The more the Herbalife Club 100 and Universidad del Exito scam settles in, the more I am convinced it is a bomb with a lit fuse inside Herbalife. Without recruits-in-training and soliciting friends and family in support of their effort to “graduate” Nutrition Club College (for which recruits/family/friends pay “tuition” of $3,000 in daily single servings), there would be no one in these Nutrition Clubs. By managements own admission, 9 out of 10 Clubs failed pursuing bona-fide retail sales before they uncovered the Best Predatory Practices in Mexico and systematically rolled them out worldwide.
The inventor of this Best Predatory Practice Club Model in Mexico met with an interesting demise. I find it startling that Michael Johnson, Des Walsh, John DeSimone would promote a predatory business practice under the banner of global health, wellness, obesity, nutrition or whatever banner of liberal feel good. They are mocking as fools those who buy their nonsense. It is equally disgusting that Carl Icahn, Bill Stiritz, Madeleine Albright, Alan Hoffman (Fmr Deputy Chief of Staff to Vice President Joe Biden and Fmr Advisor to Barak Obama) and Richard Carmona (Fmr Surgeon General) would associate their names and reputations with people of such morally repugnant character. Throw in the financial and legal advisers – and the advisers to the pro athletes too, just to cover everyone. It’s not as if people have not been put on notice to do their own due diligence. Is money really that central in their life? I guess so……
Warren Buffett speaks often about the character and integrity of management, particularly of Wells Fargo. At last look Wells Fargo was a senior lender to Herbalife. Warren Buffett is Wells largest shareholder and should be asking some seriously critical questions of John Stumpf, CEO of Wells Fargo. This isn’t just about morality (although that should be enough). These senior lenders have been deeply involved with Herbalife management, in programs the U.S. Senate recognized as very shady, if not outright illegal with respect to foreign cash management, movement and use for buybacks. If you provide capital to an illegal enterprise, you contribute to the harm. A reputable entity like Hartford Insurance won’t provide D&O coverage but Wells Fargo will provide hundreds of millions in capital? That’s strange. Warren Buffett knows the difference between a legitimate direct sales organization and a pyramid scheme. He has owned 3 legitimate direct sales companies for decades. He has no excuse for remaining silent. I’ve been a big fan of Warren Buffett’s investment principles over the years. The more honest I am, the more I think Buffett has stood by and ignored many an unfolding scandal, under his nose or in his midst, and said nothing. He cannot hide behind a hokey mid-west reputation. That may have worked back in the days of the Buffalo Evening News, See’s Candy and Nebraska Furniture Mart.
If you were wondering why a Member would sign a 140 page document just to get a discount, now you know. Because they are not Members signing up for a discount, they are recruits in pursuit of a business opportunity and they don’t show up at a Nutrition Club every day for a discount, they’re going through a Step by Step Training “Installment Buy-In” Program to financially qualify over time, to accumulate the level of Sales Leader or Supervisor. The goal is to “graduate” and get to open their own Nutrition Club and duplicate the Program with others. It costs $3,000+ and Herbalife doesn’t care if you get the money from yourself, friends, family, brothers, cousins, aunts, uncles, grandparents, kids or neighbors – convince them all to support you in your “schooling” to open your own business, right?
When DeSimone said on CNBC that people in a herd or group are less likely to quit, undoubtedly he wanted viewers to interpret that as pertaining to the Herbalife Diet plan. But the subtle and sinister Truth is that those same social forces make Nutrition Club participant victims unlikely to quit what they are really caught in – pursuing the false hope/dream business opportunity-in-training!
The executives and lawyers of pyramid schemes are masters with their words. Just like DeSimone above, when Kevin Thompson was interviewed on Bloomberg, he said “but Herbalife distributors are still “producing”. There it is again. What he meant was “recruiting”. But he’s trained not to say “recruiting” in the industry he earns his living; it’s just not a good idea. So, they develop many substitute words and phrases and the psuedo-journalists and TV infotainers are no match for them.
It was a major coup for the Direct Selling Association to get MLMs excluded from the Business Opportunity Rule because of the required wait period. Anyone who knows anything about how this scam works knows that the recruiter whips up the “target” and gets them (through pressure, guilt, enthusiasm, hope, optimism, whatever) to make an emotional decision to buy $3,000 worth of product, and closes it on the spot – no waiting. If they have to wait, the emotion wears off, then doubt and other voices of reason might come into play, and the sale is lost. We already heard the split tongues spinning the 90-day Nutrition Club scam as a generous “wait period” – as if Herbalife was doing a good deed for the poor folks. It is outrageous how immoral these people are. EVERYTHING they do and say is subject to scrutiny as a lie.
