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Herbalife - Pyramid scheme or not?

icerat said:
As Herbalife pointed out in their response to Ackman, an awful lot of people register with them primarily to buy products at a cheaper price (ala Costco).
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How come there's only an option to register as an IBO and not as a preferred customer if you are claiming "ala Costco"?
 
Some folks on the Seeking Alpha forum believe an injunction on Herbalife might be forthcoming soon. You need to register to read the commentary but I've posted some relevant comments.

•Herbalife is carrying a surplus cash balance.
•Evidently, it has plans to fritter this cash.
•Government should act quickly to prevent this from happening.

Ostensibly, the company is flush with cash. $645 million represents about 18 months worth of free cashflow/income.

Here is what is odd.

Company management has told investors that:
•dividends are off the table
•cap-ex is being reduced
•no large buybacks are in the offing and
•debt repayment is the priority du jour.


Q. If debt repayment is the company's priority, why aren't they paying off their revolver?

Riddle me this - If you had $640 million worth of cash in your bank account and $500 million worth of outstanding credit card debt, why wouldn't you use your cash to pay down your credit card?

Isn't the only rational answer "because I want to use it for something else"?

Q. What might that something else be?

Carl Icahn and Bill Stiritz playbook is well-known by now. Their mission is to continue to shrink the company's share base by opportunistically buying back as many shares as they possibly can.

For now, they have had to suspend this activity as the company's cashflow has declined. Seemingly, the company has been unable to term out its term loan and revolver.

For now, the company would appear to be at a standstill with its bankers.

Hopefully, regulators are paying very close attention to this dance. Hopefully, they understand the implications of how and why the company is hoarding cash.

One way or another, yet again, the company plans to bleed down its balance sheet liquidity in order to squeeze the shorts.

Concurrently, they will also bleed the balance sheet of any value available to any victims of the fraud. This dynamic should certainly draw the attention of interested parties like LULAC who have called for restitution payments for the victims.

Sometimes it's what you don't do in life that reveals your intentions.

For two consecutive quarters in a row, that crafty CFO Mr. DeSimone has carried a massive surplus of cash. Other than payments towards the amortization of the term loan, the revolver seems to be tapped aggressively.

What gives?

I am not sure how much success the company is having renegotiating its credit facility with its bank group right now. If I were Herbalife's banker, I would have a pretty simple message for them. "The sooner you can pay me back, the better."

Obviously, Herbalife has some other ideas in mind.

In the face of an allegation that you are a pyramid scheme, buying back stock seems like a no lose proposition.

Heads - you are going to get arrested anyway.

Tails - if not, you get serious bang for your buck if exonerated.

Put another way, what do you have to lose?

If, however, we put ourselves in the shoes of the victims it is obvious that additional share buybacks and/or debt repayments will cost victims materially.

Perhaps this is yet another argument in favor of the government acting sooner than not against this company.

Herbalife tells us they have $645 million of cash in the bank.
•Haircut for the Bolivar and you get $610 million
•Roughly $400 million is held overseas. (Who knows what it's worth on an after-tax basis?)
•Roughly $200 million is in $US

There's a race afoot to see who gets this money. Will it be Herbalife's bank group, Carl Icahn and Bill Stiritz, or actual victims of the fraud?

That would all seem to depend upon the determination levels of our government to shut this endless recruiting chain down for good forthwith.
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I personally expect an FTC announcement within the next 20 days. I also agree with SA user, 23107213 that investors should run, not walk. The outcome has been obvious for a long time in my opinion. I believe the evidence requires the fraud to be shut down and when all of this is complete, the FTC will have taken a big step in restoring its credibility as a consumer protection agency.
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FTC Settlement Coming?

http://www.forbes.com/sites/antoine...he-ftc-amid-ackmans-short-siege/#4a8a29ae34e6

U.S. Federal Trade Commission Civil Investigative Demand . As previously disclosed, the Company received from the U.S. Federal Trade Commission, or the FTC, a Civil Investigative Demand, or a CID, relating to the FTC’s confidential investigation of whether the Company has complied with federal law in the advertising, marketing, or sale of business opportunities. Pursuant to the CID, as supplemented, the FTC has requested from the Company documents and other information for the time period commencing January 1, 2009 to the present. The Company is currently in discussions with the FTC regarding a potential resolution of these matters.

