Whitney Tilson in his email discusses Betting on Zero (a documentary about Herbalife) and how this pyramid scheme has not been shut down long ago.
Whitney Tilson – Betting On Zero (a documentary about Herbalife)
I saw Betting on Zero yesterday at the Tribeca Film Festival. The film does a good job of covering the entire Ackman vs. Herbalife/Icahn saga, but its real power is its coverage of victims – in particular, how their heartbreaking stories are in stark contrast with the extensive footage Betting on Zero shows of the endless promises of riches by the company and its agents.
I wasn’t shocked by anything I saw, but that’s not because it isn’t shocking – it is – but rather because I’ve been following the company closely (and been short its stock) for years. I’ve long been convinced that this is a pyramid scheme of epic, global proportions. But I think the average person, investor and regulator doesn’t fully understand this, so I hope as many people as possible see this documentary.
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So how has something that is so obviously a pyramid scheme not been shut down long ago? I addressed this question in an article I published in July 2014 (full text below), but in summary, I think there are a few answers:
1) Herbalife is very complex and very clever;
2) It (and the MLM industry in general) is very powerful and well-connected;
3) The laws and regulations governing this industry are unclear; and
4) Until quite recently, we’ve been in a multi-decade era of deregulation and emasculated regulators.
But I think the single biggest reason is that, while Herbalife is quite similar to outright frauds like Vemma and Burnlounge, it’s not the same because there is a legitimate business within the Herbalife pyramid scheme.
For example, a year ago I read this article about a dynamic young woman, Alicea Thomas, who was struggling to finish college and earn her degree so I contacted her and sent her some funds to buy a laptop computer (her computer had been stolen so she was trying to take online classes, write papers, etc. on her iPhone). When I met her, I learned that she sells Herbalife products – and my heart sank. “There goes my money, down the Herbalife rathole – how I ironic!,” I thought.
But Alicea has convinced me that what she’s doing is legitimate and profitable for her. She has no downline and isn’t trying to build one – rather, she sells the shakes to her many friends and family as part of a get-in-shape-and-lose-weight routine that includes regular pep talks, free group workouts she offers three times a week, etc. She posts motivational and inspirational things on Instagram almost daily – here are five examples:
Alicea promises any of her customers that if they buy a one-month starter package of Herbelife shake powder (for ~$180), if they’re not happy at the end of a month, she’ll personally refund their money. She tells me her customers (including her mother and father) have lost a lot of weight and gotten into much better shape – and she’s making nice supplemental income.
So, does Alicea’s (and her customers’) positive experience prove that Herbalife isn’t a pyramid scheme? Of course not. It is – but it’s a very clever one, wrapping itself in a thin veneer of legitimacy so that it can continue its predatory ways…
Below are two review of the documentary.
Here’s an excerpt from the first, by Robert FitzPatrick:
Opponents and whistle-blowers of any “blame the victim” racket such as Herbalife’s must first withstand the scheme’s most destructive force, which is greater even than its financial slaughter – manipulating the recruits into the debilitating belief that they themselves brought on their own failure and financial loss and that anyone who says otherwise is either misguided or bad-intentioned or both. Millions who are lured into Herbalife and then churned out and replaced after losing money are told to eschew the dreaded identity of victim, which might raise questions of calculated deception, their own vulnerability, or even lead to protests. Instead, they are persuaded to accept Herbalife’s own explanation that all who “fail” in the business do not try or their failure was only in not sufficiently trying. Such is the evil brilliance of the pyramid scheme when disguised as a “sales” business with commodity products serving as transfer currency, that everyone is or could have been a winner, while 100% who join each year actually lose.
And here’s an excerpt by Quoth the Raven:
The movie has some surprisingly touching and deeply emotional moments. I always knew that what the company was doing to people who did not understand how the business plan worked was disingenuous. But seeing on film a group of victims literally praying to God for justice after many of them severed relationships and spent hundreds of thousands of dollars tugged at the heartstrings of Ms. QTR and I, who both teared up.
While the movie follows Ackman through much of his crusade, it does also raise critical points about Ackman’s intentions and his use of investor capital. In addition, the movie goes on to show that Ackman’s short has been a failed investment thus far from a monetary perspective.
But that takes a back seat to the conclusions the audience are forced to draw, namely that Herbalife is doing far more harm than good.
Clips of Herbalife executives were taken from various interviews and showcase a broad array of obfuscation, indifference and flippancy toward the victims, and the methods with which the company makes its money.
While it is clear that Director Braun wants to take an objective look at the situation, you cannot help but come out of the movie rooting for the victims and feeling educated on the basic pitfalls of what being an Herbalife distributor could entail.
Again, the movie’s strength lies in its ability to tell the story and tell the truth about the company in a manner that would resonate very quickly and very clearly with a national audience of varying intelligence levels. The movie could very well turn out to be a PR nightmare for Herbalife if it gets picked up for national distribution. It is very easy to see how this film could easily be compared to documentary exposes like Blackfish or Super Size Me.
Lastly, here’s a picture I took of the film’s director, Ted Braun, who introduced the film yesterday and did a Q&A afterward: