This week, Herbalife (NYSE:HLF) common shares turned positive when it was reported that Carl Icahn had cracked a joke about the Ice Bucket Challenge on Twitter. Longs seem to think Mr. Icahn may be cooking-up some sort of LBO. Alternatively, I suppose, Mr. Icahn could be cooking up a deal to exit his 17 million share position at a profit. Alternatively, Martians might invade from outer space too.
A great value investor once advised me:
"Don't look at the stock price, look at the business itself. Look at the fundamentals. Construct your investment thesis around the value that you see not the price of the stock. If you see a mispricing take advantage of it. If something becomes even more mispriced, don't panic. As long as your investment thesis remains intact price and value will converge in time."
Words to invest by.
Winston Churchill said the following about Russia in 1939.
I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest. It cannot be in accordance with the interest of the safety of Russia that Germany should plant itself upon the shores of the Black Sea, or that it should overrun the Balkan States and subjugate the Slavonic peoples of south eastern Europe. That would be contrary to the historic life-interests of Russia. Thus, my friends, at some risk of being proved wrong by events, I will proclaim tonight my conviction that the second great fact of the first month of the war is that Hitler, and all that Hitler stands for, have been and are being warned off the east and the southeast of Europe.
Russia is also famous for its art. Matryoshka otherwise known as Russian Nesting Dolls look like this:
Russian Dolls may have been inspired by Chinese Boxes. Chinese Boxes may look like this.
Perhaps both of these nested designs are the inspiration for the Turducken.
Q. What's a Turducken? Here's Comedian Frank Caliendo (acting as John Madden) explaining it. Turducken is a dish consisting of a deboned chicken stuffed into a deboned duck, which is in turn stuffed into a deboned turkey. Here's what it looks like "In Practice". Yummy!
Q. What do Russia, Churchill, Matryoshka, Chinese Boxes and Turducken have to do with the FBI and Herbalife?
A. Lurking behind the company's veneer of legitimacy lurks a number of additional scams that all add-up to one giant scam. We are told the FBI is investigating the company's practices. Here's what the FBIs investigation probably looks like "In Practice"
You see, once you smash through the outside of the Herbalife pinata a cornucopia of misdeeds spills out. Here's a sample set.
- Herbalife Opportunity Meetings
- Supervisor Training School
- Club 100
- Tool Scams and Business Development Fees
All of these initiatives are carefully and craftily designed to separate a new recruit from his/her money. Of course, all of these initiatives are nested within Herbalife's main fraudulent thrust - a Marketing Plan that promotes recruiting over retailing and therefore is a pyramid scheme.
Selling a business opportunity that turns out to be a total myth amounts to fraud. Faustian bargains often must be paid.
Mark Hughes was Distributor #1. Today, Carl Icahn and Bill Stiritz sit in the chair of Distributor #1. It is amazing to think that if Mark were still around today, he might be making $600 million per annum. Then again, one wonders if he would have "Gone Global" as Michael Johnson did. Sometimes professional managers do better than the founders.
Michael Johnson struck a Faustian bargain of epic proportions. He traded in his seat at Walt Disney International in order to grow and harvest the proceeds of a global pyramid scheme. Whether or not he was duped by his original recruiters or not hardly seems to matter at this stage. Mr. Johnson is now "all-in" so to speak. The results of various investigations will determine his fate. In the interim, Mr. Johnson continues to collect his check financed by the Money Transfer Machine known as Herbalife. By Michael's own admission, he didn't really understand Herbalife when he first joined the company. He tells you that much in the first 10 minutes of this video. Once the money started rolling in, however, my guess is he understood it just fine. At the one hour mark he refers to the Marketing Plan as "The Golden Goose". Truer words have never been spoken perhaps? Too bad Herbalife is actually a Turducken.
Of course, the Herbalife culture really is driven by its Top Recruiters. People like Geri Cvitanovich, Leslie Stanford, Susan Peterson, John Tartol, etc. drive the culture inside Herbalife and indoctrinate people as to how it works. In fact, even Michael Johnson was indoctrinated by John Tartol when he left Disney. Tom Salvatore writes a brilliant piece here describing how Herbalife works "In Practice"
Unfortunately, Herbalife's culture is a culture of deception. New recruits are targeted and milked for every penny they have then left for dead when they churn out of the business. New recruits are taught how to "work downline" - Herbalspeak for finding new victims. Herbalife has an annual recruiting cycle that it repeats over and over again. Always, the company is on the lookout for new people. If they actually stopped recruiting for a quarter the business would start to collapse. So, like a well-oiled machine the juggernaut churns on.
Changing the culture of an organization is indeed tough. Pyramid schemes attract a certain type of individual. Imagine getting up every morning and asking yourself: "Who can I lie to today?" Alternatively, I suppose that delusion may also be an explanation for how Herbalife participants propagate such an obvious fallacy.
8.4 million people have resigned from Herbalife since the end of 2007. This statistic alone demonstrates that neither the product nor the business opportunity have much residual appeal to participants. As a result, Herbalife's perpetual success relies upon perpetual recruitment.
That's why participants focus their efforts primarily on recruitment "in practice".
Herbalife's Gold Standard Guarantee tells new recruits that it only takes $59 to become a distributor and that there are no minimum purchase requirements unless, of course, you want a 50% discount or the right to earn royalty overrides or the ability to compete as a retailer with other Supervisors. $59 isn't going to get anyone to President's Team now is it?
Want to open your own Nutrition Club in Mexico? Sorry. First you have to take an onerous training course called Club Cien. So much for no minimum purchases. Hmmmm.
Compliance is just a bit of a problem for Herbalife. "In practice" it's the Wild West out there. Not only does Herbalife turn a blind eye to renegade conduct, it is actually rewarded with Mark Hughes bonuses and annual trips. Check out this exciting trip to Sydney, Australia. Do you recognize any of these faces?
Now, contrast it to this tragic video of a Nutrition Club in Mexico. My, how the other half lives.
QTR wrote a piece yesterday arguing that Herbalife has less than 6 months to live. Whether or not he is correct, I have no idea.
Still, the idea of the FBI serving Turducken for Thanksgiving this year certainly holds some appeal.
(With apologies to all you Vegetarians out there.)
Herbalife is a global pyramid scheme that markets a mathematical fallacy to marginal recruits all over the world. The sooner it is shut down the better.
Pershing Square has cracked-open the Matryoshka for all the world to see what is actually inside.
On behalf of the world's poor, as Ali-G might say: Spasibo Wally Backman (just a little inside joke between me and my friend "Matilda" as we head for this holiday weekend).
The FBI, FTC, SEC, NY AG, Illinois AG could shutter Herbalife any day.
Churchill's insights into Russia in 1939 proved him to be one heckuva a Nostradamus. Stalingrad turned WWII on the Eastern Front.
As Santayana famously said:
"Those who do not remember the past are condemned to repeat it."
Caveat Emptor HLF Longs.
(All Images Sourced at Google Images)
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.