The possible range of outcomes include the filing by the FTC of a contested civil complaint and further discussions leading to a settlement which would likely include a monetary payment and injunctive and other relief. The Company is cooperating with the investigation and at this time it is difficult to predict the timing, and the likely outcome, of these matters. The discussions with the FTC are in the advanced stages, but there are still a number of material open issues that could preclude reaching final agreement. If discussions with the FTC do not continue to progress, it is likely that litigation would ensue. Although we are confident in our legal position, litigation outcomes by their very nature are difficult to predict and there can be no assurance of a particular outcome.

The outcome of these matters with the FTC, whether by mutual resolution or through litigation, could have a material adverse impact on the Company’s business operations, its results of operations or its financial condition. The Company believes it is reasonably possible that it may have incurred a loss. At the present time, the Company’s best estimate of the payment amount that would be made by the Company under a mutual resolution with the FTC is $200 million. The Company has not accrued any amounts with respect to any potential monetary payments relating to this matter. If a resolution is not attained and litigation ensues, the Company is unable to estimate a range of potential loss, if any, relating to these matters.
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icerat said:
(1) Why would you think that would make something a pyramid scheme? That's how most small retail operations work, they have to buy stock before they can sell it.

(2) It's actually not true for Herbalife anyway, as distributors can take orders from customers first if they want

A pyramid scheme is defined by what's known as the "koscot test", you're paid for recruiting people, and the revenue is unrelated to the sale of product to end users. Herbalife's model is not based on either of these.
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I can imagine why you hold onto that, but sadly there are other way to have a scam scheme protected by law.

Simply have distributor have those under them buy in advance the product. The 2000$ mentioned in the previous post. Pretend they will make money. Then have people try to sell them in vain , first friend and family, then finally abandon as nobody is buying it. Then switch to the next sucker.

In all practical purpose the scheme *seemingly* sell stuff beyond the "seminar" "book" and so forth. But in reality it is a scam to get money out of people. I frankly classify amway in the same scheme, but that's a debate we had in another thread and we'll agree to disagree.

ETA: old post never mind
 
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We could sit here and quibble over the exact "According to Hoyle" definition of a pyramid scheme all day.

But regardless any business that is dependent on recruiting new members and can't function without manufactured growth is at best a little shady.

Good business grow, but it happens naturally as they gain customers and resources.
 
JoeBentley said:
We could sit here and quibble over the exact "According to Hoyle" definition of a pyramid scheme all day.

But regardless any business that is dependent on recruiting new members and can't function without manufactured growth is at best a little shady.

Good business grow, but it happens naturally as they gain customers and resources.
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One of the Herbalife rules states that distributors must have 10 customers (Amway safeguards) and move 70% of their inventory each month.

Herbalife has to replace 2 million distributors each year.

If Herbalife distributors each had 10 customers and were net profitable, the attrition would be nowhere near 2 million annually.
 
Herbalife is a pyramid scheme, just not an illegal pyramid scheme. Just because something is legal does not make it a great idea. Participating in pyramid schemes is profitable for a few, of that there is no doubt. Those few tend to be concentrated at the top of the pyramid. For the vast majority of participants, there are no profits and there are probably some degree of losses.
 
http://kfoxtv.com/news/kfox14-inves...ms-not-everyone-getting-money-back-03-31-2017

EL PASO, Texas — Some people who lost money to Herbalife, are getting some of their money back.


As KFOX14 Investigates first reported, the company must shell out $200 million for its deceptive practices after it came to a settlement with the Federal Trade Commission.

KFOX14 has been following Herbalife for more than 2 years, in July 2016 we first reported the FTC charged Herbalife with deceptive trade practices and sued the company on behalf of consumers. That story went viral.

As part of the settlement, the FTC stopped short of calling Herbalife a pyramid scheme. But many of the people KFOX14 has spoken to say, that’s exactly what it is.
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icerat said:
Probably some competitive marketing speak. "we're not like so and so because ..."



Recruit a million people in to Herbalife you won't make a cent unless someone buys products, and if they don't use them they can return them for a refund (and you have to return any profit based on that sale)

As Herbalife pointed out in their response to Ackman, an awful lot of people register with them primarily to buy products at a cheaper price (ala Costco). They are not operating a business and not attempting to profit. A few years ago the FTC proposed some new "business opportunity" regulations and in their discussion they noted this was common with MLM companies.

