FTC Herbalife investigation: They had it coming.
Despite the industry-wide ramification of a full-blown investigation into Herbalife, there’s surprisingly not all that much to write about.
Herbalife shares sank as much as 15% in Wednesday trading after the nutritional supplements marketer said it is under Federal Trade Commission investigation.
Kinda curious that Herbalife themselves made the announcement, although after further consideration, I suppose it was probably a “making the best of a worst-case scenario” situation for them.
The FTC themselves, as per regulatory policy in the US, won’t publicly comment on the investigation. That left it up to Herbalife to either maintain radio silence or break the announcement.
No doubt in a lofty boardroom somewhere, it was decided that going public was the best move. News of the investigation would have gotten out sooner or later anyway, better it come from them. Herbalife’s transparency track-record is pretty atrocious, so it’s good to see the company be open and honest about something for a change.
Along with the investigation announcement, Herbalife also reiterated their stance on regulatory cooperation:
“Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC,” the company said in a statement.
“We are confident that Herbalife is in compliance with all applicable laws and regulations.”
That they’re “cooperating fully” is good to know. Y’know, given that they don’t really have a choice.
Meanwhile as I woke up to the news this morning, this pretty much summed up my reaction.
Why am I totally not surprised at an FTC investigation into Herbalife? Read on.
When I first reviewed Herbalife back in January of last year, here’s a run-down of my thoughts:
the single most problematic issue I see with the Herbalife compensation plan is the complete lack of incentive to sell products at a retail level.
As such, aside from the Royalty Override and Production bonuses requiring monthly sales to ten retail customers to qualify, it’s entirely possible to set up an endless chain of recruitment, with distributors qualifying eachother via their own product purchases.
No doubt Herbalife will try to explain this away by stating that their distributors go on to sell these products to actual customers, thus counting as retail sales but this is simply not the case.
Distributors are not employees of Herbalife. As such what they do with the purchased products is entirely irrelevant to analysis of the revenue generation by Herbalife. This is true regardless of whether Herbalife distributors do indeed go on to sell their purchased product to customers, toss it in the bin or resell it to other Herbalife distributors.
All that matter is where the revenue comes from and who is buying the product, which in the case of distributors purchasing the product from Herbalife themselves, would quite obviously be the distributors (internal consumption).
With thirty years of business under their belt, Herbalife, although they like to play dumb, know that their retail customer figure is key to anyone making an accurate assessment of company’s business model.
Yet this is information the company has purposefully hidden from the public. Shortly after all the Bill Ackman short-seller lobbying began in late 2012, Herbalife offered a slither of redemption by announcing they were going to start tracking wholesale customers.
This was a big deal because at the time Herbalife claimed affiliates who didn’t or failed to recruit new affiliates were wholesale customers. Utter hogwash and a blatant flouting of a long-standing regulatory grey-area.
At the time, Herbalife said they’d begin tracking actual wholesale customers in April. Front the numbers, show everyone you have a mountain of retail activity going on within the business as you claimed, and everybody can move on.
Yeah, right.
April came and went and Herbalife failed to disclose anything related to how many wholesale and retail customers actually exist within the business. No doubt painfully aware of how condemning their silence looked, the company then attempted to blow smoke up our asses with a self-commissioned Nielsen survey.
“The Nielsen study found that 87 percent of the 349 respondents (out of 10,525 total respondents) who purchased Herbalife products for personal use in the past three months self-reported that they did not purchase it from the company as a distributor.
Herbalife customers would include their distributor network, which totaled approximately 550,000 in the U.S. as of the end of the first quarter 2013.”
Proclaiming the legitimacy of Herbalife on the back of the Nielsen survey is problematic for a few reasons. The first being that, as quoted above, distributors are reported as consumers.
Announce to the world you’re going to finally disclose your retail activity, wait three months and then release a survey that professes the legitimacy of your model using data that was the instigator for you to disclose retail activity in the first place, all the while still failing to disclose said retail activity?
Brilliant. A text-book example of the smoke and mirrors bullshit we regularly see in the MLM industry if I ever I saw one.
That was June 2013, but fast-forward nine months later to now and Herbalife have still thus far failed to disclose the actual retail activity taking place within the company.
Want to take a guess as to why a company, who is facing a mountain of political and activism-related criticism over the past year and a half has not made public a figure that would instantly remove all doubt of Herbalife being a pyramid scheme?
Yeah, it just doesn’t add up does it.
Well, with confirmation that the FTC have launched a Herbalife investigation and Herbalife “fully cooperating” with them (again, how nice of them), one way or another I think we’re going to find out.
Personally I’d peg actual retail activity at well below 10% company-wide. In China I’d even put money on the fact that true retail is non-existent (99.9%+ of revenue generated by affiliate-purchases).
Once the FTC get those figures from Herbalife (somehow I think the stale “but we don’t know!” excuse Herbalife trot out isn’t going to work anymore), it’s not so much a question of “are they a pyramid scheme” but whether or not Herbalife’s retail figures trigger further legal action.
I for one hope it does. Not because I want to see Herbalife go down mind, but because it might finally clarify what is an acceptable amount of retail activity for an MLM company to have.
I currently use 50%/50% in writing my own MLM company reviews, taken from common-sense and an FTC paper on “multi-level marketing” from November 2012:
Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan
Keeping the above in mind, it should be more than obvious why Herbalife have not made their true retail activity figures public. How they expected not to attract a regulatory investigation on such a crucial dataset boggles the mind, and is precisely why I’m not surprised that the FTC will no doubt demand the company hand over the data.
Now what they do with it, if anything, remains to be seen.
Tick-tock Herbalife, tick-tock.
Yes Yes Yes! Personally, I don’t want to see Herbalife go down or be any sort of “martyr” because to wish ill on a company is just..childish, but you spelled out it perfectly Oz!
The end result will be extremely beneficial for MLM spelling out what the FTC will clarify as an acceptable range of overall retail volume to make a company legitimate. In the end of this nonsense…”The Purge” of the industry is coming.
Although the FTC is still run by the US Government..so…idk how efficient or how clear, cut and dry their answer will be (Ron Paul 2012 haha)
I just hope they don’t come back with –
“So we shut Herbalife down because they had less than 50% retail revenue.”
So MLM companies need more than 50% retail revenue to not be a pyramid scheme?
“We never said that. The FTC is continually monitoring and strives to regulate the industry on a continual basis etc. etc. (insert rest of tincan response here).”
^^^ Well it’s the FTC so don’t get your hopes up for a clear answer.
Herbalife cleaned up some of the most controversial parts relatively early in 2013, when Anthony Powell left in January and Shawn Dahl left in June, and the other lead selling top earners were “handcuffed” between January and June.
Herbalife was a system with MULTIPLE pyramid schemes under the same umbrella. Bill Ackman misinterpreted that part, he focused solely on Herbalife itself as one giant pyramid scheme.
Bill Ackman should have focused on Shawn Dahl and Anthony Powell right from the start and identified THEIR businesses clearly, and THEN involved Herbalife indirectly as an organizer profiting from pyramid schemes.
From FT:
Source: http://www.ft.com/intl/cms/s/0/cdde3864-aa0e-11e3-8bd6-00144feab7de.html#axzz2vrISkRPD
For anyone interested, here’s the Amway 1979 Final Order.
http://www.mlmlegal.com/amway.html
The order itself is at the bottom. Reading through the whole document is simply not worth the time and efforts, even if some of the conclusions may have some interest.
Amway received a cease and desist to some/many of its practices, but was found not to be a pyramid scheme.
* C&D’s were largely about misreprentations of income potential, price fixings, attempts to regulate competition among distributors.
AmWay differed from the other pyramid scheme cases used as examples, in that the others mostly had sold “positions” rather than products, “income positions with some products attached”, and they had almost no retail sale outside their own networks of distributors.
* Cross selling (sponsor sell to downline) isn’t illegal in itself, but that part had too many arguments pointing in different directions.
* Price fixing among distributors in a downline may be illegal. The primary function of that isn’t about trade but about indirect recruitment rewards.
AmWay 1979 was actually a typical example for a recruitment driven opportunity, primarily selling the opportunity itself. But AmWay was also able to defend itself in court.
Explicit agreements about following a price fixing plan in a downline are illegal per se.
MLM attorneys who are using AmWay 1979 as an argument are probably focusing solely on the pyramid scheme part, the per se arguments about that sale to a downline isn’t illegal in itself.
Pyramide scheme rules clearly wasn’t the right type of rules to use in the AmWay case, they are too difficult to prove in a complicated case if the focus is on retail vs internal sale.
Complaint:
Legal analysis of the complaint:
Analysis of the defense claims:
(deleted, it’s being repeated in the partial conclusion)
Definitions, as the law saw it in 1979:
Conclusion:
The pyramid scheme charges were rejected because of wrong types of arguments. That part of the case simply wasn’t solid enough, even if AmWay clearly was recruitment driven and mostly sold the opportunity itself.
Failed arguments should probably be replaced with new types of arguments. If a legal argument failed in 1979 against AmWay, it will most likely fail in 2014 against Herbalife.
Just like AmWay 1979, Herbalife will be vulnerable to the same types of arguments about price fixing and “organized system”.
