Regular readers know that I’m intrigued by multi-level marketing (MLM) and that it’s lead me to write a number of articles on the topic. I’ve focused on a few companies that readers have asked me about. However, only reader, another blogger, asked me about the one MLM company that is in the news more than any other over the last year, HerbaLife.
I first got interested in HerbaLife when its stock crashed as hedge fund manager David Einhorn asked a few pointed questions about the sales of the products. To the average person on Wall Street, the questions probably seemed silly. After all, who really cares who buys the products as long as HerbaLife is making money, hitting the earning expectations and growing. That’s really what Wall Street is focused on. However, someone who know about MLMs would realize that if a majority of the products are being sold to distributors who are recruited as part of the business opportunity, it is a pyramid scheme.
Einhorn’s questions hit to the core of that. He found a very clever way of asking, “Are you a pyramid scheme?” HerbaLife’s inability to answer where the sales were going, along with a dismal to the importance of it amounted to them saying, “We don’t know if we are a pyramid scheme, and we don’t find it important to find out.”
It was absolutely shocking on so many levels. However, Einhorn didn’t pursue it any further and let it drop. A few months later another hedge fund bigwig, Bill Ackman, picked up the ball and knocked it out of the park with an amazingly detailed presentation illustrating why HerbaLife is a pyramid scheme. With it, he announced that he’s putting a billion dollars of his own money on the line to short the stock with the proceeds going to charity.
Wall Street did what Wall Street does… a bunch of big investors looked at one person with a large short position and figured out how to take advantage of the situation. They did this without ever addressing whether HerbaLife is a pyramid scheme or not. They closest they came is to say that they don’t expect the FTC to act because they don’t have the resources. It sounded a lot like someone exposing an organized crime ring, and a bunch of people supporting it because it was so well-funded and well-connected that the police wouldn’t touch it.
A few months later, several politicians and pyramid scheme experts got involved and wrote letters to the FTC
Herbalife and Pyramid Schemes are Heating Up. The FTC has done what it always does, makes no public comment.
Finally, about a month ago, Senator Ed Markey (from the most awesome state of Massachusetts) wrote letters to HerbaLife, the FTC, and the SEC asking the questions that need to be answered. He’s asked for responses by February 28th. That date is fast approaching and I haven’t seen any organization put together a response yet.
So I guess the story continues. It is really starting to mirror Fortune Hi-Tech Marketing which got halted by the FTC. USA Today did a story asking if it was a pyramid scheme. The president of the company defended the company saying, “If it were illegal, I wouldn’t be standing here.” It took a couple more years for the FTC to act, but it finally got a court order to shut the company down pending a full investigation.
The more that I look at MLMs, I see it as a blending of two things… a legitimate commissioned sales job, and an illegal pyramid scheme. Even the FTC seems to divide it as such: “Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
It seems clear to me that the recruiting of people and making money off sales to them makes a company out to be a pyramid scheme. That’s the core of what makes an MLM and MLM. The message here seems to be that it’s okay to run a little bit of a pyramid scheme if you blend it with a commissioned sales job. If a reputable company wanted to give individuals a business opportunity, why not just make it sole the commissioned sales job so as to ensure it is legal? My guess is that people aren’t interested in commissioned sales job and it is much easier to parade a few examples of people making big money to draw people in.
What’s the takeaway from all this? I’m not sure. One thing that I’m pretty sure of is that if anyone really looked into this they’d see that this is a huge problem with a pretty easy solution. If the watch dogs (the FTC) had the motivation and the funding (a huge problem) to do their job, we’d prevent these companies from taking advantage of the public. My guess is that will happen sometime in the next 15 years. I quite honestly can’t understand why it hasn’t happened yet.
Herbalife is just one example of this phenomenon. Obviously you’ve chronicled others, where they employ shady marketing tactics, but this is just the tip of the iceberg.
It seems like these “businesses” are popping up everywhere. With the proliferation of facebook across all user age groups, I see so many “friends” hocking their wares… Advocare, essential oils, stick on nails, candles, purses, etc.
All of these companies run on the same model: buy a bunch of crap, sell it to your friends, recruit them to buy a bunch of crap and sell to their friends… when will the madness end?
What I don’t get is why can’t people see these companies for what they are… pyramid schemes? Are people that blind to the “potential” to make a quick buck? Blows my mind.
The essential oils…Lemon Droppers… or whatever, are what piss me off. They are starting to deploy all the same shady health marketing. Saying oils cure arthritis, cancer and the like. I want to call these people out for their stupidity, but they are family or friends of my wife. Maybe I need to shut down Facebook…
Lazy Man says
I don’t think the madness will end until regulators realize that MLM is just grafting an illegal pyramid scheme on a commission sales job. Actually, I think they realize it, but the FTC isn’t funded enough to act on it, which requires a lengthy court process.
The ones with the shady health marketing get me too. It’s bad enough to run a pyramid scheme, but it is another matter to people’s health at risk with quackery.
No don’t shut down Facebook! I still have some stock in it ;-).
john callahan says
MLM it is. Crazy to me the people who are foolish enough to buy sub par products simply because someone says it’s good. Obviously they are not smart enough to do the research. They deserve what they get. The data is available. I’m shocked the company is still flourishing. Just goes to show, people will say anything to earn a commission and there are no shortages of idiots to believe them.
Paul Schlegel says
And now Herbalife executives are heading to DC to explain business model…
What could possibly be wrong with that scenario?
Interesting paper that was recently published by the FTC’s pyramid scheme expert:
Also, to quantify the lack of resources that was pointed out in this article. The FTC only requested $301 million dollars for 2014, hardly enough to seriously engage in battles with billion dollar corporations or tackle other complex scams.
You can see a history of the FTC budget requests here:
Lazy Man says
I’m just starting to read that Keep paper. I love his work and a couple of pages in, it isn’t disappointing.
That marketing research journal article by Keep and Vander Nat (Feb 2014) is a landmark. It’s the most (only?) authoritative paper on MLM to date. It does not bode well for the MLM industry that this was coauthored by an FTC senior economist, or that this came out at roughly the same time that Senator Markey announced his plans to petition for a congressional investigation of Herbalife.