Club 100 and Universidad del Exito Were Born in Latin America. That Should Surprise No One.

Latin Americans have elevated preying upon their own poor people to an art form. The fact that Club 100 and Universidad del Exito were born in LatAm should surprise no one.   (Africa is pretty good at it too. Sociologists may link this to colonized continents with populations long familiar with being beaten down.)

“Paco” is the sludge base leftover from cocaine processing, laden with toxic chemicals, causing a crack-like addictive high. Some sinister SOB’s decided to take it to a whole new level. Instead of dumping this waste in the Amazon, they sell it to poor kids in cocaine trafficking countries for $2 in single servings. Just like Club 100 or Universidad del Exito conscripted “daily consumption, it’s more accessible. They want to export paco to the U.S., but can’t get the transport costs to work for this “dirt-poor crack”.

37,000 Clubs in LatAm, but I don’t hear anyone saying, that’s in addition to OmniLife (formerly Omnitrition) the $4B Mexico-based pyramid scheme with a pay plan nearly identical to Herbalife and owned by former Herbalife top Mexican recruiter Jorge Vergara (who was recruited by Mark Hughes and John Peterson, the deceased husband of #1 Herbalife Distributor Susan Peterson). In 1989, having cracked open the Mexican market for Herbalife, Vergara decided he wanted to be distributor Numero Uno in his own pyramid scheme. He’s now a multi-billionaire and owner of multiple soccer clubs, which no doubt helps promote his scheme.

I’ve wondered about this:  LatAm is modern in many ways, but primitive in many others.  And certain countries may be be turning the corner.  But machine gun toting intruders have been known to venture into busy commercial city centers to hold businessmen hostage for ransom in their offices (I know this by first hand account of my friends). Here’s the thing I’m curious about… Club 100 and U del Exito operate 37,000 rackets throughout LatAm – many on the gun toting thugs’ home turf – but we never hear of a Club 100 or U del Exito shakedown? They suck nearly $1 Billion out of those neighborhoods and “the competition” doesn’t do a thing about it?

Here’s an observation: When a new crew starts running rackets in the neighborhood, the boss of the neighborhood sends a messagenger to let them know they admire their crafty work, but they have a new boss and partner; and if they resist, they will be learning to walk again or pushing up daisies.

Here’s another observation: When the leader of that crew gets whacked, a company or trust for the young children ordinarily wouldn’t inherit a claim to the residual profits from the racket. The guy who ordered the hit would. Eduardo Salazar comes out of nowhere and gives birth to a pretty clever scam, he gets whacked at the height of its success in 2004 by a guy with ties to the Beltran Leyva cartel, and a corporation takes over Salazar’s rackets (I mean downline), the operation continues to grow like a weed and (with the exception of the government wanting a cut, too, through taxes) the scam spreads uninterrupted.

While the above is worth thinking about, it could just as likely be nothing at all. If it were true, then wouldn’t we also see rival cartels trying to muscle in on the action? I suppose they would be, but we don’t see that either.  Maybe they have a piece of another racket.  There is an awful lot of cash running through those rackets. Rival criminals typically don’t ignore that. Maybe there is something we don’t know or we’re missing. Then again, maybe not.  Maybe the thugs just love their shakes too.  (Do they make a cash flavored shake? I bet they’d love that.)

With respect to the economic fate of Herbalife, I believe it is important to note that Herbalife doesn’t control Club 100 or U del Exito. Jorge Ruiz, an individual top recruiter, trademarked them in Mexico. I wouldn’t be surprised if Ruiz has a large family in Mexico, just to make sure he doesn’t get too full of himself. I suspect that mega cash machine that is Club 100 and U del Exito et al. will never be subjected to the jurisdiction of the U.S. government; the same way Vergara and Omnitrition (renamed OmniLife) was never subjected to U.S. jurisdiction.  (I don’t suspect we will be expatriating pyramid scheme operators any time soon.)  If or when the U.S. regulators engage Herbalife in a way that will materially restrict/restrain LatAm distributors, I predict Club 100 and U del Exito will break away in LatAm and wherever else they see fit.  Herbalife may be no more, but Club 100 and U del Exito will live on.   This pyramid scheme is no different – greed will be the driving factor.

The same freedom from U.S. jurisdiction does not apply to Herbalife, however, even though it is based in Cayman. Many supporters of Herbalife have suggested they could just cut off the U.S. operation, which is about 20% of revenue, and continue to operate unimpeded worldwide. In the May 1996 Fortuna case, the FTC called upon the DOJ, Office of Foreign Litigation to obtained a court order in Antigua, West Indies and all other foreign jurisdictions world-wide freezing company funds. The owners of the company were US citizens and held in contempt of court and separate arrest warrants were issued until the funds were returned to the United States. Fortuna operated in 60 countries. That may (or should) be another reason why the DOJ is involved with Herbalife.

Michael Johnson convinced Top Recruiters to stop selling Internet Leads and Tools Scams because the risk to Herbalife was great and he perceived less risk with Nutrition Clubs. Tools were a multi-hundred million dollar per year business for Top Recruiters. Johnson convinced then to instead… roll out Nutrition Clubs around the globe, because they are clever and well disguised; they won’t have to deal with the civil RICO lawsuits (HLF was getting sued, settling and attracting increasing risk and attention), we can “prove we have retail sales” (finally get out from under the pyramid scheme allegation) and we won’t go to prison!

But it is becoming more and more difficult to do business as a Top Recruiter for Herbalife. Michael Johnson can spin it any way he wants. The truth is the truth. Return policy, check. China, check. Tool scams, check. Nutrition Clubs, check.

We heard Des Walsh on the most recent earning call refer to the need for more Extravaganzas.  That is where the scam begins, when Top Recruiters (1,050 or so Founder’s Chairman’s and President’s Team) work their magic to get an average of 250 Supervisors each per year – or 250,000 total per year.  Those 250,000 in turn need to directly or indirectly sign up an average of 10 new members each.  That is basically how the math works (whether I have the numbers exactly right or not.  I wrote about that in here.)  If there is a breakdown at the top, it ripples all the way through and is magnified.

The Club scam is now out in the sunlight and if that cash flow gets cut off from Top Recruiters, too, things should get very interesting. Top Recruiters will not take kindly to this lifestyle change when they are used to $10M running big rackets. Shutting down Tool scams put a dent in their income. They’ve been in the spotlight for 2 years. Criminals don’t like the spotlight. It’s bad for business.

Soon enough, we will be talking about Herbalife in the past tense and society will be far better off. Those who enjoy a healthy shake have plenty of alternatives, sans the pyramid scheme and related frauds.

In the Mafia, when the Made Guys can’t earn, it’s a real problem. The Family comes apart at the seams.  They start whacking each other.  I don’t think that will happen at Herbalife, but it will be interesting to see who flips first, who quits and goes to another Family.  By definition Management and Top Recruiters are among the most selfish and self centered, egotistical people on the planet.  As this drags on, they will increasingly act greedy and selfish.  Count on it.

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