Price fixing is about when a distributor is bound to buy from a specific sponsor at a fixed wholesale price / fixed discount rate, or when a retail customer is bound to buy from a specific distributor at a fixed retail price / fixed discount rate.
Price fixing systems are designed to protect the interest of recruiters at the expense of the recruited, or at the expense of retail customers.
AmWay clearly ENFORCED a price fixing system, even if it was possible to find distributors selling products at their own prices among the 360,000 distributors.
* it had several control system in place to control the prices.
* it had a reporting system where distributors could report other distributors violating the AmWay price policy.
* it had “other methods” to control prices, e.g. methods to freeze out distributors if they violated the price policy.
Price fixing will ensure that people near the top will earn a relatively stable share from purchases in downline. It doesn’t have any other functions than to regulate the rewards throughout a system.
The result will normally be higher prices to retail customers, but regulated prices is actually what MLM is about. People expect to reasonably be able to calculate what they can earn from recruitment and sale.
In normal retail trade, retail prices will normally be reduced if the number of retail shops increase. The market will gradually become less profitable per unit sold. Retail shops must change strategy several times to survive.
Attempts to regulate prices are normally illegal. It can be done by monopolized institutions supported by laws, but it will be illegal for others.
Normal trade is actually based on that the market will regulate the prices by supply and demand factors. If you recruit too many distributors, each distributor position will become less profitable, forcing most distributors to quit.
Price fixing methods can be clear indicators for pyramid schemes, along with the other indicators. The main function of fixed prices is to maximize growth / prevent the pyramid from collapsing. If you remove that function, the pyramid will rapidly collapse by itself.
Some weak arguments in the AmWay 1979 case were the traditional arguments about pyramid schemes, e.g. arguments about saturation of the market.
Promotional pyramids can continue to grow even when the market is saturated, they will only grow slower. The payments from participants are made over a longer period of time than in traditional pyramid schemes, so they won’t suddenly reach a point of saturation where it all collapses. They are more affected by people’s belief systems than by the realities in the market, e.g. people may interpret saturation as “successful company” rather than as the opposite.
Promotional pyramids might have a “plateau effect” = they will be in balance between the number of people recruited and the number of people leaving.
FTC vs AmWay 1979 clearly focused on wrong types of legal arguments. The arguments were too difficult to prove in court.
* Retail vs internal purchases.
* Saturation of the market.
The fact that 75% of the distributors don’t recruit can be interpreted in several different ways. AmWay used it as a defense argument, but it was supported by other facts, such as low average purchases among those distributors.
Herbalife has already used similar types arguments about distributors being consumers. Almost all MLM based companies use it as a defense argument.
* Price fixing. The court has clearly found illegal activities.
* The organized system AmWay had for price fixing, e.g. the internal “court” AmWay Distributor Association.
* The compensation structure. The court has described it, but there’s no clear conclusion.
* “Doomed to fail”. That argument was not recognized by the court as a proof.
* “Intolerable potential to deceive”. That argument was not recognized by the court.
* Substantial sales to consumers. That was absolutely the strongest defense arguments against the pyramid scheme allegations in both courts.
Vague arguments will most likely fail in court, like they did in the AmWay 1979 case.
Arguments will need to be backed up by correct types of proof, something recognizeable as a valid legal proof.
From Wikipedia – Evidence – types of evidence:
* In the law, testimony is a form of evidence that is obtained from a witness who makes a solemn statement or declaration of fact. Testimony may be oral or written, and it is usually made by oath or affirmation under penalty of perjury.
Unless a witness is testifying as an expert witness, testimony in the form of opinions or inferences is generally limited to those opinions or inferences that are rationally based on the perceptions of the witness and are helpful to a clear understanding of the witness’ testimony.
* Documentary evidence is any evidence introduced at a trial in the form of documents. Although this term is most widely understood to mean writings on paper (such as an invoice, a contract or a will), the term actually include any media by which information can be preserved. Photographs, tape recordings, films, and printed emails are all forms of documentary evidence.
* Real evidence, material evidence or physical evidence is any material object,that play some actual role in the matter that gave rise to the litigation, introduced in a trial, intended to prove a fact in issue based on its demonstrable physical characteristics. Physical evidence can conceivably include all or part of any object.
* Digital evidence or electronic evidence is any probative information stored or transmitted in digital form that a party to a court case may use at trial.[
* Exculpatory evidence is evidence favorable to the defendant in a criminal trial that exonerates or tends to exonerate the defendant of guilt. It is the opposite of inculpatory evidence, which tends to prove guilt.
* In law, scientific evidence is evidence derived from scientific knowledge or techniques. Most forensic evidence, including genetic evidence, is scientific evidence.
