** and introduced potato chips (I’ve long ago forgotten the failed brand) with this novel ingredient. This is irrelevant. Herbalife _claims_ to customers that “We’re doing research around the clock in this company” and “Since 2003, we’ve increased our research and development expenditures dramatically to advance the product-development process.” Except the Herbalife 2011 Annual Report states, “For all periods presented, research and development costs were expensed as incurred and were not material.” That’s right, their own financial statements indicate they have minimal research expenditures. From the Herbalife 2004 Prospectus: “The Company’s research and development is primarily performed by outside consultants and is less than $2 million per year.” So it does not matter if R&D is trying to develop the neatest new innovation, or just trying to come up with a better formulation for multivitamin or a better tasting shake product, it’s R&D as being used by Herbalife and as being used by Ackmann, and Herbalife states they don’t spend much on it. They are misrepresenting themselves in their marketing versus their financial statements. > [@](#): > > Slide 74 and others. Here and in multiple other places in the presentation Ackman intentionally lumps “discount buyer distributors” in with those who actually have a profit motive. About 83% of Herbalife distributors only register as such to receive the 25% discount versus paying the full retail price. It is the logical thing to do; if you like the products and want to consume them, you register and get the discount. So these people are not “failed distributors,” they are consumers. To view them as profit-seeking is a gross distortion, we believe… If you look at the materials, there are 4 levels of “distributor” below the Supervisor level. Those 4 levels make up the 82.3% referred to above. They are called collectively “Non-Sales Leaders”, as opposed to the “Sales Leaders” that are collectively the groups from Superviser and above. Distributor: 25% discount Senior Consultant: 35% or 42% discount on retail, 7% or 17% on wholesale (driven by number of Volume Points sold, requires 500 in one month) Success Builder: 42% discount (for 1000 VP orders) Qualified Producer: 42% retail profit, 7% or 17% wholesale profit (2500 VP in 1 to 3 months) Different places in the presentation, Ackmann makes different points. However, to get the designations above “Distributor”, you have to be selling more product than just purchasing for yourself to get the discount. ($500 in sales in 1 month, minimum.) Later in the presentation, Ackmann defends the position that most of the Non-Sales Leaders are failed distributors rather than mere consumers. He bases this argument on the fact that there is high turnover in these categories, and that sales from these Non-Sales Leaders down their supply chain are counted as _retail_ income even though they are sales of product to downstream distributors. He points out the bookkeeping that Herbalife uses to justify their claims, and explains why he feels it is obfuscatory bookkeeping. By the way, the FTC defines how much “internal consumption” (i.e. using the products yourself rather than selling it outside the company) is acceptable, yet Herbalife does not track this at all. Guess what: “Distributors” that just join to get the discount count as “internal consumption” as far as the FTC is concerned. So it does matter, if Herbalife is trying to defend that it is not a Pyramid Scheme. Oh, and in case you wish to know, Ackmann eventually states that he uses a conservative number of 30% for his purposes in estimating the amount of product that is bought by members rather than sold outside the network. > [@](#): > > Slides 105–107 go after the “Actual Retail Price of Herbalife products. … > \*Distributors dumping product on eBay? Herbalife product is often found listed for sale on eBay at prices much less than the retail price. At present there are over 1,600 items listed and over 1,400 that are at fixed price “Buy-it-Now” auctions. These products are listed at prices that are often below the price that a distributor would pay. This can only mean that distributors are buying more product than they need or can sell in order to maintain a “sales leader” status, and then selling the product at a loss. This is a classic hallmark of a pyramid scheme – pyramids sell product that nobody really buys or consumes. \* Wait, Ramey just confirmed this is a sign of a pyramid scheme. - > [@](#): > > \*Herbalife does not allow distributors to sell on eBay or in a retail environment because it violates the person-to-person model of the business. Herbalife wants the seller to have a personal, almost consultative role with the buyer. In most cases the sellers are third-party vendors who are not distributors but are buying product from distributors. This indicates that there is some abuse of the “qualifying” system for Herbalife’s sales leaders. This would not be a sustainable model if it was widespread, and yet Herbalife has sustained growth for 32 years. This fraction of eBay sales has to be viewed as the fringe, small-time activity that it is. While we wonder why there is any online sales presence at all, Herbalife points out that it is tiny relative to its sales base and is the lowest of the multi-level companies. \* - The sustainability of buying product to maintain status and then selling it at substantial discount on E-Bay is a fair argument - if everybody did it, it would undercut the legitimate sales. Except if the bulk of income is really derived from royalties, then it can still be economically viable for a mid-level sales leader to buy his way in. There is an actual example where real dollar values were obtained from a lawsuit that demonstrates it. Furthermore, part of Ackermann’s argument is that the sustained success of Herbalife is due to their continued expansion into more and more markets, keeping the pyramid base growing to mask the losses. There’s a lot more in the presentation that this rebuttal is ignoring. I