The FTC's complaint against Equinox sounds just like a description of Herbalife.
Herbalife's willful lack of enforcement regarding retail sales against its distributors is a big no-no according to the FTC.
If Herbalife suffers the same fate of Equinox, it will be a total wipeout for shareholders.
Equinox was the top multi-level marketing firm in terms of growth of the 1990s and was one of the fastest growing companies in general as well, growing 35,000% between 1991 and 1996. I happened to stumble upon the Equinox case and was shocked to learn how eerily similar the dynamics of that now shutdown illegal pyramid scheme sounds like Herbalife (NYSE:HLF).
Following an FTC investigation that was accompanied by six states (sound familiar yet?) that led to the initial lawsuit and charges, Bill Gouldd, then CEO of Equinox, said to the press, "We have a war ahead of us." He blamed his critics. He blamed his disgruntled ex-distributors. He lambasted publicly, "Thank you so much for showing how stupid a lot of you really are." He blamed everybody but himself on the tactics of his company.
So what does Equinox have to do with Herbalife besides both having hot-tempered CEOs and both companies selling "vitamins, nutritional supplements, and skin care products" among other things? I suggest you read the initial FTC release against Equinox here and decide for yourself. Below I will quote various sections of the release. In each instance, it seems like you could substitute the word "Herbalife" for "Equinox" at least according to the vast complaints surfacing:
According to allegations in the complaint filed with the Court, Equinox operated a multi-level marketing company, which offered distributorships for products including water filters, vitamins, nutritional supplements, and skin care products.
Okay, Herbalife doesn't sell water filters but everything else fits.
The complaint further alleges that Equinox told the recruits that they could earn money by selling products or recruiting but emphasized that the real way that Equinox distributors make money is through recruiting, not through sales.
Many Herbalife recruiting videos confirm this.
New recruits were encouraged to purchase $5,000 worth of products so they could enter the program at the manager level
For Herbalife, this is called the Supervisor level.
The complaint alleges that a very small percentage of distributors who became participants in the Equinox program actually made more money than they expended for front-end expenses, and that a vast majority of distributors discontinued their participation in the program with little or no earnings.
Herbalife's own disclosures prove that as well. In fact, by one account 96.4% of distributors make less than a bottle and can collector.
The complaint also alleges that while Equinox purported to link compensation to retail sales, it did not enforce the policies and requirements ostensibly designed to assure such sales. "The result of the structure and operation of the program is that financial gains to Equinox participants are primarily dependent upon the continued, successive recruitment of other participants, and retail sales are not required as a condition precedent to realization of such financial gains," the complaint says.
Herbalife arrogantly says that it doesn't keep track of retail sales. It freely admits to the media and the public that it does not "enforce the policies and requirements ostensibly designed to assure such sales" which the FTC is quoted in this release as stating is a requirement. The non-requirement of retails "as a condition precedent to realization of such financial gains" applies to Herbalife every bit as much as Equinox.
The FTC alleged that the deceptive earnings claims made by Equinox are false and misleading and violate federal law. By furnishing distributors with promotional materials that contain false and misleading information, including the deceptive earnings claims, Equinox has supplied the means for the distributors, themselves, to violate federal law. The defendants represented that everyone who participates in the program will receive substantial income, instead of disclosing that many participants will not.
This article is not an attempt to conduct a Herbalife trial. As investors, we truly don't know all of the facts, both pro and con. With that in mind, this risk is extremely high. If it looks like a duck, walks like a duck, and quacks like a duck, we need to be cautious that it might just be a duck. In the case of Herbalife, it looks, walks, and quacks like the FTC's description of Equinox. It shouldn't come as a surprise if Herbalife ends up with the same fate. For these reasons, I would avoid Herbalife like the plague.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.