Herbalife Pyramid

Op-Ed Columnist

Riddle of the Pyramids: What Is Herbalife?

By JOE NOCERA

Is Herbalife a successful marketer of protein shakes or something more terrible than a Ponzi scheme?

Columnist Page NYT Now Riddle of the Pyramids: What Is Herbalife? Joe Nocera “We’re doing God’s work,” said William Ackman, the hedge fund manager, on CNBC this week.   He was referring to his $1 billion bet against Herbalife, the company that he accuses of being an illegal pyramid scheme.   For the two years that Ackman has been “short” Herbalife, it has been the most entertaining of business stories. Carl Icahn and Daniel Loeb — both, like Ackman, activist investors — made a grand show of buying Herbalife stock. The stock went up, meaning Icahn and Loeb were making money while Ackman was losing it. Icahn called Ackman a “crybaby in the schoolyard.” Then the two men kissed and made up at a CNBC conference. Ackman made lengthy presentations laying out his evidence that Herbalife was a pyramid scheme. He set up a website dedicated to exposing it. He raised enough of a stink that both the Federal Trade Commission and the Department of Justice opened investigations. Herbalife fought back with its own battery of P.R. people and lobbyists. The company adamantly denies being a pyramid scheme. Since the middle of last year, however, it has failed to meet Wall Street’s expectations. Now Herbalife’s stock is way down. Although Ackman is now making money on his Herbalife bet, he is not satisfied. He expects the stock to go to zero.   In a way, the ongoing Ackman-Herbalife story is a little like the coverage of a hotly contested political campaign. The horse-race aspect is so entertaining that sometimes more serious issues get short shrift. In this case, the issue is not whether Ackman is up or down or feuding with Icahn, but whether Herbalife — like dozens of other “multilevel marketing” companies — is, in fact, a pyramid scheme.   Pyramid schemes are terrible things — in some ways worse than Ponzi schemes. For one thing, they often involve more money — the direct-selling industry, which includes multilevel marketing, claims that it generates $154 billion in annual revenue and has some 90 million members worldwide. For another, most pyramid schemes take advantage of lower-income people, who are lured in by the prospect of making money while working from home, only to discover that, as pyramid scheme experts will tell you, 99 percent of the people who participate wind up losing money, and sometimes a lot of money.   “There are millions of victims,” says a pyramid scheme expert named Bruce Craig. “I don’t know why people aren’t interested in this.” Craig is a former Wisconsin assistant attorney general, now retired, who brought a number of pyramid scheme lawsuits in his day. He is passionate about the issue. What frustrates him even more than the lack of attention is the way the government has, in his view, largely rolled over for the industry.   A pyramid scheme, fundamentally, is a scheme in which the only way to make money is to recruit other people, who recruit other people, and so on. It is a kind of chain letter with a product attached to give it the sheen of legitimacy. Until 1979, the Federal Trade Commission was pretty tough on pyramid schemes, according to Craig. But that year, an administrative judge for the F.T.C. ruled that Amway was not a pyramid scheme because it had certain protections for its members, such as not requiring a large entry fee and buying back excessive inventory. Since then, with a little finesse, pyramid schemes could turn themselves into multilevel marketing companies.   Craig has written letters to F.T.C. commissioners asking them to review the Amway decision “on the question of enforcement and enforceability of its rules,” an issue he believes allows companies like Amway — and Herbalife — to pretend to be real when in fact they are pyramid schemes. In one of those letters, he quoted from a 2010 F.T.C. staff report that said that identifying pyramid schemes “entails a complex economic analysis.” The report added that “there is no bright line disclosure that would help consumers identify a fraudulent pyramid from a legitimate [multilevel marketing company].” Really?   When I spoke to John DeSimone, the chief financial officer of Herbalife, he insisted that the company was legit. He said it was built on sales of its weight and nutrition products rather than recruitment. He said it offered numerous protections, such as a money-back guarantee for the first year. He said 80 percent of its members never recruit another person. Ackman, for his part, says that none of this is true, and that the F.T.C. will ultimately see that Herbalife is the very definition of a pyramid scheme.   Assuming, of course, that the F.T.C. has a definition. On Friday afternoon, I called the agency and asked what distinguished an illegal pyramid scheme from a legal direct-selling company. Even having talked to Craig, I found it hard to believe that it wouldn’t have some kind of definition.   A few hours later, I received an email from an F.T.C. public relations staffer. “I’m sorry,” it began, “but we won’t be able to offer you any on (or off) record assistance.” Link: http://www.nytimes.com/2015/01/10/opinion/joe-nocera-riddle-of-the-pyramids.html?action=click&contentCollection=Opinion&region=Footer&module=MoreInSection&pgtype=article