Herbalife Ltd. (HLF): FTC in Fortune Hi-Tech Case Defines “Sale”

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Herbalife Ltd. (HLF): FTC in Fortune Hi-Tech Case Defines “Sale”
By Herbalife International of America, Inc. (http://www.herbalife.com) [CC BY-SA 4.0], via Wikimedia Commons

Herbalife Ltd. (HLF): FTC in Fortune Hi-Tech Case Defines “Sale”

From the FTC filing:

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“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.

Additionally:

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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

 

Via: valueplays

Updated on

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.
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25 COMMENTS

  1. Well I’m not a Global Joke and can say the figures of customers verses distributors is accounted for as Global has stated. I see it every time I’ve gone to my center in West Los Angeles. They come in at the boat loads to the center, beach, parks and streets cleaning gatherings. This is bigger than marketing, it has become a family of a sort that reaches out to the community and makes sales last and health important. You have to figure if this was a marketing gimmick then where’s the collection plate like church at. I don’t ever have to pay to exercise with the group, I can workout and choose whether I want a shake, tea or nothing at all. I’m in process of wanting to be a distributor because the product and people works. The mind state alone helps you lose the weight and to actually make a few dollars back (no out of greed) but because they give you an opportunity to become a team member is great and allows you to reach out to others in need that are skeptical in their health nutrition system.

  2. 11,000 comedians out of work and we get tex2… and his self proclaimed LOL’s

    In your article you mention it says…. South Omaha had more Herbalife clubs a year ago, said neighbors, but their operators gave up waiting for a profit.

    Typical.. here in lies my point. When you own a business you don’t sit around waiting for a profit. Only fools do that! You go to work and make things happen because if you sit around and WAIT for a profit it isn’t showing up in this or ANY other business. The real reason 8 out of 10 businesses fail in 18 months http://www.forbes.com/fdc/welcome_mjx.shtml

    I believe people underestimate the amount of work it will take to succeed at any business! If I opened my doors and waited for a profit I would go broke too! You don’t site around waiting for profits they don’t show up. The people that do the work… get the pay. I knew you had to be a failed distributor of something to be seething all this vile hatred toward the industry…. Thanks for tying it all together.

    You keep trying to blame these companies for people who are making poor business decisions and somehow claim to go broke. How do you lose money when you can return the start up kit AND the products for a full money back guarantee? Seriously?

    I buy a kit for $70 and take one of these loans for $1500 and put it into products. Now according to your article you quote i sit around waiting for a profit. Hmmm… Doing that plan does’t seem to work so well… People don’t just start beating my door down for them so I can now return it for my money back… I didn’t go broke or go to work to sell it now I made a profit.

    Look at some point personal responsibility and reason have to come into play with all this…

    Something I found on another board and I quote….

    …”meanwhile back at the ranch THE STOCK IS UP THIS MONTH…..bill stiritz, carl Icahn, George soros and several other billionaires who are long the stock and selling puts have done their own investigation…this group of billionaires have a lot better investigators, lawyers, and analysts than the government could ever hire.. do you think Icahn would have put so many on the hlf board if he had not done a thorough investigation…DUE DILIGENCE..it is what these billionaires do and they do it very well, ackman on the other hand NOT SO MUCH I use j c penny , target. and now hlf as my examples…these billionaires just keep selling puts and the puts just keep expiring worthless.. and once these investigations end and hlf gets a fine and a slap on the wrist the stock goes to 100 bucks a share and all the shorts will be SQUEEEEEZED like volkswagon was..this is going to make a great movie once it is over….one more thing…only 18 percent of hlf sales are in the united states so WHAT IS THE WORST POSSIBLE OUTCOME?? they lose 18 percent of there sales…IT IS NOT POSSIBLE FOR IT TO GO TO ZERO…

    The shorts don’t think that HLF is a pyramid scheme they “HOPE” that it is.