Ackman believes, contrary to the FTCs own statements on the issue as well as various legal precedents, that anyone who registers as a distributor cannot simultaneously be considered a legitimate customer, thus he considers much of Herbalife's sales to be illegitimate.

He quotes a well known anti-mlm critic, Robert FitzPatrick, who has been making the same argument for some decades, with no legal success. FitzPatrick and his colleague Jon Taylor have however been very successful in promoting themselves and their positions with the media and public (and alas, several influential "skeptics") but continually get shot down in the courts, to the extent that in a recent case involving Amway, a California court rejected FitzPatrick as an "expert" and wouldn't accept his affidavit. That didn't stop the media reporting the plaintiffs had provided "expert evidence" (ie FitzPatrick's affidavit) that Amway was a pyramid scheme.



All pyramid schemes are illegal virtually everywhere. There is no such thing as a "legal pyramid scheme". Anyone who says otherwise is using a different definition of "pyramid scheme" so needs to define what they mean.

There's actually quite a few publicly traded MLM companies, many of which have been around for decades. Avon converted to a multi-level compensation model some years ago. Buffett's Berkshire Hathaway owns an MLM, The Pampered Chef. Unilever operates an MLM in India and Africa (Hindustan Unilever Network). Amway's local subsidiaries are publicly listed in Malaysia and Thailand.

The first company to use an MLM compensation model was Nutrilite, which was merged in to Amway in the 1970s. It's been operating now continuously for nearly 80 years. That alone should be enough to give one pause to wonder if how you think MLM operates is actually how it does operate.
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Social Security is a legal pyramid scheme.

- Pays past investors using money given by current investors.
- Needs ever-growing number of people to maintain viability. Originally was 36 investors for each person getting a payout, now it's 3 paying for 1.
- Investors as of 15 years ago will no longer be getting out of it what they pay into it.

This is mathematically a pyramid scheme, and one that can force new investors to join and borrow money from investors not yet born to keep the money flowing to current receivers.

It is having difficulty for the exact reason pyramid schemes were made illegal. Forcing everybody to join, and borrowing from people not yet born, just pushes off the inevitable, which will be reduced payments in one way or another. Increasing the retirement age is one such delaying trick.
 
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Beerina said:
Social Security is a legal pyramid scheme.

- Pays past investors using money given by current investors.
- Needs ever-growing number of people to maintain viability. Originally was 36 investors for each person getting a payout, now it's 3 paying for 1.
- Investors as of 15 years ago will no longer be getting out of it what they pay into it.

This is mathematically a pyramid scheme, and one that can force new investors to join and borrow money from investors not yet born to keep the money flowing to current receivers.

It is having difficulty for the exact reason pyramid schemes were made illegal. Forcing everybody to join, and borrowing from people not yet born, just pushes off the inevitable, which will be reduced payments in one way or another. Increasing the retirement age is one such delaying trick.
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Are all payments made from current revenue "pyramid schemes"? Extreme rightists used to call them "Ponzi schemes", but how can they be called "pyramid schemes"? Where is the multi level aspect? Should tax payments destined for social security be voluntary? Why should people get out what they pay in? If I pay taxes in the U.K. to fund the National Health Service, but I don't fall ill; have I been swindled by a pyramid scheme? I don't understand. If I pay taxes to cover social security, but I never require relief, have I been defrauded?
 
Craig B said:
Are all payments made from current revenue "pyramid schemes"? Extreme rightists used to call them "Ponzi schemes", but how can they be called "pyramid schemes"? Where is the multi level aspect? Should tax payments destined for social security be voluntary? Why should people get out what they pay in? If I pay taxes in the U.K. to fund the National Health Service, but I don't fall ill; have I been swindled by a pyramid scheme? I don't understand. If I pay taxes to cover social security, but I never require relief, have I been defrauded?
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I do think Beerina is confusing Ponzi Scheme with Pyramid Scheme.

Regardless, the argument in favour of Herbalife is that it's a legal MLM, as opposed to a Pyramid Scheme, which would be an illegal type of MLM where the product is only token and the business model is recruitment itself.
 
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