Herbalife And The MLM Industry: Questions Of Veracity by William Keep

Summary

1) The FTC says Herbalife “actions cause or are likely to cause substantial injury to consumers.”

2) Herbalife says, “many of the allegations made by the FTC are factually incorrect.”

3) Direct Selling Association says the settlement “will serve to answer questions and misunderstandings about the direct selling business model.”

But 1) + 2) ? 3).

Veracity means: conformity to facts, accuracy, and habitual truthfulness.

The FTC complaint against and settlement with Herbalife (NYSE:HLF) is clear, specific, and replete with examples. Confident in its ability to “move forward successfully,” Herbalife presumably negotiated the best deal possible. But soon afterward Herbalife claimed that many FTC allegations are “factually incorrect.”

In claiming that many – not some but many – FTC allegations are factually incorrect, does Herbalife seek to ease investor or distributor concerns (i.e., it isn’t as bad as the FTC complaint suggests)? I argue that Herbalife’s statement actually makes investors and distributors risk opaque because there are factually incorrect allegations and there are FACTUALLY INCORRECT ALLEGATIONS.

For example, according to the FTC complaint, “89% of those newly-recruited [Herbalife] Distributors, however, simply replaced U.S. Distributors who left that same year.” If Herbalife believes this to be “factually incorrect” because their analysis shows the correct measure to be 84% instead of 89%, then the difference would be of little interest. However, what if Herbalife claims the correct number is 34%? Or, consider these statements: FTC – “Defendants Do Not Offer a Viable Retail-Based Business Opportunity” and “Herbalife is going to have to start operating legitimately”; and Herbalife – “our business model is sound” and “Herbalife has evolved some of its policies and practices over the past decade to ensure that its customers and more that 4 million preferred member and independent distributors have the best experience possible.” How can investors reconcile these statements and what are the implied risks?

Potential recruits and consumers also have something at stake. Should they buy product and/or pursue the business opportunity or not? If Herbalife does not currently offer a viable retail-based business opportunity but must now develop one, how long will that take and what are the risks to distributors? Does Herbalife agree with the FTC that up to this point they offered no viable retail-based business opportunity? If not, why not? Where is their factual evidence?

And what about marketing material and promotional statements made by Herbalife representatives? The FTC says, “Defendants’ Promotional and Marketing Activities Are Misleading” Earlier Herbalife claimed, “studies have revealed that the vast majority of Herbalife members have realistic expectations of the business opportunity and the effort required to succeed at all levels.” Is the FTC’s allegation here correct or not? Who did the Herbalife survey and why isn’t it public if they want to make their case? What should potential recruits and customers think about FTC allegations and Herbalife counter claims? Investors, distributors and consumers could benefit from a more clear statement from Herbalife regarding which FTC allegations they believe to be factually incorrect and why. Or, will we have to wait for some future settlement like Nu Skin (NYSE:NUS) entered into, paying out $47M to investors?

The DSA press release, filled with ambiguity, claims to see only clarity. How in the world does a settlement where one of the signatories questions the allegations and underlying facts, “serve to answer questions and misunderstanding”? What questions and misunderstandings have been answered? Is the question of sales to non-distributors answered? Or, is the DSA sticking with its previous position that retail sales need not involve sales to non-distributors?

According to the DSA, the MLM industry (we should call it what it is) has a “special place in the American economy” with “over 16 percent of American households had someone involved with direct selling,” and that “direct sellers have always recognized our unique obligations to our customers and salespeople.” When the FTC found that Herbalife, one of the largest MLM companies in the world and a leading member of the DSA, failed to offer a viable retail-based business opportunity and engaged in misleading marketing, exactly what unique obligation is the DSA talking about?

With the Herbalife settlement and Vemma, an award-winning member of the DSA, accused by the FTC of operating a pyramid scheme, how can the DSA defend “the principles and requirements of DSA’s self-regulatory Code of Ethics for all DSA members”? Last fall I: a) criticized the DSA for giving an award to Vemma for its ethics – DSA President Mariano denied ethics played a role while his own words affirmed otherwise (the Ethos Award has been discontinued); and b) that a former member of the DSA General Council team and a member of its Hall of Fame advised Fortune Hi-Tech Marketing, a pyramid scheme closed by the FTC – DSA President Mariano denied the connection yet multiple pieces of evidence confirm it. Importantly, Mariano accused me of having a “blatant disregard for the facts” when, actually, it was he who issued vacuous statements that lacked support. That pattern continues. It now seems fair to ask: What is the DSA actually selling? And, who is buying?

Unsupported and less-than-truthful-statements can be found in other areas, including: sellers of sunscreen, our largest retailer, a major automobile manufacturer, and even youth sports. All of which ask how much veracity should we reasonably expect from a company, an industry, a non-profit trade association, or the government. Given the FTC settlement with Herbalife it is safe to say that we have a ways to go.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Herbalife Ltd. HLF

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