    Name us a MLM company that was found to be a pyramid scheme by the FTC that had:

    1) No inventory loading*

    2) No recruiting payment

    3) Excellent Return Policy**

    4) Commissions paid related to product sales only

    5) Good customer service. Small # of complaints

    * Members can become supervisors over a 12 month period. Monthly purchases are cumulative until 5k volume is reached.

    ** HLF Gold Standrad

    http://bit.ly/1phPHDh

    Member can return products for a full refund within 1 year of purchase, Free shipping both ways. Introduced in 2012 and in current Q1 2013 HLF has the lowest product return in history 0.2%”

    Tex2 i am done we just have to agree to disagree. We have two totally different visions in life and that’s just how it is…. I gotta get back to work because you have proven your point very well that sitting around waiting for profits just doesn’t work.

  3. How do you know this is true of the nutrition clubs in general, perhaps you visited some unusual examples? Besides, you’re a Global Joke. LOL

    We don’t even know if you’re lying, and didn’t visit any nutrition clubs. LOL

    The other question is whether these clubs make any net profit before they go broke. Although not illegal, this would show the nutrition club approach sucks. LOL

    I apparently missed this story when it came out: http://online.barrons.com/news/articles/SB50001424053111904370004577390241476503930#articleTabs_article=1 LOL

    If this was true, HLF could have proven it over 2 YEARS ago – Why haven’t they? LOL

    Keep in mind there is a second major approach, the “lead generation” angle, and people who were financially raped by this approach were shown in Ackman’s recent videos. LOL

    I know what “amazing” means, I was in Amway. In this context, it means chalky. LOL

  4. Sorry Tex2 but you are just flat our wrong on this retail issue. The nutrition clubs have few distributors and loads of customers who are not distributors coming in every day. Just the opposite of your fairy tail. My curiosity in this has lead me to personally visit these so called nutrition clubs now and they have loads of “customers” coming in who tell me they are not part of selling herbalife or even singed up for a discount with the company. Every club I went to was loaded with “customers” who told me they come in nearly every day for their aloe tea and shake. Very smart idea actually. Your facts are simply wrong and that’s just a fact! You will NEVER convince me this company has “few” customers after what I have seen. If they truly have over 90,000 of these clubs around the world this company has more customers than they can count and those shakes taste amazing by the way! Now drift back into your fairy tale coma and keep telling your tales.

  5. meanwhile back at the ranch THE STOCK IS UP THIS MONTH…..bill stiritz, carl Icahn, George soros and several other billionaires who are long the stock and selling puts have done their own investigation…this group of billionaires have a lot better investigators, lawyers, and analysts than the government could ever hire.. do you think Icahn would have put so many on the hlf board if he had not done a thorough investigation…DUE DILIGENCE..it is what these billionaires do and they do it very well, ackman on the other hand NOT SO MUCH I use j c penny , target. and now hlf as my examples…these billionaires just keep selling puts and the puts just keep expiring worthless.. and once these investigations end and hlf gets a fine and a slap on the wrist the stock goes to 100 bucks a share and all the shorts will be SQUEEEEEZED like volkswagon was..this is going to make a great movie once it is over….one more thing…only 18 percent of hlf sales are in the united states so WHAT IS THE WORST POSSIBLE OUTCOME?? they lose 18 percent of there sales…IT IS NOT POSSIBLE FOR IT TO GO TO ZERO…

  6. Amy is a liar. I tried to report Amway’s tool scam to the DSA, and Amy was the main point of contact in the discussion. We had a conference call, the DSA asked me to send them detailed information, which I did, and after prodding them for not responding after 2-3 weeks, they sent back a meaningless form letter. The DSA is merely a lobbyist for the MLM scam industry. Amy is talking about the unusual cases in her response, and totally ignores the vast majority of the cases where people are being ripped off. But what would one expect from somebody who gets PAID by the MLM companies? If you want the FACTS regarding MLM companies that rip people off, see my blog: http://www.stoptheamwaytoolscam.wordpress.com

  7. It is unfortunate that articles like this one misrepresent many aspects of direct selling, thus providing a convenient tool for those who do not understand (or purposely ignore) how direct selling works for a majority of participants.

