You ever hear the expression, "it takes one to know one?" Such is the thought process behind interviewing a criminal mind on his thoughts about Herbalife (NYSE:HLF).
QTR spent the afternoon on Sunday chatting with Sam Antar, who is a former CPA, convicted felon, and the former CFO for one of the biggest securities frauds in history - the company once known as Crazy Eddie's. Sam's website describes Crazy Eddie's as:
[A] securities fraud that cost investors hundreds of millions of dollars, cost many people their life savings, cost many people their jobs and careers, cost creditors hundreds of millions of dollars, and many people's suffering that cannot be measured.
Sam became the government's main witness on "Crazy Eddie" Antar, his cousin and other co-conspirators. He was the government's key witness in both the criminal and civil prosecutions.
From Sam's website, he "make[s] no excuses for [his] criminal conduct. Nor should [he] receive any praise for [his] cooperation."
Instead of silently fading away, Sam has taken on a "it takes one to know one" view and has spent the better part of his days trying to expose white collar crime, securities fraud, accounting irregularities, and corporate corruption.
At Sam's website, White Collar Fraud, you can review the full history of the Crazy Eddie saga, and how Sam helped perpetrate one of the biggest cases of securities fraud in history.
He has appeared on Fox News, Fox Business Channel, CNBC, Canadian Broadcasting Corporation, Canadian Business News Network, National Public Radio's Planet Money, Progressive Radio Network, Reuters TV, RT News, and numerous other media outlets. His blog has been recommended by the Journal of Accountancy and the Huffington Post named him one of the 25 most feared financial reporters in America.
I had seen Sam discussing Herbalife on an RT News segment last year, and had been hoping for some time to get a chance to interview him and ask the questions that I wanted to.
This past Sunday afternoon, I had the chance.
With QTR calling from his home base and Sam taking the call in Manhattan, Sam's tone was fiery and energetic - often cutting me off mid question to get his thoughts out. He spoke with conviction and certainty and it was evident that this wasn't his first rodeo, he had superlative grasp on the matter at hand.
His disdain for the multi-level marketing industry and Herbalife, in particular, was evident from the get go.
QTR: So first, I just want to take a second to say thank you for taking time out of your Sunday to participate in this interview.
Sam: No problem. I'm gonna give it you from the criminal point of view, putting aside all other issues, ok?
Sam: MLM is a classic fraud. What I mean by that is all criminals look for exploitable weaknesses in people. Some people have an exploitable weakness that a criminal can use, some people don't. Like you don't have the exploitable weakness of being conned into being a multi-level marketer - but some people do.
One exploitable weakness that's common to all human beings, is need. Everybody has needs - you have needs, I have needs. We all have different sets of needs - some of them overlap with each other, some of them don't. One of the needs that we all have is to be able to earn a livelihood and to be economically secure. Some people can do it by being an accountant, some people can do it by being an investor, some people can do it by running a public company - some people can't.
So, how do fraudsters target groups of people that have a perceived need? You sell them false hope.
Everybody has hope. My cousin Eddie used to teach me back when I was doing fraud that everybody - especially poor people - lived on hope. Herbalife has this thing where they're promising riches, curing diseases and they don't have to do it themselves - they can just close one eye, "wink wink", and have their distributors do it. Then, every once in a while they make a token gesture and clamp down on some distributors to try and show that they're honest people - which they're not.
Multi-level marketing companies sell "income opportunities" like boiler room brokerages sell penny stocks. It's hype backed up with false hope.
I am only aware of one college that offers a major in multi-level marketing. Even the scammers running diploma mills won't offer a business degree in multi-level marketing.
QTR: Is HLF cognizant of what their distributors are out there saying? Take, for instance, John Tartol - he sits on the Board of Directors of the company and had previously made promises of $100,000 a month in earnings.
Sam: Yes, I am sure that they're cognizant of what their distributors are saying and doing - they know how to respond to Ackman, they know how to lawyer up. They know how to send out threatening letters to CNBC and the NY Post, which none of these organizations have said publicly, but I know.
They have to know what their distributors are doing. The people running Herbalife are not dumb people, they're very, very clever people. They've been running this scam for many years. And scams, by their nature - organized scams - last only so many years. My scam lasted for 16 years. This "wink, wink, we didn't know" is bull****.
It's simply not true, and I'm giving it to you from the background of somebody that ran an organized criminal enterprise in the form of a public company.
QTR: Now that the FTC, FBI, SEC, and DOJ are involved - what do you think is coming next at a minimum for the MLM industry? Can the industry escape this Herbalife situation unscathed?
Sam: They are facing an [onslaught] of government investigations. On the positive side, you have competing people within the [onslaught] all trying to get to the prize of taking the company down. That's what the critics have going for them. At the same time, the US government is not - I doubt - I hope very much they do - but I doubt they're going to put Herbalife totally out of business. When all is said and done, they don't have the balls.