Herbalife deliberately targeted the poorest who cannot afford to ante up at once, so they get them to drink it on the spot in single servings among target/friends/family so they can’t return it. Again, the “Gold Standard Return Policy” is touted as a good deed by the company, but the recruits can’t return what they drank or packages they opened and put in plastic containers already. The recruiter has to make sure the target sticks to the program and doesn’t quit, doesn’t get discouraged or doubtful, so the total sale is eventually completed. The way they do this is the group/herd instinct, the “school/university” concept, complete with cap/gown graduation and “teachable” nature of the targets. It is a Step-by-Step Course, just like a For-Profit Technical School Diploma. In both cases the student winds up with a worthless diploma. In the technical school case the government winds up eating the student loan debt. In Herbalife, the student, friends and family eat it – literally!
If a recruit gets (in round numbers) 10 friends/family to spend $5 per day for 90 days, and not everybody goes every day – BINGO – you bought yourself a $3,000 graduation, complete with cap and gown, proud smiling upline sponsor (did I forget to say financially independent, successful, rich upline sponsor?) and a certificate to open your own Nutrition Club. And if you “play ball” and inventory load, the other top club owners will start feeding you recruits-in-training at your new club and you can become part of the inner circle of recruiting/training (pyramid scheme) machine!
It sounds like La Cosa Nostra. I wonder if after graduation they burn a saint and make you swear an oath of Omerta? Maybe that’s why the origin of the Nutrition Club concept is so shady.
Management has been telling the world that all this Nutrition Club volume is retail and that’s at least a large part of why they are not a pyramid scheme. But… if the vast majority of the rewards from Nutrition Clubs goes into the “recruiting bucket” (and not the retail bucket), Herbalife is absolutely a pyramid scheme.
- Herbalife’s Sales Leader/Supervisor Program is a Pyramid Scheme and the FTC can/should/will seek a temporary injunction from recruiting new Sales Leaders and Supervisors and paying any program related rewards. (Much has already been written about this. Suffice it to say that the BurnLounge Mogul Program and Ninth Circuit Court of Appeals ruling is the blueprint.)
- Management has misrepresented the structure and function of Nutrition Clubs and the motivation and incentives of participants and “patrons”. Nutrition Clubs are a Pyramid Scheme, as well. The FTC can/should/will seek a temporary injunction from recruiting new Club “Training” Members and paying any program related rewards.
- Herbalife management claims it sells overwhelmingly to true bona-fide arms-length customers at retail and outside the network who are simply seeking a few months weight loss program or a healthy lifestyle. (That’s why the defenders quote the weight loss industry program duration statistics in comparison to Herbalife’s churn.)
- If it were true, Herbalife should have “a manageable problem” with a FTC temporary injunction prohibiting recruiting in those 2 specific programs (Salesleader/Supervisor and Nutrition Clubs) for say 12 months while the FTC gets inside the company (the FTC is not actually inside the company, they are issuing CIDs from outside. After the injunction, they set up shop inside.) and work out a comprehensive settlement, right?
- NFW – Management knows that sales will evaporate. There is no demand for product in the absence of recruiting. Period. And that is what defines a pyramid scheme. Management can never let that fact be revealed. Bill Ackman just shined a giant spotlight on it, even if day-trading speculators don’t want to see it. I saw it first hand 2 years ago in my home town and had it confirmed on Tuesday in Bill Ackman’s webcast. Peter VanderNat will see the Nutrition Club Program for what it is – a pyramid scheme.
A few more thoughts that came out of the Nutrition Club presentation:
- Bill Ackman went 0 for 3 persuading speculators and the intellectually lazy media, despite a mountain of unanswered questions and damning evidence.
- If he wants to persuade the market and the media to his way of thinking, I suggest a new PR strategy and/or a new pitchman. For the TV interviews he’s excellent, because it’s short and focused. (More probing questions, less softball from questioners.)
- Carl Icahn is a great “back-of-the-envelope” investor. The vast majority of speculators in Herbalife are worse that back of the envelope; they followed him like lemmings. What a cruel twist it would be if he blew the stock out on his loyal band of followers.
- Not everything that is knowable is worth knowing in order to make a successful investment. But in this case, the Devil truly is in the detail, is very well concealed and at the same time pervasive.
Here’s my suggestion to Bill Ackman if there is a next presentation.
1. Consider finding or hiring someone else to deliver the presentation. Note: Mike Johnson is no longer in the media. The TV interviews you do are great because they are short and focus on the main points. Don’t hype.
2. Limit presentations to 30-45 minutes, cover “back of the envelope” and direct obsessive compulsive nut jobs like you and me to a website for the all-we-can-eat granular detail buffet. I will read everything, watch every video and even listen to audio in my car and on my phone every spare minute of the day.