    First, the text of this article omits an important sentence from the quote in the FHTM order that defines the sale of products or services to ultimate users: “This definition is limited to this particular case and is consistent with past orders of this nature.” This clarification is key as, in general, sales of products or services to participants in the plan, either for their own use or for resale, are perfectly legitimate. It is in cases where there has been demonstrated abuse that the FTC might make this stipulation.

    Further, and despite the author’s attempts to convince the reader he is tipping the numbers away from the point he is making, the truth is one cannot assume to know the motivations of anyone in direct selling because they vary widely – and may even vary over time for any one person. Additionally, asserting that individuals who join a direct selling company have “lost money” merely by signing up is misleading (and just plain inaccurate) because many people sign up with the intent of solely being a self-consumer – or they may just want to get the products in the kit for a reduced price! Those individuals would say they have SAVED money by signing up. It is also incorrect to assume that those with a downline are being defrauded if they are not receiving significant payments from the company. “Having a downline” can be as simple as one person who signed up as a distributor to receive products at a discount. This person may or may not continue to be active, and the original seller may not ever try to recruit another person, but remain a perfectly content self-consumer – yet according to company records, this person “has a downline.” There are myriad reasons why people may not receive significant payments from the company, and most of them have nothing to do with being defrauded or even being unhappy with their experience. And don’t forget that many of those sellers are likely reselling product and keeping the retail profit – income that is not reflected in a company’s income disclosure.

    It would be much more productive to recognize that one size does not fit all in direct selling and the focus should be on where harm has actually occurred and ways to curb that behavior instead of assuming people have been harmed just because the potential for such exists.

  8. There is no lack of retail sales in Herbalife. They have tens of thousands of nutrition clubs that are ALL retail. I highly doubt there is a MLM with more customers than Herbalife.

    First source is 8 out of 10 business fail in 18 months. I will find the second that caries it out to 3 years if you provide me some proof.

    http://www.forbes.com/sites/ericwagner/2013/09/12/five-reasons-8-out-of-10-businesses-fail/

    Now can you provide some proof they have “complete lack of retail sales” Not your opinion but some proof.

    I would love to see that!

  9. Did you not see the victims telling their stories and being interviewed by Ackman’s team? Why are you focusing on Nevada, we have the FTC, SEC, DOJ, FBI, at least 2 state AGs investigating, and the FDA will probably join them soon. Nevada? Are you SERIOUS? LOL

  10. Yes Tex, HLF has ripped off millions. Is that why the AG of Nevada refused to do an investigation on HLF – until she was presented victims?
    Where your link to proof – no link? no truth!

  11. The numbers you are using are gross profits, the net profit picture is MUCH worse.

    Can you provide the source of your 97% figure?

    You only get the product cost back, not any of the other costs. As the former HLF distributors said on stage recently, the products are a small percentage of the overall losses. There are also time limits on getting the product cost back.

    HLF is responsible for the distributor behavior, the courts have always determined this to be true for other MLMs. It’s not just a couple of “sideways players,” it the almost complete lack of retail sales resulting in an illegal pyramid and lead generation RICO frauds.

    Come on people – PILE ON!

    Think again – Ackman won’t be sued, HLF would open themselves up to discovery that they don’t want to do.

  12. This article states….. ‘Now, if we compare these numbers to Herbalife Ltd. (NYSE:HLF), we find that 73% of HLF distributors make < $300 per year and 90% are paid <$2,200 per year which does not cover the startup costs of being a distributor (HLF 2013 numbers) .' The start up cost is $70 they make $300 to $2,200 how is that factually accurate? $70 – $300 is a profit of $230 on the low end?