* Demonstrative evidence is evidence in the form of a representation of an object. This is, as opposed to, real evidence, testimony, or other forms of evidence used at trial.
* Eyewitness identification, in criminal law, evidence is received from a witness “who has actually seen an event and can so testify in court”.
* DNA is not relevant here.
* Lies, on their own, are not sufficient evidence of a crime.
A “best evidence rule”:
en.wikipedia.org/wiki/Best_evidence_rule#United_States
http://www.law.cornell.edu/rules/fre
The pyramid scheme part of that case failed because of arguments not supported by correct types of legal evidence = the case hadn’t been interpreted correctly by the FTC public prosecutor.
AmWay managed to prove that it actually had substantial retail sale to end users (including distributors), and that it had policies and control routines to safeguard distributors.
Misrepresentation failed because of similar reasons. The misrepresentations had to be taken out of context to become really misleading. The court pointed out that they were misleading in themselves, but not illegally misleading.
Jeff Babener stated that “the AmWay case is still the rule, the Omnitrition decision was ‘in dicta’ (not necessary for the ruling)”. That’s probably correct from a legal point of view, even if that viewpoint has failed in some obvious pyramid scheme cases.
HERBALIFE’S STRATEGY SO FAR
Herbalife has, like most other MLM companies, preferred “expert research” rather than plain information from its own records, e.g. about retail activity. It seems like it’s relatively easy to find “hired guns” to defend almost anything.
Even the appeal in Belgium had a “research report” showing that most distributors didn’t want to earn money, they were simply interested in buying the products at a reduced price.
http://federalevidence.com/rules-of-evidence
(Rule 703 and 704 not quoted here)
I have ignored court appointed expert witnesses, they’re not relevant here.
The defense expert witnesses I have seen so far seems to be vulnerable to rule 702 b, c and d, and to Rule 705. They will be vulnerable to other experts checking the methods they have used from a neutral (but critical) point of view.
The expert witnesses I have looked at were from “Inside an MLM trial” found at Jeff Babener’s Youtube account, from the 1997 TravelMax case. He only uploaded his OWN role questioning the witnesses, not the opposite one.
More about Federal Rules of Evidence (FRE) …
RELEVANCE
RELEVANCE
The purpose of checking stuff like this is simply about understanding the rules.
It may be rather difficult to prove the existence of a pyramid scheme in the Herbalife case. It has cleaned up the most controversial parts in early 2013, when Anthony Powell and Shawn Dahl left in January and June.
Anthony Powell topped the complaint list for pyramid scheme complaints, but it was easier to find information about Shawn Dahl’s Online Business Solutions / IncomeAtHome.com / Centurion Media.
Herbalife may be vulnerable to its own defense arguments, e.g. to the argument that low level distributors actually are CONSUMERS, “consumers who have joined as distributors for the purpose of buying products at a reduced price”.
It’s much easier if you can agree on something, but use it in a different way.
If the low level distributors actually are consumers (rather than participants), the participants will be easier to identify.
* To participate as a consumer, all you need is to buy a distributor kit. You can qualify for higher discounts by making volume purchases.
* To participate as a participant, you will need to buy a distributor kit and make a volume purchase of products of more than $2,000 (4,000 PV in one month, or 2,500 PV in 2 successive months). It will qualify for the max discount level and for commissions from the compensation plan.
A logic like that will clearly identify some payment requirements. It will make Herbalife’s OTHER defense arguments fail, e.g. the argument about low startup costs for the opportunity.
Participants in the opportunity will actually need to pay a SIGNIFICANT amount of money to participate, much more than the $500 limit for startup costs (more than $500 in startup costs is about “business opportunity” rather than MLM).
The previous post was about a POTENTIAL vulnerability. This post is about the same, but putting it into a wider context.
INTERNAL CONSUMPTION VS EXTERNAL CUSTOMERS
Courts will normally accept internal consumption (to some degree) as equal to sale to external consumers. That was one of the key arguments in the AmWay 1979 case, a per se argument (in itself). “Internal consumption isn’t illegal in itself” (the law doesn’t recognize that as something illegal).
AmWay was able to prove that it had substantial retail sale to external consumers, while internal consumption among non-recruiters was as low as $20 per month in average.
There’s nothing illegal in that type of internal consumption (but statistics can be used to hide the truth). $20 average is much more typical for consumers than for resellers, it indicates consumption rather than resale.
STANDARD DEFENSE ARGUMENTS, AMWAY STYLE
MLM companies will typically use the same set of defense arguments over and over again:
* Low startup costs
* Retail requirements (AmWay had a 10 customer rule)
* 70% rule (70% must have been resold or consumed)
* Buyback policy
* Some proofs for retail activities to external consumers
LOW STARTUP COSTS?
