In an email sent to investors, Whitney Tilson discusses Avon Products, Inc. (NYSE:AVP)’s membership withdrawal from the Direct Selling Association and its implication on Herbalife Ltd. (NYSE:HLF) and Ultrasonic AG (ETR:US5)’s fraud, as we earlier noted would one day be a case study.

As promised in my last email, attached is an updated version of the presentation I gave at the Value Investing Congress last week entitled Lessons From a Dozen Years of Short Selling (it’s also posted at: www.tilsonfunds.com/Shorting.pdf). In it, after sharing some lessons, I updated my analysis of two very successful (but still attractive) short positions, K12 and Lumber Liquidators, and presented one of my current favorite shorts, EXACT Sciences Corporation (NASDAQ:EXAS).

Lumber Liquidators LL Tesla Whitney Tilson K12 Questcor Pharmaceuticals QCOR
Whitney Tilson picture courtesy of Kase Capital

Whitney Tilson: Avon withdraws its membership in the Direct Selling Association

Avon Products, Inc. (NYSE:AVP) issued a press release Friday that it has withdrawn its membership in the Direct Selling Association, following Tupperware Brands Corporation (NYSE:TUP), which did so a year ago. It’s clear that AVP and TUP are trying to distance themselves from scummy and likely illegal multi-level marketers like Herbalife Ltd. (NYSE:HLF), USANA Health Sciences, Inc. (NYSE:USNA) and Nu Skin Enterprises, Inc. (NYSE:NUS). Avon’s letter of resignation cited “three major aspects of our business model that we believe further safeguard our Representatives and consumers.” All three aspects contrast markedly with HLF’s model and consequently leave the impression that Avon is acting with a sense of urgency to distance itself from HLF and similar operations. Those “three major aspects” are [with my comments in brackets re. the difference with HLF]:

  1. The Avon business model does not rely on nor does it encourage sales of inventory, training or business support materials between Representatives. [In the world of HLF all of the above are common practice as the senior distributors prey on the members at the bottom of the pyramid.]
  1. Avon has reasonable return policies. [Although HLF recently adopted (in response to Ackman’s charges) a “Gold Standard” return policy, which has considerably improved the plight of the low-end distributor stuck with inventory, HLF still employs usurious shipping and handling charges as well as a maze of forms that no one would categorize as “reasonable.”]
  1. Avon limits earnings to three generations. [Strike three for HLF, which employs the infinite chain of recruitment rewards in its pyramid structure. If HLF adopted a three-generation limit, the model would implode.]

Whitney Tilson – Here’s Herb Greenberg’s take on this (his full article is below):

Reality: If the entire industry operated with a sharply limited downline, using the Avon model, the business models for most multi-level marketers would go through a hard reset. Much of the unlimited model is based on downlines of distributors that purchase product from the company, kicking shared profits up the line. It’s unclear if Avon is trying to put a bug in the ear of the FTC, especially if the FTC (as a result of its Herbalife probe) decides to create new rules for the multi-level marketing industry. If so, it’s a brilliant move, especially if the FTC ultimately decides not to formally go after Herbalife, but instead gives the industry a new set of rules to live by.

Whitney Tilson: One of the more brazen China frauds I’ve ever seen:

This is an actual headline from a company press release: “CEO and COO disappeared, most of the company’s cash missing.” (Via FastFT)

In a statement, German-based shoe company Ultrasonic said its CFO, Chi Kwong Clifford Chan, has been unable to reach the company’s CEO, Qingyong Wu, and COO, Minghong Wu, who apparently left their homes and are untraceable.

Chan also said most of the company’s cash funds have been transferred and are no longer “in the company’s range of influence.”

So basically the money’s gone.

Shares of Ultrasonic AG (ETR:US5) trading on the Frankfurt Stock Exchange were down as much as 76% on Tuesday.

I continue to believe that China is almost uninvestable due to widespread fraud like this, little rule of law, etc., but I do think Alibaba is real – and own it through Softbank.