    The Fact is some 97% of new business start ups are out of business within 3 years. Most business ventures fail. I'm not talking MLM here just normal business start ups. Most of those business failures take people's life savings with them. So why are we ripping on Herbalife over $70 investment and a higher percentage of success rate then the average start up and it's only $70 to get started?

    Some people have a hard time separating herbalife the manufacture from the independent distributor. The company does not market the product. The distributor does. So they had some bad distributors at least they cleaned them out. How is that different from your favorite sports team with a few bad apple players? Should the owners of the team be held liable for the actions of a couple sideways players? REALLY?

    Come on people lay off. The real scam here seems to be short selling a stock and releasing news to make it go down in the attempt to make millions. I would think Ackman could be sued for interference of business practices and a whole litany of other things….

  13. Sure they banned it, but what about the previous 33 YEARS of abuse? Less than 1% of Amway distributors “employ” the Amway Tool Scam, because the other 99% are the victims of their abuse.

    Having “programs” isn’t what matters, it’s the VOLUME of customer purchases that counts.

    HLF has ripped off millions!

  14. HLF banned the lead generation system over a year ago. Less than 1% of distributors employed that system. HLF has BEAT earnings for 21 straight quarters!!!

    HLF distributors use these methods to grow customers & business:
    – Wellness Evaluations/Profiles
    – Tanita Body Composition Analysis
    – Weight Loss Challenges
    – Nutrition Clubs
    – Fit Clubs / Herbalife Active
    – Wellness Centers
    – Level 10 Body Transformation Challenges
    – Wellness Wednesdays
    – Total Plan Presentations

    HLF has helped millions to look and feel better!
    HLF has helped millions to better nutrition while saving money!

  15. Two major differences between HLF and FHTM are —
    a) Little to no retail sales by most distributors, which makes them illegal pyramids.
    b) The “lead generation” tool scam businesses are RICO frauds. I don’t know how big the tool scam was in FHTM, but HLF can be “favorably” compared to Amway, the world’s largest MLM scam, in this regard.

  16. To the author: Can you tell us why royalties are better than commissions and salary?
    You mentioned the # of members earning over 100k/year – which is in royalties!
    How many member will earn 25k to 99k/ year in royalties?
    Let us know your response and I will share my answer on why royalties are better than commissions – thanks

  17. Two major difference between HLF & FHTM are —
    a) HLF distributors make ZERO money in recruiting others. Anyone signing
    up as member has 90 days to return the starter kit for a full refund (around
    $100). The kit includes around $100 of products and samples plus dvd’s,
    complete business information and a coach to orientate and assist new
    person. Note: products and the kit do NOT needed to be sent back to HLF to receive a
    full refund.

    b) All members that purchase products have a full year to return
    products to HLF, free of shipping charges, to receive full refund of their investment. This generous product return policy is the best in the industry
    and since introduced last year…HLF reported Q1 to have the lowest
    product return in their history – 0.2%

  18. FTHM was NOT a member of the DSA – where $HLF is good long standing member.
    From an article Jan. 29, 2013 –
    FHTM had applied for DSA membership, but withdrew its application in
    2011. A rigorous review of each applicant’s marketing and compensation
    plan is conducted to ensure compliance with DSA’s self-regulatory Code
    of Ethics. DSA works with applicant companies to address any
    deficiencies in policies and procedures prior to recommending to the
    Board of Directors that the company be approved for full membership.
    Mr. Mariano explained that “the membership review process serves to
    identify pyramid schemes that are masquerading as legitimate direct
    selling companies.” Mr. Mariano also stated “that well over half of the
    companies that apply for membership in the Association withdraw their
    applications for a variety of reasons including failure to come into
    full compliance with the requirements of the DSA Code of Ethics,” thus
    making the company ineligible for membership. Pyramid schemes and other
    fraudulent scams are ineligible for DSA membership.

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