just don’t think I can summarize it here. > [@](#): > > Slide 122 cites the “renewal rate” of Herbalife distributors as ~10%. The footnote references the 2005 annual report. We do know that “Sales Leaders” (those that are really in business) requalify at a rate of over 52%. The rest are customers and customers often do need to fall away and then be re-acquired. The basic disagreement here is whether Non-Sales-Leaders in the three levels above basic Distributor are in it just for the discounts, or are trying to make money at it. I don’t find his rebuttals convincing, and think Ackmann has put a lot more into it than the rebuttals did. > [@Fotheringay-Phipps](#): > > That doesn’t follow. Nothing can keep rapidly growing forever. Eventually every business has to reach some plateau. That doesn’t mean that when this happens the business will then go to zero. If the business model is based on revenue from product sales, then you are correct. If the business model is based on revenue from recruiting distrubutors who pay for the privilege of recruiting more distributors, then the business case will go to zero when there are no more people to recruit. > [@typoink](#): > > In the presentation, it states that current law defines a pyramid scheme as one that makes \>50% of its revenue from recruitment rather than selling product. Herbalife states they make ~25% from recruitment and ~75% from selling product. > > A fair bit of Ackerman’s presentation seems to be (I skimmed) trying to suggest those numbers are either fudged or unsustainable. Yes, that is a correct assessment. His claim is that they are playing games with the numbers and misrepresenting actual costs, actual revenue, and actual retail sales income, and that an accurate assessment will show that they earn more from recruiting than from product sales. > [@Aji\_de\_Gallina](#): > > The system the Herbalife uses has been going on very successfuly for decades in the beauty sector in Peru and it is not a pyramid scheme. Multi Level Marketing is a practice that can be done in a sustained manner, but it is also a fundamental element of a pyramid scheme. Ackmann’s arguments are that Herbalife is dramatically misleading on how it actually works, that the real finances do not match the claims, and that the longevity of success is because Herbalife has been perpetually moving into new markets - new countries, now finding new ways to reach out to lower socio-economic groups. It hasn’t hit bottom yet, because Herbalife keeps digging deeper. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [October 3, 2013, 4:51pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/33 "2013-10-03T16:51:50Z")
[Bill Ackman’s Herbalife Retreat](http://www.forbes.com/sites/nathanvardi/2013/10/03/bill-ackmans-herbalife-retreat/) > [@Irishman](#): > > Wait, if evaluated against what it claims itself is, it would be a failure? The fact that it is successful at being something else does not protect against the fact that it is misrepresenting itself to it’s customers. That’s advertising. > [@](#): > > Ackmann addresses this, though, by pointing out that Herbalife spends “de minimus” dollars on product advertising. That’s not his description, that is taken from HerbaLife’s own responses to the SEC concerning their financials. All MLMs spend minimal dollars on advertising. That business model does not rely on corporate advertising, but relies on the distributors to pump the products. > [@](#): > > And look, there is Herbalife stating right there in the clear their promotions are aimed at recruiting distributors, not selling products. Shouldn’t that be a giant red flag? As above, the company recruits distributors, the distributors sell the product. I don’t see any problem with this at all. > [@](#): > > If the business model is based on revenue from product sales, then you are correct. If the business model is based on revenue from recruiting distrubutors who pay for the privilege of recruiting more distributors, then the business case will go to zero when there are no more people to recruit. New people keep being born. [I should note that you’ve made many good points. I didn’t address it until now because it was a long post with a lot of content.] ---
**Author:** ![Irishman](https://avatars.discourse-cdn.com/v4/letter/i/b487fb/32.png) [@Irishman](https://boards.straightdope.com/u/Irishman)\ **Post date:** [October 3, 2013, 5:56pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/34 "2013-10-03T17:56:50Z")
[QUOTE=Fotheringay Phipps] [[COLOR=#22229c]Bill Ackman’s Herbalife Retreat](http://www.forbes.com/sites/nathanvardi/2013/10/03/bill-ackmans-herbalife-retreat/) [/quote] [/COLOR] Thanks for posting the followup. What it shows is that Ackman is not a great hedge fund manager and that he did not accurately predict how people respond to Herbalife. It doesn’t make him wrong in his analysis of the company. > [@](#): > > [COLOR=black]That’s advertising. [/COLOR] Well, there’s advertising, and false advertising. I’m not saying Herbalife falls legally into false advertising, but your original statement was that Herbalife was failing to be what it claims it is. > [@](#): > > [COLOR=black]All MLMs spend minimal dollars on advertising. That business model does not rely on corporate advertising, but relies on the distributors to pump the products. [/COLOR] Though they usually rely on distributors to pump distributorships. > [@](#): > > [COLOR=black]As above, the company recruits distributors, the distributors sell the product. I don’t see any problem with this at all. [/COLOR] When more revenue comes from signing up distributors than actual product sales, that crosses the line to illegal pyramid schemes. Focusing on getting more distributors rather than making distributors successful sellers seems to be focusing on the illegal pyramid scheme rather than the legal product distribution plan. > [@](#): > > [COLOR=black]New people keep being born. [/COLOR] There is that. There are also new countries to invade. > [@](#): > > [I should note that you’ve made many good points. I didn’t address it until now because it was a long post with a lot of content.] Yeah, and I came along kinda late to the party. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [October 3, 2013, 6:07pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/35 "2013-10-03T18:07:27Z")
