Herbalife facing “pending law enforcement action”
In what is usually a quiet time for business around the world, here in the MLM industry we’ve had the FTC bust Fortune Hi-Tech Marketing for being a pyramid scheme, damning allegations exposing Bidify being made by Bidsson’s former CEO and of course the ongoing saga between Bill Ackman, Herbalife and the FTC.
Make no mistake, 2013 is shaping up to be one of the most explosive years in MLM I’ve seen since I started covering the industry on BehindMLM.
With January delivering multiple eye-opening stories, it appears February looks set to continue the trend with the FTC confirming today that Herbalife is indeed facing “pending law enforcement action”.
After investor Bill Ackman made his public presentation back in December 2012 claiming that Herbalife was nothing more than a sophisticated pyramid scheme, the New York Post hit the FTC with freedom of information request ‘to see if there had been any substantive complaints six days after hedge-fund activist Bill Ackman went public‘.
In response, the FTC released a staggering
729 pages of complaints about false promises Herbalife made and the difficulty distributors had in collecting income owed and in getting refunds.
Some (distributors), months and years before Ackman did so, told the FTC they believed the company is a pyramid scheme.
Of critical importance to the future of Herbalife however was the inclusion of notes attached to several complaints, ‘referring to a “pending law enforcement action.”’
The FTC redacted some sections, saying it didn’t have to divulge “information obtained by the commission in a law enforcement investigation, whether through compulsory process, or voluntarily …”
Unfortunately however ‘the FTC did not say whether the action was civil or criminal.‘
Following Ackman’s presentation it was uncovered that the SEC had launched an investigation into Herbalife, however this is the first time the FTC have confirmed their own involvement in an investigation into the company, much the less “pending law enforcement action”.
Having reviewed Herbalife myself and finding a clear lack of retail customers, the uncovering of an FTC investigation and pending law enforcement action against Herbalife of course comes as no surprise.
Dissection of the Herbalife compensation plan quickly reveals retail sales make no financial sense when compared to the commissions Herbalife distributors earn when reselling their own bought inventory to recruited Herbalife distributors.
And even then the above sales process makes no sense, given that it costs more for Herbalife distributors to buy from their upline rather than directly from the company itself.
Looking forward this is obviously a breaking story but for now the FTC’s confirmation of pending law enforcement action and their own investigation will no doubt send shockwaves throughout the MLM industry.
In light of the FTC’s revelations, The New York Post did attempt contact both the FTC and Herbalife for comment but unfortunately at the time of publication neither were “available for comment”.
In the meantime I for one welcome any action against Herbalife by a regulator, not because I’ve got it in for the company or have any financial stake in the company, but rather because I maintain that the MLM industry desperately needs to some clear-cut guidelines as to what is an acceptable amount of retail sales.
In the absence of clear-cut guidelines, I myself go by the 51% rule, in that if an MLM company clearly doesn’t have 50% or more of its revenue being generated by sales of a product to non-affiliate retail customers, depending on the business model and compensation plan used it’s most likely a pyramid or Ponzi scheme or some sort.
This naturally continually raises objections from company owners and participants in schemes who fail this simple test, which usually go along the lines of “show us this rule in writing from a regulatory authority”.
Of course at the moment one doesn’t exist and despite the obvious logic behind the 50% rule, “believers” continue to get sucked into these schemes which cause irreversible and irreparable damage to the MLM industry year after year.
Here’s hoping the pending law enforcement action against Herbalife and SEC and FTC’s investigations into the company might finally provide the industry with some clear cut guidelines as to what percentage of an MLM company needs to be retail.
Will 2013 be the year US regulators finally clean the MLM industry up for good? Here’s hoping…
Update 5th February 2013 – Seemingly unable to grasp the concept of an internal undercover investigation, Herbalife have denied any such investigation exists.
Other than the voluntary dialogue with regulators, which we communicated on our January investor day, we are unaware of any other regulatory interest and/or investigation.
We are demanding a correction from the NY Post.
Given that the NY Post were simply quoting documents provided to them by the FTC, a correction demand seems somewhat amusing.
Meanwhile the FTC clarified the redacted parts of the FOI reply, stating that
the reason some material was redacted was because the agency can’t disclose “any material reflecting a consumer complaint obtained from a foreign source if that foreign source has requested confidential treatment.
Despite what was written in the FOI reply sent to the NYPost however, the FTC are still refusing to “confirm or deny whether any government agency is investigating Herbalife“.
Personally I think the FOI reply speaks for itself.
Update 6th February 2013 – There was a bit of uncertainty following the New York Post report after the FTC corrected terminology it used in the FOI report.
The Federal Trade Commission yesterday corrected an earlier statement regarding a “law-enforcement investigation” into Herbalife.
In response to a Freedom of Information Act request by The Post, the FTC said some complaints against the company were withheld because the information was “obtained through a law enforcement investigation.”
The agency said yesterday that the language in its letter accompanying the FOIA request was incorrect and it should have said that the exemption from disclosure was related to “foreign sources.”
The FTC then went on to define “foreign sources” as ‘government entities, including law enforcement agencies‘.
Sounds to me like one way or another there’s at least one government agency in the US investigating Herbalife.
The agency said it could not confirm, or deny, an investigation into the nutritional supplements company.
I’m a big fan of 1 + 1 = 2 and I’d be very surprised to learn the FTC weren’t investigating Herbalife, or at the very least working in full co-operation with other agency’s investigations.