That title is the first thing that came to mind after reading the disclosure at the bottom of an article on Seeking Alpha last week.
Please allow me to rewind and tell the story from the beginning.
A couple of months back, something very interesting happened on an earnings call for HerbaLife (NYSE:HLF)... David Einhorn possibly the biggest hedge fund manager asked some pyramid scheme questions that cause Herbalife to lose 3 billion dollars.
He did so slickly that most of Wall Street didn't even pay attention to the questions, but instead focused on his appearance on the call and his history on shorting stocks. Those who knew the industry though figured it out quickly. It goes like this:
HerbaLife Doesn't Know if It is a Pyramid Scheme
From HLF's own 8-K about the Einhorn question:
"Question #1 from David Einhorn: First, how much of the sales that you’d make in terms of final sales are sold outside the network and how much are consumed within the distributor base?
Answer: We don’t track this number and do not believe it is relevant to the business or investors."
"Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products.
Avoid any plan where the reward for recruiting new distributors is more than it is for selling products to the public. That’s a time tested tip-off to a pyramid scheme."
The conclusion that HerbaLife doesn't know if it is a pyramid scheme is very obvious.
As if you need more proof a California court ruled in 2009 that HerbaLife should be looked into as to whether it is a endless chain scheme:
"Moreover, in the Court's view, Herbalife's entire business model appears to incentivize primarily the payment of compensation that is 'facially unrelated to the sale of the product to ultimate users because it is paid based on the suggested retail price of the amount ordered from [Herbalife], rather than based on actual sales to consumers.'"
I have been all over Seeking Alpha trying to educate the stock picking gurus that their focus on the financials is misguided. They shouldn't focus on price/earnings ratios, but whether the FTC is going to put them out of business.
"I Was Paid to Write This Slanted Article to Raise My Client's Stock Price"
Now, that you have the background, here's the article that I read last week: Herbalife: A $6B Scheme Or A Stock To Double?. The author made a bunch of incredulous statements that were unrelated to whether an MLM is a pyramid scheme. I spent a some time debunking the article in great detail.
It wasn't until I read the disclosure at the end of the article that everything became crystal clear:
"Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours."
Wait, that's not the problem disclosure, it's this one:
"Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence."
In other words, this company is seeking IR (Investor Relations) business from the company they are covering HerbaLife and this article represents their audition. Okay, so maybe they weren't paid for this particular article after all. This could be a freebie they are offering to get a contract with HerbaLife. So what does the distributor, Gould Partners, of this "research" report offer it's clients?
Here's a quote from Gould Partners:
"At Gould Partners, we drive value creation for our corporate clients through tailored IR services - everything from generating positive news flow to publishing buy-side equity research. We will use our media channels to promote your company, defend its interests, attract Wall Street, and help drive long-term stock appreciation.
Major media channels that we will use include: NASDAQ, Yahoo! Finance, Google News, MarketWatch, E*TRADE, Fox Business, The New York Times, The Wall Street Journal, and newsletter partners - we are the leading financial media broker.
We will articulate to investors the strengths of your company, why it merits a "strong buy" rating, and publish favorable equity broker research aggregated on Bloomberg, Capital IQ, and FactSet.
Our clients have generated double-digit, even triple-digit, returns through our campaigns - we will aim to do the same for yours."
So in other words the article that I just read was an example of how Gould Partners "generates positive news flow", "defend its clients interests", and "drives long-term stock appreciation." Shouldn't they have disclosed that at the beginning of the article? More importantly, shouldn't they have been more clear in their additional disclosure that they provide misleading, slanted articles that are effectively advertisements to buy their clients' stock?
Or shouldn't this be illegal stock manipulation? I the SEC doesn't want to look into it, the FTC should on the basis that it is enormously confusing and appears to fraudulently misrepresent an advertisement as an unbiased opinion.
Additionally, Gould Partners' website seems extreme shady in that it solicits business from publicly traded companies, but doesn't list an any type of physical address or a phone number. It is almost like the company is designed to quickly disappear if their scam is discovered. I guess we'll find out now.
Readers, please help me out. Where would you place this on the Lazy Man's Scam Scale? My gut says it's a solid 7 in deception (could be worse, but the disclosure of the Gould Partners at least made it possible to figure out) and another 8 in terms of doing financial harm (convincing people to invest in a company that doesn't know if it is a pyramid scheme is very bad).
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