Herbalife’s claim that low level distributors actually are consumers will be in conflict with the argument about low startup costs.
The low startup costs are for the “consumer distributors” ONLY, while the higher level distributors must pay more than $2,000 in startup costs.
* The high qualifying purchase is mandatory
* Whom to buy from is mandatory = from direct upline
* It generates commission payouts to upline
* It’s only refundable in theory (several restrictions)
As far as I can see, the other parts of Herbalife’s defense system is weaker than “internal vs. external sale”. It’s vulnerable to a COMBINATION of the other factors used in normal MLM defense strategy.
The 2 previous posts were about potential vulnerabilities in Herbalife’s defense strategy. This one is about pyramid scheme rules. Most of the arguments here will not be directly related to Herbalife.
BASIC DEFINITION FOR PROMOTIONAL PYRAMIDS
1. A chain recruitment system
2. where participants pay for the opportunity
3. to earn financial gains
4. that derives primarily from other participants
5. rather than from sale/consumption of goods/services.
The ILLEGAL part is about a “money game”, based
* partly on skills and experience
* partly on chances and luck
* partly on mathematical principles
That logic was found when I checked some old pyramid scheme cases in 2009.
Skills and experience CAN affect the individual outcome of the game, but not the average outcome. The average outcome is PRIMARILY under the control of mathematical principles.
Skills and experience CAN affect MORE THAN one person’s individual results, e.g. people organized as a team can potentially be more effective than a group of unorganized individuals. But that idea has some limitations, “duplication” doesn’t work well if too many are trying to duplicate the same ideas.
Chances and luck will always be present when you’re depending on the performance of other people. You can’t KNOW absolutely sure that your own skills and experience will work for other people, some people will simply produce less if they try to follow plans set up by other people.
Mathematical principles will heavily affect the average results in a group. Recruitment driven opportunities are “rigged games” based on mathematical principles, where the chances to become profitable will be heavily reduced.
* The saturation argument in the AmWay case should have focused on the mathematical chances to become profitable, rather than on the saturation itself. AmWay was still growing, but the chances to make a profit had been heavily reduced.
That’s why people complained about pyramid scheme issues in the first place, their chances to make a profit had been heavily reduced. They felt they didn’t have a fair chance to make a profit. Their focus was on their own chances, not on AmWay’s growth.
INTERNAL VS EXTERNAL CONSUMERS
That idea isn’t recognized by the law as something that involves anything illegal. It’s an INDICATOR people can use to vaguely identify a potential problem with a business model.
Sale to consumers is generally completely legitimate in itself. Whether or not some of those consumers have additional roles as employees or affiliates isn’t important. A prosecutor will need to prove something ILLEGAL, and that’s the wrong type of proof.
“Internal vs external consumers” doesn’t prove anything of importance. Posts #7 – #12 were about checking the AmWay case, and about identifying the TYPES of evidence accepted by a court.
“PAY TO PLAY” AND REWARD SYSTEM
The “Pay to Play” has importance. It’s a part of the potential illegal activity. It will have importance if people are paying something EXTRA for the opportunity itself. It needs to be significant and identifiable, and not related to normal “exchange of values”.
The reward system used will have some importance, e.g. if some of the “pay to play” from participants are being used to reward other participants.
LEGAL STRATEGIES
Herbalife lost the pyramid scheme case in Belgium in 2011, but it won the appeal. I didn’t understand the logic in that last decision, since it involved changes made AFTER 2011.
One of the failed tactics was about VAGUENESS and LEGAL MISINTERPRETATIONS, e.g. claiming that the low level distributors were actually retail customers, and claiming the opponent had the burden of proof to prove otherwise.
What I’m doing here is HYPOTHETICAL. I’m simply trying to vaguely identify some factors that can make a legal strategy work or fail.
I have looked briefly at the following cases …
* AmWay 1979
* Herbalife 2011 Belgium
* Herbalife 2013 Belgium
* Other cases, e.g. BurnLounge.
A good legal strategy should include multiple viewpoints:
* How do I see it?
* How does the opponent see it?
* How will a prosecutor see it?
* How will the court see it?
“How people see it” is about:
* What do they primarily focus on?
* How do they interpret that?
* etc.
That’s the difference between a good legal strategy and a poor one, the poor one will focus solely on the party’s own viewpoints. A good legal strategy will try to focus on how the court will see it, and try to focus on important factors rather than unimportant ones.
I identified some poorly presented arguments in the different cases I looked at:
* “Saturation” will need to be identified correctly, as something that will affect the individual chances to make a profit rather than something about the company’s growth potential. The pyramid scheme issue itself will need to be about the illegal “money game” rather than about legal trade activities.
