herbalife-logoStandard practice here at BehindMLM is to ignore stock market theatrics.

Herbalife’s stock price goes up, it goes down, some guys appear on tv to talk about it and so it goes.

Of far more importance is the regulatory side of the Herbalife story, which just got more interesting with news of an FBI probe breaking yesterday.

Whereas in the past though we’ve seen the FTC and SEC both investigate and continue to investigate Herbalife directly, the FBI’s investigation is a little different.

…or is it?

The headline those who see Herbalife as an MLM vs. anti-MLM battle will run with is that “the FBI are investigating Bill Ackman”.

And rightfully so, as it seems like that’s what’s happening:

The FBI and other federal authorities have interviewed people hired by activist investor Bill Ackman as part of a probe into potential manipulation of Herbalife stock, according to a report.

Ackman, who needs no introduction, has bet $1 billion that Herbalife is a pyramid scheme. He’s already millions in profit on the bet (Herbalife’s stock has plummeted over the past two years), but wants the stock to hit $0.

Something that will most certainly happen should regulators launch legal action against the MLM giant. Which Ackman has been heavily pressing for, to the tune of some $50 million dollars thus far.

The probe is looking into whether people, including some hired by Ackman, made false statements to regulators and others about Herbalife’s business model, the Journal reported.

The false statements were made to spur investigations into Herbalife and lower its stock price, according to the report, which cited people familiar with the matter.

The money at stake here clouds the issue.

Those who refuse to look at the bigger picture simply dismiss Ackman as an anti-MLM zealot, looking to make a quick (albeit large) buck by destroying Herbalife.

Unfortunately, from what I read during my MLM research travels, there’s a somewhat depressingly significant amount of people in the MLM industry who blindly adopt this stance.

Personally I couldn’t care less about Ackman or his short bet against Herbalife. The way I see the FBI investigation is not as a PR fodder for the “we’re not interested in having a rational discussion about this” rabidly pro-Herbalife camp, but rather a positive to getting to the bottom of the company’s murky business model.

Key to the FBI investigation will be how they determine whether or not Ackman has manipulated the stock.

Boil down any of Ackman’s presentations, speeches given, letters written or anything he and his related entities have presented to regulators – and the message is loud and clear: Herbalife is a pyramid scheme.

Therein lies the rub.

If Herbalife is indeed a pyramid scheme, then Ackman can hardly be accused of manipulating the stock through false pretext.

If Herbalife isn’t a pyramid scheme, then Ackman and Pershing Square deserve everything coming their way.

Determining as such though brings us back to the other ongoing regulatory investigations and Herbalife’s business model itself.

Simply put: The FBI cannot determine stock manipulation without a decisive outcome on the Herbalife pyramid scheme issue.

I maintain, as I have since I first reviewed Herbalife, that the company deliberately and purposefully operates in the grey.

The entire Herbalife business model appears to be geared towards “how can we run a near 100% affiliate-funded compensation plan, within the current US legal framework?”

To that end Herbalife have no wholesale customers, and claim their affiliates purchase product for self-consumption and resale. The company claims most of their affiliates are affiliates simply to earn a discount when purchasing Herbalife products.

Of course they, by design, have no way of tracking this – at least not publicly. Yet they profess as much like it’s the gospel-given truth.

Left unsaid is the fact that it’s pretty evident that Herbalife themselves do virtually nothing to demonstrate or prove the existence of retail activity taking place.

After reversing a promise to introduce a wholesale customer class (which would prove their assertion that the bulk of their affiliates only want Herbalife products at a discount), it’s evident that Herbalife are fine with maintaining the murky status-quo.

And it is this mess that regulators have been dissecting now for over a year. The FTC, SEC and now FBI are involved. We just need the DOJ and Secret Service to now confirm their own investigations and we’ll truly have a regulatory free for all on our hands.

When regulators investigate, vague statements and hollow PR doesn’t cut it. They will need to break down the flow of money in Herbalife’s billion dollar operations and establish where revenue is being sourced, why Herbalife products are being purchased and how and on what the bulk of the company’s affiliates are getting paid.

That unfortunately takes time.

Looking at Herbalife’s business model, I think it’s pretty clear that retail is virtually non-existent. You’ve got thousands of affiliates around the world purchasing products, which are then either given away or consumed, with commissions paid via recruitment of others who also buy into the scheme.

Given that, anyone who is celebrating the FBI investigation on some notion that they’re going to be dragging Ackman in for stock manipulation sometime soon, should probably re-evaluate their position.

Neither Ackman nor Pershing Square is under investigation, but the FBI and prosecutors from Preet Bharara’s US Attorney’s office in Manhattan have conducted interviews and sent out document requests in connection with the probe.

The FBI and Bharara’s office declined to comment.

Far more likely is that the FBI are gathering information to be used throughout a wider joint-regulatory investigation that is currently playing out.

They need to know precisely what is being alleged here and by whom. Anything less and the question of whether the agencies actually conducted their own investigation or just took Ackman’s lead will always linger.

And when you’re looking to bust open a multi-billion dollar company’s business practices, you don’t want to leave any avenue unexplored.