I checked into my stock watchlist this morning to see Herbalife stock up around 20%. That was my first indicator that the FTC/Herbalife settlement must have been announced.
Sure enough… the news headlines were, “Herbalife declared NOT a pyramid scheme.”
I shook my head thinking that this feels like an inside job, just like how The Big Short described the housing bubble that collapsed in 2007-2008.
I saw that the FTC was having a news conference though, so I tuned in… while I watched Twitter.
A funny thing happened… the news got it wrong. It seems that everyone jumped on the first headline rather than wait for the truth.
In this case, it seems it was Herbalife declaring it was deemed not to be a pyramid scheme.
If you watched FTC Chairwoman Edith Ramirez’s press conference, you got a different story.
The video was choppy for me on Facebook live, so I didn’t catch everything. I’m still waiting for the transcripts of the conference (or the conference to be available on-demand). With those limitations in mind please understand that this is my opinion on quickly developing story.
Thankfully, the LA Times is coming out with more accurate information. For example, they quote FTC’s Ramirez from the conference:
“Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”
Does that sound like an innocent company to you?
The LA Times also said, “But Ramirez said at a news conference that it would be inaccurate to say the FTC determined Herbalife’s practices were not a pyramid scheme.”
When Ramirez took questions at the end, big news organization after another barraged her with questions about how Herbalife was not deemed to be a pyramid scheme considering that the FTC seemed to be saying it had all the indicators.
Time and again, Ramirez said that this was a legal settlement and they weren’t going to use that label. She stressed that they got a significant sum for the damaged parties and significant changes to the business model going forward. She also stressed that they were able to accomplish this without spending years in expensive litigation. That’s one of the big reasons why the FTC can’t fight pyramid scheme.
In short, it seems like the FTC won and won big. Here are some of the ways it won in my opinion:
- Lambasting Herbalife – While they didn’t use the “pyramid scheme” label (more on that later), they did just about everything else to explain why it is a terrible company. It vindicated everything that Bill Ackman said about Herbalife.
- Money – While $200 million is probably not enough money to compensate all the victims, it is a lot of money. I read one article (which I can no longer find among all the news on the topic) where Herbalife seemed to say that it was worth spending $200 million to put this behind them. This is what I consider to be the biggest case of “bad optics” in history. Herbalife, rather than choosing to sell your product in retail stores, you decided to pay huge, huge money to continue to operate in this dark, dark grey area that got you investigated in the first place.
It’s my personal opinion and belief that this amounts to tacit admission that the product/pricing aren’t viable in retail by itself.
- Business Restructuring – There are a lot of restructuring changes that Herbalife needs to make. I’m still pouring through them, but they need to clearly show who is a distributor and who is a customer (one of the big issues with MLM/pyramid schemes) and ensure that 80% of sales to go customers who aren’t distributors (another big issue). These are the kinds of restrictions I wrote about in December of 2015 that could bring MLM scams to an end when Vemma was forced to comply with them. Last I checked Vemma’s business fell on very hard times since they were forced to “operate legitimately” (to use the FTC’s words here).
- Timing – While the settlement came around 30 years too late, but at least they got a “quicker” resolution with the settlement. This is important to mention, because again the lawsuit would have been long.
In fairness, what did Herbalife win?
- Pyramid Scheme Label – The FTC seems to have agreed not to apply the term/tag/label of “pyramid scheme” to Herbalife. However, the FTC didn’t declare that Herbalife is NOT a pyramid scheme either. It’s left as undetermined.
- Only 20% of the Business – It only applies to the United States operations (for now), so it appears that 80% of Herbalife’s business can continue unharmed.
- Puts the FTC in the Rearview Mirror – Herbalife dodges the threat that the FTC is going to outright shut them down. That’s as big as a win as you can get. I’m now curious if they are going to settle with the SEC and DoJ as well as I’ve read they’ve got their own investigations going.
As a consumer advocate, I’m going to put this “win” column. The biggest reason is that it further shines a light on the problem of MLM/pyramid schemes… and does it in a very, very public way. It looks like we’re moving forward to a place where these companies are going to be more heavily regulated. We need these watchdogs to protect us… remember we are all consumers.
Great follow up on this issue. I guess they won’t go after the “products” so at least go after the hokey business model of these MLM’s.
I don’t think anyone feels that the products themselves are harmful. It’s the marketing/pricing/business model/etc. that I think people complain about. If the products were on Wal-Mart’s shelves, it wouldn’t be a discussion.
FTC website has more information – https://www.ftc.gov/news-events/press-releases/2016/07/herbalife-will-restructure-its-multi-level-marketing-operations
next up: ADVOCARE.
I’ve never been a big fan of the MLM structure, even though I know some people who made big money as distributors. I would much rather buy products online or at a store than to buy them from people in the business.
@Roby A. Weinbaum: Hopefully Lifevantage too
Wonder if you could play the news going into the next earnings? It could take years but eventually this has to hurt them over the long term.
On Twitter, I said that I should have shorted the stock. I knew that the news organizations had got it wrong because they ran with Herbalife’s version rather than listening to the FTC’s conference.
The question about this long-term is whether it will really matter than much when 80% of the business is overseas.
Even though Bill Ackman seems to be taking a beating on his position with Herbalife stock, I believe he is still in a favorable position, and he seems to think so as well. Unfortunately, the demise of Herbalife has been postponed, but this should be hugely detrimental to their business, even if it is only 20%. Not many businesses can take that big of a hit, and Herbalife is already fading.
I believe the court case overall was a resounding success, and I hope this doesn’t discourage the FTC from coming after the rest of the giants. It seemed to be a long and grueling process, and I also hope that Bill Ackman will continue to throw his hat in the ring against other businesses like Amway, Advocare, Life Vantage, and any of these other ridiculous supplement people since they are doing the exact same category as Herbalife. I think he can translate his case with Herbalife into those quite well.