3. If you’re going to use the boxing analogy for “Knock Out Blow”, use a simple “4 Punch Combination” (instead of 40 or 400) to deliver it, maybe as follows:
A. These are the Perpetrators
B. These are the Victims
C. This is the Scam and How They Do it (In a Nutshell)
D. This is What It Means for Herbalife
Having wrapped up 30-45 minutes at that point, remind people they can get granular detail from the website. Then open for questions.
Close if you want by delivering any personal message you want so people know you are dead serious and tenacious like nobody’s business, possibly driving it home as follows:
1. If you are a Top Recruiting Distributor, Executive or Board Member: you are or might be going to jail and have personal liability/exposure. Think seriously about how to mitigate that exposure a la Prisoners Dilemma.
2. If you are any other employee: do the right thing.
3. To Regulators: get off your butt and do something! Millions of the most vulnerable people have been and are now getting hosed in a carefully planned and executed scheme specifically targeted at them. It is glaringly obvious. It is horrifying that nothing is being done about it. You are the only people who can stop it. Is this going to be another case of large scale multi-billion dollar fraud right in front of you, with a whistle blower screaming at you and you only do something after the fact?
A large problem with markets today is general investor short-termism and infotainment masquerading as news. The overwhelming majority of investors (we should really call them speculators) keep score by the short term stock price. Ben Graham said, “In the short term the market is a voting machine, in the long term it is a weighing machine.” Graham also said, “You are neither right nor wrong because people agree or disagree with you. You will be right if your facts and reasoning are correct.” I heard Seth Klarman once refer to value investing as the intersection of science and psychology, which i interpret as fundamentals and catalyst. Half of what Ray Dalio says I don’t understand, but the stuff about brutal Honesty and seeking what is True – when I first read that, it resonated so strongly I couldn’t contain myself. Some people read the Bible seeking Spiritual guidance and Truth, myself included. When it comes to investments, I keep all of these and more such “Value Investing” Principles, Books, Quotes, etc. handy, and I refer to them often for value investing truth.
If one is scoring Herbalife by any other measure but the stock price, this is enormously skewed against Herbalife – with one caveat – timing. I could care less if the stock bounces around, except if I can unemotionally exploit it somehow. It has little bearing on what action the government will take or not take. And having no risk of a margin call because I out long dated puts, I either wind up in or out of the money. The TV infotainment interviewers ask “day trader” questions of a “long term fundamental value investors” (Ackman) and they’re confused by the disconnect. It is unfortunate, when they could be asking much more informed, intelligent and probing questions – of both sides.
The Bill Ackman camp must feel like Harry Markopolos did, armed with a mountain of evidence (far more than Markopolos had) and no one seems to care. In fact, the more evidence he/they present the more the stock price goes up, seemingly invalidating his thesis with a consensus “vote”, which must be enormously frustrating (most likely not for him, but likely for many on his team who lack his tenacity. Having moral tenacity in a amoral or morally slothful world is quite an interesting experience. Knowing right from wrong, willing to do or speak Truth about it, particularly when other human beings are deeply harmed by it, is a duty and obligation of every human being in a just society.
Ackman is exceptionally detail oriented. I’m like that too. When I get onto a project, I’m like a pit bull. When I know or believe I’m right, and if you stand still long enough, I’m going to tell you about it in granular detail – you might even fall asleep. If you walk away, I’m probably going to follow you and keep talking. That’s just how I’m wired. I know it irritates many people and I’m trying to work on that. (I’m also open to the idea I might be wrong, although many don’t perceive it that way.)
I go on and on and on about incredibly minute detail to investors, friends and family. When I get really honest with myself, I have to accept that they don’t enjoy it and could care less, although they sometimes patient and listen. Why? They only tolerate it because I make them money, they’re really good friends or one of them gave birth to me. For me, it’s like oxygen. I don’t know any other way. It’s not that I’m the possessor of the sole Truth. I don’t believe Ackman thinks he has a monopoly on Truth regarding Herbalife, either. I believe he wants everyone to seek the Truth as diligently as he does. Rip apart his thesis if you like, with as much rigor and tenacity, just don’t bring any “back of the envelope” arguments that carry little weight or substance, rely on others opinions or some other intellectually lazy analysis. I’m far from the smartest guy, but I compensate by spending three times the number of hours. If I don’t get to sleep, so be it. The point is: I know an incredible amount about very few things. Unfortunately, the vast majority of people simply don’t care to know that much about anything. I have to keep saying those words over and over again to myself. It irritates me. Slowly, I’m learning to deal with it.
George Bernard Shaw said, “2% of people think. 3% of people think they think. And 95% of people would rather die than think.” And before readers start commenting or rolling their eyes, I recognize that I presume I’m in the 2%. I work very hard attempting to earn it and I believe it requires an unwavering commitment to seeking Truth, in all things.