A distributor suing a company should probably ask for disclosure of the number of distributors in his own geographical area, to be able to prove the illegal type of saturation.
* “Internal vs. external consumption” doesn’t really prove anything important. It will need to be supported by other evidence to prove anything important.
A company can use retail sale as a defense argument, “we’re primarily focused on completely legitimate TRADE activities, including building up sales teams”. It may end up like “I’m driving completely legally most of the time, so I can’t be guilty in any illegal driving”, if the opponent is prepared with valid counter arguments.
In the BurnLounge case, the legitimate trade activity wasn’t halted, FTC only halted the illegal recruitment parts of the program. Because of that, the legitimate trade activity wasn’t included in the final decision (it used “for the purpose of this order” and “for the purpose of this definition” to focus SOLELY on the illegal parts).
The BurnLounge decision caused great frustration among MLM lawyers. Legal activity HAVE BEEN USED as a defense argument in several years, and the lawyers have even won several cases based primarily on that defense argument.
I haven’t checked the final result of the APPEAL in the BurnLounge case, I used it only to show an example for “How the court will see it” vs. “How an MLM lawyer will see it”.
* A good legal strategy will identify differences like that, and try to place its own arguments closer to how the court will see it.
* A poor legal strategy will express frustration AFTER the case have been lost in court, and generate theories about something wrong in the system. Nehra is still convinced about that Equinox was completely legitimate, but was ruined by the affiliates themselves, making the organizer become a victim of the system.
I have looked at the Koscot test, as it has been applied in the AmWay 1979 case. It’s rather dysfunctional in some parts, even if lawyers claim it still is the main method.
The test was probably useful when applied to Koscot in 1975, but it can be dysfunctional when applied to other programs.
* Koscot’s definition use the term “company” rather than the vague “plan or system”. It’s possible to organize a promotional pyramid so that test will fail. The core part of a pyramid sceme is a chain recruitment system, not a company.
* Koscot’s definition use the term “unrelated to sale of products to end users”. That doesn’t identify anything meaningful if the test is about legal / illegal.
* “Receive the right to sell a product” is a DESCRIPTION of a part of an agreement. It isn’t an IDENTIFIER for whether something is legal or illegal.
If a test is meant to separate between LEGAL / ILLEGAL, then it must identify both clearly.
Unlike Ponzi schemes, pyramid schemes disguised as MLM can be extremely difficult to prove if they have a retail component. Ponzi schemes will have “phantom ROI” or similar signatures.
Evidence will need to be clear and recognizable. Herbalife’s lack of retail statistics makes it difficult to use that as evidence. Low level distributors CAN count as retail customers.
Herbalife will be vulnerable to its own defense argument, “the low level distributors are actually retail consumers buying products at a wholesale price”. That argument will change how the business model will have to be interpreted, and make it easier to identify a pyramid scheme component.
LOW LEVEL DISTRIBUTORS
They will be presented for the income opportunity, but they will only join as CONSUMERS purchasing goods at a discounted price. That’s not an income opportunity, and it can be separated from any pyramid scheme definitions. Some of them will upgrade and buy a Supervisor position.
That part can be IGNORED completely, they are consumers rather than participants. They must first upgrade to Supervisors before they will become part of a pyramid scheme.
It’s actually EASIER if the low level distributors can be separated from the high level ones.
HIGHER LEVEL DISTRIBUTORS
The first level where people are buying into the income opportunity is at the Supervisor level, by making 4000 or 5000 Volume Points VP “qualifying purchase” (more than $2,000 purchase).
* “Low startup costs” will fail as a defense argument. That argument can only be applied to the consumer level distributors.
Supervisors and higher levels have monthly qualifying purchases for the right to earn commissions. It’s mandatory to make the purchases from upline rather than directly from Herbalife. Products cannot easily be returned and refunded.
* “Refund policy” will fail as a defense argument. It can only be applied to products bought directly from Herbalife.
* “Internal sale/consumption” will be questionable. The compensation plan pay 10 levels deep directly, and even more if we include the different leadership bonuses.
Most likely, the 10 levels of commissions to upline will partly go to people not directly involved in the sale = there’s no movement of products between all of those people in reality, only a hypothetical movement of products. Laws are about realities, and hypothetical sale doesn’t qualify as real sale.
* That may change how the compensation plan will have to be interpreted. It has hypothetical sales internally that will generate commissions, but the commissions are based on recruitment rather than on sale of goods or services.
* The PRIMARY function of the compensation plan is to distribute recruitment rewards upwards in the system. Recruitment rewards = “not related to any real distribution of goods or services”.
