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.

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.

This past week is it was so hot in New England, I felt my eyes getting melty like at the end of Raiders of the Lost Arc. I couldn’t help but think that it must be like how MLMs and Herbalife has been feeling lately. It seems like people are really turning up the heat on them.

A lot of the action seems to be directed to the FTC to do their job in holding these MLMs accountable. In particular these letters focus on Herbalife, which is hot in the news since hedge funds managers put it in the spotlight, including a billion dollar bet from Bill Ackman that it is an illegal business. My favorite letter is from William Keep to the FTC. He’s known for having worked with the FTC in the past, especially when it comes to MLMs, but he’s also the Dean of The College of New Jersey. The letter is actually a fairly general commentary about the industry.

The letter makes a couple of points that are probably not news to readers of this site. In particular he points out, “However, the lack of clear regulatory and enforcement makes distinguishing [an MLM from a pyramid scheme] very difficult. The recent FTC case of Fortune Hi-Tech Marketing (FHTM) – a firm that operated for more than ten years and had two former attorneys general on its advisory board – is one illustration of this point.” In case you missed it, the Fortune Hi-Tech Marketing scam was halted by the FTC for allegedly being a pyramid scheme after it was running for ten years. Many organizations pointed out that it was run like a pyramid scheme. USA Today made such comparisons. By the time the FTC had acted tens of millions of consumers dollars were lost to the scheme.

It’s almost like William Keep read my article: Now We Can’t Trust the FTC to Protect Consumers? Then again, in fairness, it’s the only logical conclusion a person can make of the situation.

Keep isn’t the only one putting the pressure on the FTC. Congresswoman Linda Sanchez of CA has written her own letter to the FTC. NYC councilwoman, Julissa Ferreras, has written her own letter. These two letters are from concerned politicians worried that the company is targeting their Latino community.

This is putting FTC Chairwoman Edith Ramirez in a bit of a tough spot it seems. The problem, as is often the case, comes down to something we are all familiar with: money.

For years I’ve been citing the FTC’s inability to fight Free Credit Report legally due to financial constraints. The FTC had resorted to coming up with catchy jingles like FreeCreditReport’s to explain that there are hidden fees and it wasn’t really “free.” As the author of the article, Bob Sullivan, concludes, “But it says something eerie about the state of consumer protection in America that the federal agency charged with protecting us has resorted to satire. Given the size of advertising budgets at companies like Experian, I can’t imagine the FTC can win a marketing war.”

The New York Post wrote, “The FTC has been reluctant to pursue Herbalife, due in part to the expense of going up against such a huge, well-financed company – especially given the ambiguity of the rules, sources said.”

It’s a really sad state of affairs that America can’t figure out a better way to solve this issue. It doesn’t take me ten minutes to figure out a few solutions. One idea would be to require any MLM company to pay a regulatory fee and that money would be used to investigate and ensure that they aren’t pyramid schemes. If an MLM isn’t a pyramid scheme they should jump at the chance to support this as it would clean up the industry from the bad eggs. If the MLM industry doesn’t like it, then I’d say, “tough poop”, there’s precedent to doing it. Drug companies need to pay FDA fees to regulate the industry. Another solution would be just let the FTC collect the money they get from lawsuits and add it to their budget to fight more. I’ve made it very, very easy for the FTC to nab One24 for being a pyramid scheme, and they aren’t even well-funded. The FTC should be able to go there with Lionel Hutz representing them, shut them down, and recover millions to fight other cases.

The above solutions are obviously very general frameworks, but this isn’t an insurmountable problem. It’s just a problem that people are too lazy or don’t care enough to solve.

While I’m here, I just wanted to check with the rest of the readers, particular those in America. This is still America, right? I’m not sure anymore. Politicians trying to come to the rescue of American consumers? The organization whose sole purpose is to protect American consumers is turning a blind eye to the issue? Sounds like Bizarro America, right?