What I believe will probably happen is that the government will impose fines, increase regulatory scrutiny, and maybe make them modify some of their disclosures and business practices. I doubt they'll eliminate the MLM industry - as they should do. I just don't think the government has the balls to do it - doesn't matter whether its a Republican or Democrat in office - it's all the same.
QTR: What do you think about the big names that have backed Herbalife? Guys like Bass and Soros have left, or reduced their positions. Carl Icahn remains the big driving force on the long side. What's your take?
Sam: Put simply, these guys are just whores for money - they have no ideology, except the almighty dollar. Icahn, Soros, they're just whores for money. At the end of the day, Icahn saw an opportunity on the long side and took it. Being a whore for money isn't illegal, but that's just my opinion.
QTR: What do you think Icahn's plan will be going forward?
Sam: I don't know, because if he tries to unload that stock on the open market fast, you know what's going to happen. He's got to try and hope for one of two things: an LBO where he can cash out some money, or to be able to sell his position as part of an acquisition. Now, will anybody buy that heap of trash? There's a sucker born every day. A schmuck like Victor Palmieri who took over Crazy Eddie's thought he got the golden goose. Instead, it was a golden calf. Investors are fleeced because they marry their assumptions.
If he can't do an LBO, he's going to have to sell his stock slowly to cash out. Once he starts selling shares, the market will look at it as a signal that Icahn's getting out. All he has right now are paper profits based on perception. Market perception can change on a dime.
Let's take the best case scenario for Icahn - there's no regulatory action from anyone on Herbalife. There are still other problems - macro economic issues, growth issues, issues related to overseas countries' markets and their regulation of MLM. Herbalife had to go to China because the U.S. is a finite market - and China doesn't allow it. Now you see China cracking down on their practices.
Icahn could taint his legacy by making money this way. There's many other ways for Icahn to make money, but I personally think it's the lowest and worst way to do it by supporting this MLM industry.
QTR: Do you think Icahn's investment in Herbalife was simply personal due to his feud with Bill Ackman?
Sam: People close to Icahn - who have their hands on the pulse - say that same thing. I'm one of the few people who gets calls from both longs and shorts, about my opinion on the company.
QTR: What do you make of the distributor turnover?
Sam: According to Bill Ackman, 88% of Herbalife distributors lose money and 96% earn less than half the pay of a minimum wage job. So, maybe about 1% of Herbalife distributors are making money that they can live off of, right? Herbalife then comes out and says something like 70% don't buy for the opportunity - just for the product. So let's do some math. 1 in 100 succeed and let's take Herbalife's word for it and subtract 70 people. Now 1 in 30 succeed. The number of people that succeed triples, but it's still just 3%. Is that still that significant of a number? No.
Even in the best case scenario - even if you assume all of HLF facts are true - still, over 95% of their distributors fail. The ones that succeed, for the time invested, are better off flipping burgers at McDonald's.
QTR: What do you make of the perception that Herbalife's audit from PriceWaterhouseCoopers validates their business model?
Sam: Big 4 audits are the accounting equivalent of a spell checker to catch accounting typos. Audits aren't designed to find financial fraud and they're certainly not designed to find business fraud. One thing has nothing to do with the other.
The world is littered with people and very smart investors that have relied on audits to make investment decisions and they wound up losing their shirts - like Mr. Palmieri on Crazy Eddie's and HP with Autonomy.
Audits are not designed to find accounting fraud and they certainly aren't designed to find business fraud. They're designed to catch material non-intentional errors. And they do a sh*t job at that anyway - you can quote that. Because if you look at the PCAOB inspection reports, the big four accounting firms regularly fail between 25 and 50% of audit inspections, even given the limited scope of audits.
The accounting profession is at fault itself. The word "audit" is misleading. They don't do "audits". That's like me saying Crazy Eddie's accounting was GAAP, when it wasn't. What they call "audits" aren't "audits" by definition. They are limited reviews of financial reports meant to catch unintentional material errors. Audits are meant to catch the equivalent of typos - innocent mistakes in numbers. It has nothing to do with the business model.
QTR: What do you make of the company's recent buyback that just ended, looting their balance sheet of a lot of its equity?
Sam: They believe that Ackman is motivated simply by money. They believe he's like Icahn - a whore for money. Maybe it's true, maybe it's not. If they can get Ackman out of the way, it's one less threat - so they're taking steps to inflate the stock price. I'm not accusing them of doing it illegally. They've probably gone through the legality of it with their lawyers and they're trying to bury Ackman.
QTR: So, in your opinion, is the buyback specifically to squeeze shorts or deliver value to shareholders?
Sam: Yes. It does both at the same time. At least temporarily it spikes up the stock price. Warren Buffett doesn't like buybacks and he's the guru of value investing. I'll tell you, when I was involved with Crazy Eddies, our stock dropped too - we couldn't cook our books enough to make the numbers, even with the fraud. So what I did was a stock buyback, too. A buyback doesn't necessarily mean there's no fraud or that the business model is clean. All it's meant to do is give the stock price a temporary boost. It keeps the stock price up because it's perceived that they're really building value.
