Herbalife Ltd. (HLF): FTC in Fortune Hi-Tech Case Defines “Sale”
From the FTC filing:
“Prohibited Marketing Program” means any marketing program or plan in which any participant pays money or valuable consideration in return for which the participant receives the right to receive rewards in return for recruiting other participants into the program or plan, which are unrelated to the sales of products or services to ultimate users. For the purposes of this definition, “sale of products or services to ultimate users” does not include sales to other participants or recruits or to the participants’ own accounts.
The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More
IT IS FURTHER ORDERED that Defendants, Defendants’ officers, agents, servants, employees, and all other persons in active concert or participation with any of them, who receive actual notice of this Order, whether acting directly or indirectly, in connection with the advertising, marketing, promotion, offering for sale, or sale of any product, service, plan, or program, are hereby restrained and enjoined from misrepresenting, or assisting others in misrepresenting, including by providing others with the means and instrumentalities with which to misrepresent, expressly or by implication:
1. The amount of sales, income, or profits that a consumer can reasonably expect to achieve;
2. The amount of sales, income, or profits that participating consumers have actually achieved;
3. That consumers can reasonably expect to recoup their investment;
4. That all or most of the people who fail to make significant income failed to devote substantial or sufficient effort;
5. That consumers will or are likely to receive substantial income; and
6. Any other fact material to consumers concerning any product, service, plan, or program, such as: the total costs; any material restrictions, limitations, or conditions; or any material aspect of the performance, efficacy, nature, or central characteristics.
As for any potentially fraudulent income claims, simply go here and watch the videos from the “Chairman’s Club” (which includes members of the board of Directors)
What happened in the Hi-Tech MLM?
“For example, 98% of participants lost more money than they made and at least 88% didn’t even recoup their enrollment fees. To the extent people made any money, 81% of the payments to FHTM participants came from recruiting new members, not from sales.”
Now, if we compare these numbers to Herbalife Ltd. (NYSE:HLF), we find that 96% of HLF distributors make under $300 per year and 98.6% are paid under $2200 per year which does not cover the startup costs of being a distributor (HLF 2013 numbers) .
Further, 81% of Fortune payments were the result of recruiting, not sales, which deems it a pyramid scheme. Here is where the above REALLY matters. Self consumption by a distributor and/or their downline are NOT considered “sales” by the FTC. So, any payments by Herbalife Ltd. (NYSE:HLF) to the upline from those people are consider “recruiting payments” , not “sales commissions”.
If the % of those payments is far enough in excess of true outside sales (it is), BIG problem. Now, despite being required to, HLF claims they do not track outside sales vs self consumption. So, in effect they have no way to counter any FTC claim to the contrary. I am of the opinion the only reason one would not track something like this is because you do not want to know the answer as you know it isn’t the right one.
All told Herbalife Ltd. (NYSE:HLF) has 116,000 US distributors with downlines (2013 data) and 53* made “Presidents’ Club” ($100k income). Their service time ranged from 3yr to 31yrs with the company. We will assume everyone without a downline never wanted one (408,000 people). This a highly erroneous assumption but by doing it this way no one can accuse me of making assumptions purely to help the argument I am trying to make. If anything, doing it this way hurts my argument. Of those 116,000 we have ~50% churn rate (many estimates are far higher but again, I will error on the side of hurting my argument) meaning 58,000 fresh distributors (with downlines) try to make a go of this each year while the same number drop out. Over the course of the next three years that means 232,000 people will try to make a business out of Herbalife and 53, if they tie the fastest results ever will make $100,000 in a year. Using the company’s own numbers, the “average” length of time to that level is 9 years** meaning 580,000 people will come and go and only 53 of the original group will ever make over $100,000.
Of those 580,000 US people who go into this for the business opportunity over those 9 yrs, based on Herbalife Ltd. (NYSE:HLF)’s own numbers, 522,000 will never cover their costs……..
These numbers are awful and admittedly they are too rosy based on the assumptions I made. Even if we assume just 20% of the distributors w/o downlines (81,000) got into this for the business opportunity the above numbers get even worse really fast.
* the 53 number is in line with previous years results (2012 was 47)
** 9 year average is the same as disclosed in other years