> [@Irishman](#): > > Thanks for posting the followup. What it shows is that Ackman is not a great hedge fund manager and that he did not accurately predict how people respond to Herbalife. It doesn’t make him wrong in his analysis of the company. True. There’s an old saying “the market can remain irrational for longer than you can remain solvent”. > [@](#): > > Well, there’s advertising, and false advertising. I’m not saying Herbalife falls legally into false advertising, but your original statement was that Herbalife was failing to be what it claims it is. I don’t think it’s as black and white as that. Herbalife emphasizes one aspect when it’s really relying on another. If Ford advertises that their cars are “the best cars on the market”, they don’t mean that they’re better than Lexuses, and if you expose Ford as a scam by proving that they’re not. That was just advertising hyperbole. As long as the cars are good value for the money they should do OK. > [@](#): > > Though they usually rely on distributors to pump distributorships. And the products too. The point here is that you can’t make something out of the fact that Herbalife has vitually no spending advertising their products, since they have a business model that explicitly rejects this approach in favor of an alternative form of marketing. > [@](#): > > When more revenue comes from signing up distributors than actual product sales, that crosses the line to illegal pyramid schemes. Focusing on getting more distributors rather than making distributors successful sellers seems to be focusing on the illegal pyramid scheme rather than the legal product distribution plan. We’re taling about their “promotions” not their revenue. ---
**Author:** ![Irishman](https://avatars.discourse-cdn.com/v4/letter/i/b487fb/32.png) [@Irishman](https://boards.straightdope.com/u/Irishman)\ **Post date:** [October 3, 2013, 9:45pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/36 "2013-10-03T21:45:07Z")
Legally, the claim they are a pyramid scheme cannot be measured by their promotions. It can be measured by their revenues. But if one wished to make a claim regarding them being a pyramid scheme, one could look at a pattern of traits, and include promotions as one part of the pattern. I think the pattern is indicative. I will concede that the MLM marketing plan does not focus on advertising through billboards, TV spots, etc, and relies on grassroots, in-person awareness raising. I think there is still a point regarding the fact that they are primarily marketing the Herbalife brand rather than any actual products. McDonalds may focus on the McDonalds brand, but they still talk about Big Macs. ---
**Author:** ![Omar\_Little](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/omar_little/32/269_2.png) [@Omar\_Little](https://boards.straightdope.com/u/Omar_Little)\ **Post date:** [October 3, 2013, 10:07pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/37 "2013-10-03T22:07:34Z")
Considering that Herbalife’s stock has appreciated about 60% since Ackerman started his campaign last December, it would appear that the market disagrees with him and he lost a substantial amount on the short position he put on. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [December 18, 2013, 3:31pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/38 "2013-12-18T15:31:31Z")
[More pain for Ackman](http://www.forbes.com/sites/nathanvardi/2013/12/17/herbalife-shares-continue-re-audit-surge/). > [@](#): > > Shares of Herbalife, which rose 9% on Monday’s news that the company had received three years of re-audited financials from PricewaterhouseCoopers containing no material changes, rose by more than 4% to $78 in Tuesday morning trading, but then gave away the early Tuesday morning gains by mid-morning. This despite Ackman’s attempts to intimidate the auditors > [@](#): > > In an effort to slow down or even stop the re-auditing process, Ackman had previously sent a warning letter to PwC and made it public, saying PWC could incur substantial liabilities because of its auditing work for Herbalife. Ackman has said he will “go to the end of the Earth” to defeat Herbalife, but the company’s share appreciation this year of more than 125% has weighed down the returns of Ackman’s hedge fund. The “end of the Earth” line [seems to be true](http://www.forbes.com/sites/nathanvardi/2013/09/11/the-auditing-front-in-the-herbalife-war/). Besides his attempt to pressure the auditors > [@](#): > > In his effort to win the Herbalife war, Ackman has appealed to the Federal Trade Commission, lobbied Congress, and lodged complaints with the Securities & Exchange Commission. Skeptical as I tend to be of MLM schemes like Herbalife, I would really like to see Ackman get crushed. So far, so good. ---
**Author:** ![Irishman](https://avatars.discourse-cdn.com/v4/letter/i/b487fb/32.png) [@Irishman](https://boards.straightdope.com/u/Irishman)\ **Post date:** [December 18, 2013, 4:06pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/39 "2013-12-18T16:06:41Z")
That’s the problem with white whales - sometimes they win. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [December 18, 2013, 4:09pm UTC](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949/40 "2013-12-18T16:09:03Z")
Of course, with all that, I’m not investing any money in Herbalife stock either … BTW, Ackman is also playing the Race Card, in harping on the fact that many of the Herbalife distributors are lower income Hispanics. He managed to get some Hispanic activist group interested. Really great guy. [Previous page](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949.md?page=1) [Next page](https://boards.straightdope.com/t/epic-takedown-of-herbalife-as-a-pyramid-scheme-scam/644949.md?page=3)