QTR: Thanks for that, Sam. What do you make of the company's new PR efforts, such as what they're doing buying space on Twitter with @HerbalifeTRUTH?
Sam: They're a bunch of f*****g p*****s on Twitter. Me? I always respected my adversaries, even when I was a crook. I expect clever crooks to do things cleverly and they're not being very clever with that Twitter feed. It's a waste of money for them, it's not really helping them - maybe it drums up support for some of their followers, maybe it's just there as a lightning rod for their other supporters. But it's not even that much of a lightning rod. It's become a complete non-issue.
If you're going to fight a war, you fight it right. Remember The Untouchables where Sean Connery says, "you never bring a knife to a gun fight?" It's like this Twitter feed isn't even a knife - it's a water pistol.
QTR: So their PR efforts clearly aren't impressing you. Have you seen any of the executive interviews on CNBC or ABC?
Sam: I saw one a while ago on CNBC. Michael Johnson and Herbalife threw up every obstacle possible to stop CNBC from doing their report on the company. I know for a fact they made life very difficult for them.
QTR: So, with all you've said, how does the company have this veneer of legitimacy?
Sam: We have a country of 300 million people - there's always going to be schmucks out there. They're going to find some schmucks that believe them. Everybody has an exploitable weakness and the trick for the criminal is finding it.
Like you - if I got to know you long enough I could find something you have a passion for that your rationality or critical thinking could go out the window for. I could find that. Herbalife is very clever at finding young people that are in economic need with a certain degree of desperation - a certain group of people that like to be followers, and that's what Herbalife does as their business
You know, when Michael Johnson was at Disney, he was selling fantasy. Except now he's selling economic fantasy at Herbalife. Michael Johnson hasn't changed. He's still in the fantasy business, but this time it's hurting people.
At least at Disney, it was an innocent fantasy. Everybody knows Mickey Mouse doesn't exist, but it's nice and amusing. Now the fantasy he's selling is causing very strong economic harm to hundreds of thousands of people - who can least afford it. At best, Herbalife is predatory capitalism - at its worst, it's a fraud - and that's the same for all MLMs.
QTR: It's clear to me that the products are commodities - do you think there some legitimacy behind the product side of the company?
Sam: Let's take the shakes. I live in Manhattan, there's plenty of health foods stores and health food restaurants all over the place, right? And there's plenty of places that sell health foods. How come I don't see Herbalife products on any corners in downtown Manhattan, Union Square or Gramercy Park area - or even any areas frequented by tourists? Why are they only sold in poor areas? They're not selling a product, they're selling what they claim is a viable income opportunity. That's ultimately where it ends up. I don't see it at Whole Foods, at Duane Reade or Walgreens. Duane Reade sells a lot of sh*t, but for some reason the sh*t from Herbalife doesn't qualify. Why is that?
QTR: What do you make of the statement from Des Walsh that, "the reality is that most people know that this is a wonderful way in which to pay a $50 or $60 start-up fee to earn a few hundred extra supplemental dollars a month?"
Sam: If you look into the time its taking these people to make a "couple hundred" extra dollars, it comes out less than minimum wage. Do the economics of it. The reality is that even if you accept Herbalife's numbers as true - that most of the people buy it to consumer the product - still 99% earn less than minimum wage regardless of what their intent is. Doesn't matter what they're setting out to earn, substantially all of their distributors fail. Even say 90% and be conservative. You know the numbers better than me, but you get the point.
QTR: What's your take on how long will it take regulators to figure this one out?
Sam: I do a lot of work with the government - 95% of what I do you won't see on Twitter or in an article. You never know how long an investigation is going to take and you never know what the outcome is going to be. It's like life after death - we can look at all sides of the argument, but we just don't know.
I'm hoping Herbalife and the MLM industry is going to get abolished. I think we're more likely to see what we saw happen to the banks on Wall Street, however. Regulatory reform and fines to change business practices - if that happens in 4 to 5 years they're going to be back at their same old sh*t and there will then be a new group of crusaders arguing against MLMs.
The only way to get rid of this worst predatory form of capitalism - if you accept what they're doing as true capitalism - is to ban it.
But regardless, Michael Johnson, Herbalife's CEO, has gone from selling innocent dreams that entertain people to dreams at Herbalife that screw people.
Part of the US economy unfortunately, relies on the exploitation of the poor with these kinds of predatory practices. That's how sick our [expletive deleted] society has become. It's an unfortunate situation.
Sam's blog: White Collar Fraud
Follow Sam Antar on Twitter: @SamAntar
Disclosure: The author is short HLF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Sam Antar holds no position in Herbalife and has not been compensated directly or indirectly for providing this interview.