The Securities and Exchange Commission is pressing charges against an alleged pyramid scheme that targeted Asian and Latino communities with misleading promises, but anyone who is shorting Herbalife Ltd. (NYSE:HLF) along with Pershing Square founder Bill Ackman shouldn’t get their hopes up just yet.
WCM, WCM777 used cash for other investments: SEC
The SEC alleges that the companies WCM and WCM777, controlled by California resident ‘Phil’ Ming Xu, posed as legitimate multi-level marketing businesses but were actually just Ponzi schemes using investors’ cash to hide the fact that there was never a real business model. The SEC says money was spent on stocks, real estate, and other investments.
“Xu and his entities claimed they were using investor funds to build a strong cloud services company that would then ignite other high-tech companies and ultimately make their investors very wealthy,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office in a press release. “In reality, they were operating a pyramid scheme that preyed on investors in particular ethnic communities, leaving them with nothing left to show for their investment.”
The targeting of ethnic minorities and promising riches but leaving people worse off than when they started echo Ackman’s and others’ allegations against Herbalife Ltd. (NYSE:HLF), which the company’s defenders dispute, and there is speculation about what this case could mean for the Herbalife Ltd. (NYSE:HLF) probe. But there are too many significant differences between the two different cases to draw any real parallels.
Clear distinctions between Herbalife, WCM
The FTC probe into Herbalife Ltd. (NYSE:HLF) isn’t even close to resolved, and trying to divine what one regulator might do tomorrow based on what a different regulator did yesterday is already pretty weak reasoning.
But the bigger distinction, and the reason why Herbalife Ltd. (NYSE:HLF) has defenders in the first place, is that it has actual products to sell. If the allegations against WCM and WCM777 are true, then they were just pocketing investors’ cash instead of developing the cloud platform they were promoting. No one denies that Herbalife has actual products for sale.
The big questions surrounding Herbalife Ltd. (NYSE:HLF) are whether distributors primarily make money from selling or from recruiting, and whether the health food products are a legitimate business model or just a cover for a pyramid scheme. We won’t hear the FTC’s opinion for quite a while, and when a flagrant Ponzi scheme gets taken down by the SEC it just doesn’t tell us that much.