CONCLUSION
I have looked at how courts have interpreted different cases. A court will normally not accept “constructed arguments” in any direction. That’s why AmWay 1979 partly failed for the prosecutors, the pyramid scheme part was about “constructed conclusions without proof”. The court actually looked at the reality.
Herbalife HAS some “constructed defense systems”. I have pointed out a different part than the most obvious one, a part where it is more vulnerable.
The most vulnerable part is the compensation plan, from Supervisor and up, with all the mandatory qualifying purchases, with a poor refund policy. The discount purchase part is less vulnerable.
M_Norway, I would like to discuss Amway with you in more detail. Thanks.
Let me know when you two have made contact so I can remove the email address.
(Ozedit: M_Norway has responded so I removed the contact details)
I don’t respond to e-mails. We have 2 AmWay articles here where you can post relevant info about AmWay in general. You will find both articles if you use the “Search” function.
The “AmWay Tool” seems to be about the AmWay culture, e.g. about how leaders are rewarded in different ways, e.g. by receiving the right to run internal side businesses (selling training, selling leads, etc.)?
My focus in this thread has been on the “AmWay 1979” case, not on AmWay itself. The focus has been on that “AmWay 1979” repeatedly has been used as defense argument by MLM attorneys.
I have analysed that case mainly for “communication purposes”, e.g. to understand what people (MLM attorneys) are talking about. I’m not really interested in that case for other purposes than that.
The “AmWay Tool” can be relevant info in threads about Herbalife too, if I have interpreted it correctly. Herbalife had a similar system, where people near the top were allowed to run their own businesses.
You may have valuable info about systems like that in general, based on your AmWay experience?
The focus on this website is normally on factual info, i.e. we don’t support “campaigns” against specific companies, and we don’t support promotional campaigns either. “Stop the AmWay tool” sounds very much like a campaign. 🙂
How about a free conference call, I can even send you instructions regarding how to keep your number confidential. Or Skype?
Also, who is the “we” you are referring to, above?
It isn’t about keeping it secret. I don’t follow up my e-mails on a regular basis, I’m trying to avoid using that communication method. I don’t use PMs in forums either, but I will reply to them if others prefer to use that communication method.
“We” is “corporate language”. People working for companies will normally use “we” rather than “I” when they’re talking about something related to the company itself.
The sentence started with “this website”.
I have partly covered the lead sales businesses in Herbalife, e.g. Shawn Dahl’s Online Business Systems. People near the top were allowed to organize and run their own “side businesses”, a method to generate their own profit DIRECTLY from people they recruited.
I analysed OBS, and looked vaguely at a few other types of “side businesses” (“boot camps”, etc.).
That’s why I asked about the AmWay tool. “Is it something similar?”. The Herbalife solutions drained people for money. Bill Ackman showed one example for the types of additional costs.
What I mean by a conference call or Skype is a verbal discussion, not an email or PM.
I’m even more confused by what “we” means, let’s talk.
The Amway “side business” is similar to Herbalife, except on steroids.
I don’t have time to focus too much on one single company. The 10 comments I had in 3 days were way too much. 🙂
If you have signed a Non Disclosure Agreement or something similar you should probably respect that agreement. I can find information myself if you tell me WHERE to find it on your blog (the information you feel is important).
HERBALIFE
Herbalife popped up on the radar here because of the pyramid scheme case in Belgium in 2011, and later because of Bill Ackman’s December 2013 presentation. That presentation immediately led to some “cleanups” in the first half of 2013.
Bill Ackman should probably have focused on the parts they tried to clean up rather than on Herbalife itself. Herbalife would have been much more vulnerable to an attack on Shawn Dahl’s business than to a direct attack on itself. I’m analysing defense strategies, e.g. arguments that have worked or failed in court.
Shawn Dahl’s business used radio commercials to promote IncomeFromHome, using famous radio hosts to promote it, focusing on specific groups of people.
People visiting the site typically had to enter contact info to get information, a method to capture leads and to filter visitors (the ones unwilling to be led through a system like that will simply drop out, only the most naive ones will go all the way).
I checked the recruitment system and the lead capturing system. I had already checked some complaints for other details, e.g. that people were motivated by leaders to buy huge quantities of products to promote themselves to higher positions.
I checked a few other leaders, but they seemed to be less aggressive recruiters. They offered product sales boot camps, i.e. they weren’t solely focusing on recruitment.
The ones with most detailed complaints about pyramid scheme was Anthony owell and Shawn Dahl. Anthony Powell left Herbalife in January 2013, less than a month after Ackman’s presentation. Shawn Dahl left Herbalife in June 2013. 28 lead selling leaders were “handcuffed” in February or March 2013.
