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.”’
Additionally,
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.
Meanwhile,
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.
I checked the situation in Norway, and it didn’t look to bad there (on the surface). I checked a few distributor websites to see how focused they were on recruitment vs selling products. On the surface it looked very good, with more focus on the products than on the opportunity.
However, Herbalife in Norway seemed to be over priced compared to the U.S. market, e.g. the “International Business Pack” was sold for 1,900 NOK (around $330 USD).
* Some of that price can be explained by the local 25% VAT.
* Some of that price can be explained by all the different fees (“surcharge”, S&H), if the fees are included in the price.
The overall conclusion was “It didn’t look too bad on the surface”. Selling products received more focus than recruiting new distributors (on the few websites I checked).
The again, all the other Herbalife material I have checked HAVE looked good on the surface, in their OWN presentations. So the method I used to check that market is very little reliable, I only checked their own material.
Article updated with Herbalife’s denial of any regulatory investigation and demand for a correction from the NY Post.
FTC has denied it, too. Or CORRECTED it.
http://www.bloomberg.com/news/2013-02-04/herbalife-drops-after-report-of-law-enforcement-probe.html
That covers the reason for the redactions, but what about the reference in some complaints referring to “pending law enforcement action”?
Here’s the FOI request response:
http://www.ftc.gov/foia/frequentrequests/1301herbalifecmpts.pdf
I have to head out now so didn’t have time to locate the reference to the pending action.
When I get back I’m going to go through those complaints and catologue them one by one in an easier to read format (will be a seperate article).
you FORGOT to mention these 729 pages contain 192 complaints received by the FTC, over SEVEN years.
that’s a rather important fact to overlook soapbox, or did you think it would stand in the way of driving your stake into herbalife ?
I didn’t forget, I just didn’t see it as relevant information. The size of the information however did hit me.
As noted in the FTC’s FOI response:
And furthermore only 20% of Herbalife’s revenue is generated in the US anyway, so it’s hardly representative of the business at large. A lot of countries don’t even have the same level of consumer protection the States do.
I don’t subscribe to the crap about how many complaints indicating whether or dodginess is occuring. The number of complaints doesn’t dictate whether or not a company is a pyramid scheme, it’s business model does.
How many official complaints did Zeek Rewards and FHTM have before they were shut down? From memory Zeek Rewards were banging their drum about how “normal” it was to only have 9 complaints (or something like that) in two years.
Fat lot of good that did them.
Article updated with FTC’s definition of “foreign sources”.
“Foreign sources” are probably “foreign regulatory or enforcement agencies” (foreign, not U.S. agencies).
It can be the court in Belgium. Or more likely, it can be about an on going investigation in another country.
Yeah the use of foreign is a bit ambigious. I initially took it to mean offshore agencies but then figured there was no reason it couldn’t apply to non-FTC agencies. After all, they too are “foreign” to the FTC’s operations.
OK color me dumb on this one, why is it that retail sales are the issue?
If I understand correctly a rep buys volume at wholesale and retails it making a profit… If the consumer buys a single product from herbalife and doesn’t want to be a distributor they pay more, so yeah it is a benefit to become a distributor if the person is willing to buy quantity…
As a young man I worked for a convenience store, we purchased many items from a Distributor NOT the manufacturer, why?, because we could not afford to carry the larger quantity required to purchase direct so we opted to pay more to the Distributor…
Again please forgive my ignorance here but please explain the difference!! No I am not a Herbalife distributor
Because without retail sales to genuine retail cusotmers, MLM is indistringuishable from a pyramid scheme.
There is no evidence that this is occuring. Given the compensation plan and stacking towards affiliate purchases, it’s far more profitable for reps to recruit new reps and offload their product onto them.
Furthermore, revenue wise regardless of what the reps do with their purchased products, this is a seperate action to Herbalife’s own revenue stream. Reps are not employees of Herbalife, nor do they work for them.
If I burger from McDonalds and sell it to some guy on the street for $100, that’s not McDonalds making $100 on a retail sale.
1. A convenience store is not MLM. There is no multi-level marketing component in a convenience store’s wholesale chain.
2. You worked for the convenience store. Herbalife distributors do not work for Herbalife, they are “independent entrepreneurs” or whatever similar term it is they use. What they do with the product has nothing to do with Herbalife’s own revenue stream, which is either retail or internal (distributor purchases).
From memory Herbalife have pegged their true retail at about 30% of their total product sales, which, if the FTC get off their arses, is well below a retail majority and should invite an investigation.