Herbalife Ltd. (NYSE:HLF) may have been utilizing a lobbyist army to defend against claims made by Bill Ackman, but it’s nothing multi-level marketing companies like Herbalife aren’t already used to doing. The Verge‘s Matt Stroud explained in a lengthy article today exactly how lobbying has enabled MLM companies to convince regulators to look the other way, so to speak.
Herbalife fights proposed rule
He talks about a rule which the Federal Trade Commission proposed in 2006 and took effect in 2012. It was called the Business Opportunity Rule, and it required any sellers of to give potential customers a page explaining some facts about their company.
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For example, the sellers would have to reveal if it was being sued for fraud, explain its refund policies, tell how many people had bought from them the last two years, and say how many of them wanted a refund or canceled their order. The rule also required a list of references and documentation which supports income claims made by the seller.
Herbalife Ltd. (NYSE:HLF) significantly increased its spending on lobbying after the rule was proposed. The company donated money to both Republicans’ and Democrats’ campaigns. By 2008, Herbalife reportedly spent more than $800,000 on lobbying, while it had spent next to nothing on either lobbying or campaign contributions in 2002.
Of course Herbalife Ltd. (NYSE:HLF) wasn’t the only one. As a result of all that money spent, most MLMs received an exemption to the Business Opportunity Rule, which was aimed at work-from-home business opportunity sellers. MLMs basically didn’t want to be forced to provide documents supporting the income claims their distributors were making.
The problem with some MLMs
The Direct Selling Association notes that not all MLMs are exempt from the rule. However, a Wisconsin attorney who specializes in pyramid scheme cases told The Verge that “it’s close enough.” He said the big problem with MLMs like Herbalife Ltd. (NYSE:HLF) spending so much money on lobbying is that the stories of those who are taken advantage of get lost.
He said often it’s low income people who are just “mesmerized by how these very rich people get on the stage and claim they’re making millions by selling health shakes.” He said usually those who fall for those claims are “unsophisticated” in terms of business and “not very wealthy.” He said they’re also the ones who quit their jobs and max out their credit cards on the so-called “business opportunity.”
Herbalife case draws attention to MLMs
MLM critic Robert FitzPatrick told The Verge that until very recently, no one spent any money lobbying against MLMs. However, when Bill Ackman launched his campaign against Herbalife Ltd. (NYSE:HLF) in 2012, that started to change. Recently Herbalife disclosed that the FTC has launched an investigation of its business practices.
It would seem as if, after more than a year, Ackman finally got regulators to pay attention to what might be going on, in spite of all the lobbying aimed at getting regulators to ignore MLMs. Unfortunately though, FitzPatrick suggests that Ackman’s shot at prevailing in the battle is a long shot, comparing it to the battle between Edward Snowden and the National Security Agency.
Herbalife versus Ackman in the media
Some have suggested that Ackman is only trying to discredit Herbalife Ltd. (NYSE:HLF) so that he can make money on his firm’s short position. Some even accuse him of trying to “wield undue influence.”
However, The Verge leaves us with an interesting question from MLM expert Bill Keep, who said, “Suppose the worst of what people say about both Ackman and Herbalife are true—Ackman is targeting Herbalife simply for the financial return for his hedge fund, and Herbalife is operating a massive, international pyramid scheme. Which should worry us more?”
Keep noted also that whatever happens with the FTC’s investigation of Herbalife Ltd. (NYSE:HLF) is going to “send ripples” throughout the MLM industry. He said the agency could do anything from simply requiring the company to comply with the Business Opportunity to Rule, to clarifying MLM rules. He said regulators could even charge Herbalife with running a pyramid scheme.
If that last scenario happens, he said the result will be “more like a tsunami” than a ripple throughout the MLM industry.