Herbalife has $2,000-$2,500 in monthly product purchases if people want to buy their way upwards in the system, or if they want to qualify for commissions. Higher positions will require recruitment of a downline who also buy positions through product purchases, and that’s why the leads were sold.
THIS WEBSITE
The focus here is normally on “what do people want or need to know about the opportunity?”, i.e. we’re not SOLELY focusing on scams. The focus we have had on Herbalife have mostly revolved around the lack of identifiable retail customers / too much mandatory purchases internally in the network.
People posting here are typically “contributors”, e.g. we had 6 people from Brazil posting regular updates about the shutdown of TelexFree Brazil.
I cover a wide range of topics, but I’m not specialised in any way. I’m familiar with most of the ideas used in commercial business (trade). I’m not very familiar with other business areas, e.g. banking or finance.
It looks like you don’t want to talk. Goodbye.
Correct. If the information is secret and can’t be shared publicly then I won’t have it.
That’s not the point, the point is communicating faster and more effectively.
Shawn Dahl / Online Business Systems / incomeathome.com / Centurion Media Group was described in “The Verge”.
theverge.com/2013/3/27/4099100/income-at-home-herbalife-scamworld-biz-opp
From memory
Incomeathome.com is a lead capturing system. You will need to provide SOME personal information to get access to the next pages. Each and every page will ask for some type of input from the visitor.
* “Enter email to proceed” (page 1)
* “Download free tax advices”
* “In which radio show did you hear about us?”
* “What are your goals as an entrepreneur?”
* “Enter name and e-mail to participate in $1,000 draw”
* “Order $9.95 DVD Work From Home Toolkit”
In the last example, you will need to give complete information about name, delivery address, credit card details, telephone number, when they can call you, etc. = high quality leads that can be sold to other income opportunity seekers.
Some of the other pages will only test if you’re willing to give SOMETHING, if they can “interact with you” through a website. The “low hanging fruits” will be eager to get more information. They will give their e-mail address on the first page, potentially answer some questions, and either accept one of the free gifts or order the DVD directly.
Some will potentially answer the questions about their personal goals as entrepreneurs, e.g. how many hours they can work per week, if they can accept business travels / business meetings, etc. = questions that will give the feeling of a “job interview”, but where everyone will get the job.
People who want to know how a lead capturing system works can take a look at incomeathome.com. It’s possible to bypass the lead capturing forms by using the search technique site:incomeathome.com, it will display all 38 pages in a list.
People who prefer to avoid lead capturing systems (and be listed as “low hanging fruits”) can look at it too. The average costs of being a “low hanging fruit” is $4,000 – $7,000 per month (based on the Herbalife complaints).
The DVD “Work From Home Toolkit” is presented as “free gift, just pay $9.95 shipping & handling”. It’s free for 30 days, but then they will charge you $39.95 full price if you don’t return it. The DVD doesn’t contain anything of interest, it’s just some marketing.
BurnLounge Appeal, June 2 2014, “Opinion by Ninth Circuit”.
cdn.ca9.uscourts.gov/datastore/opinions/2014/06/02/12-55926.pdf
It has SOME clarifications about what a pyramid scheme is, e.g. some corrections to FTC’s interpretation but also to BurnLounge’s interpretation.
“BurnLounge is correct, BUT …”
“The products were sold to ultimate users, but that doesn’t mean all the rewards derived from product sale to ultimate users” (products can be grossly overpriced, and part of the price can be about payment for the opportunity itself, e.g. products bundled with the right to earn rewards).
“This internal sale doesn’t make BurnLounge a pyramid scheme”. Correct, the SALE didn’t make it a pyramid scheme, but the REWARDS (from the Mogul packages) were clearly part of a pyramid scheme (when analysing how the business really worked).
“Rewards not tied to consumer demand for the merchandises in the packages” = indicator of a pyramid scheme. The relatively few non-Moguls who bought those packages clearly showed a different purchase pattern than the Moguls.
“Necessity to recruit to earn cash rewards” = indicator of a pyramid scheme. It’s about paying more incentives for recruitment than for retail sales, e.g. paying much higher rewards for selling Mogul packages to new Moguls than for selling music or merchandises to consumers (“internal or external” isn’t really important in this context).
That appeal has been covered in a separate article:
behindmlm.com/companies/burnlounge-appeal-denied-still-a-pyramid-scheme/
Herbalife filed cease and desist after an Latino Herbalife critic stated on TV that many Herbalife distributors who are illegally in the US are afraid of speaking out for fears of being “anonymously” reported to the ICE (immigration and customs enforcement).
NOLINK://nypost.com/2014/07/18/herbalife-fires-back-at-latino-activist/