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Bruce Craig  

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  • Anatomy Of A Short (Or Long) Part 6 - A Live Case Study Using Herbalife - Stewards Of Capital [View article]
    I know this must be a naive question for an investor, which I'm not, but what are the motives of those who have taken the steps you outline in your articles?
    Feb 9, 2015. 09:37 AM | 5 Likes Like |Link to Comment
  • Analysis Of IRS Statistics Suggests A 98.94% Financial Failure Rate For Herbalife Sales Leaders [View article]
    Dave, excellent and well researched article.

    As a footnote to your IRS data, the actual federal tax returns of all 192 Amway Direct Distributors, active in Wisconsin during 1979-80, were examined by a University economics expert as part of our Wisconsin case filed against Amway in 1982. They disclosed an average annual net income of minus $913. This was not a survey.

    Significantly, this was after Amway had testified in the FTC case brought against it that its "Rules" protected against losses such as those documented in Wisconsin. To me, this raises significant concern about the efficacy of Amway style 'Rules' intended to protect against losses and the validity of the FTC's 1979 Amway decision.

    Your research appears to confirm that financial failure of many "Leaders" is of continuing concern.
    Jan 20, 2015. 12:33 PM | 6 Likes Like |Link to Comment
  • Primerica; Bad Company, Compelling Stock [View article]
    Primerica has one upstanding supporter of its marketing program, Timothy J. Muris, former Chairman of the Federal Trade Commission. He was, among others, successful in efforts to remove MLM from the Commission's Business Opportunity Rule.
    http://1.usa.gov/1I53CUx
    Jan 2, 2015. 01:03 PM | 2 Likes Like |Link to Comment
  • Why Bill Ackman Will Be Proven Right On Herbalife Soon [View article]
    casbus 7

    A rhetorical question whether I was 'intentionally misleading' is not appreciated.

    The quotes from Koscot reflected that Court's view of the law. Here are a few additional quotes from Koscot, some of which are from complaint counsel and which were affirmatively referenced by the Court as 'keen analysis'.

    http://1.usa.gov/1y0dpLG

    "Respondents' marketing plan contemplates upon the payment of consideration, participants would thereby acquire the right to engage in two income-producing activities, one of which contemplated the sale of similar rights to others for which substantial compensation would be paid, while the other contemplated the sale of products or services. Since implicit in the holding out of such rights is the representation that substantial rewards would be gained therefrom, and since the operation of such plan due to its very structure precludes the realization of such rewards to most of those who invest therein, such plan is inherently deceptive. Furthermore, such plan is contrary to established public policy in that it is generally considered to be unfair and unlawful and is by its very nature immoral, unethical, oppressive, unscrupulous, and exploitative Therefore, such plan was and is inherently unfair and the operation of the Koscot marketing plan by respondents, having caused substantial injury to the participants therein as well as to other members of the public, constitutes an unfair and deceptive act and practice and an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act."

    "The Commission has previously condemned so-called 'entrepreneurial chains' as possessing an intolerable capacity to mislead. Holiday Magic, Inc., Docket No. 8834, slip op. pp. 11-14 [84 F.T.C. 748 at pp. 1036-1039] (Oct 15, 1974); Ger-Ro-Mar, Inc., Docket No. 8872, slip op. pp. 8-12 [84 F.T.C. 95, at pp. 145-149] (July 23, 1974), rev'd in part 518 F.2d 33 (2d Cir. 1975). Such schemes are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users. In general such recruitment is facilitated by promising all participants the same 'lucrative' rights to recruit.
    As is apparent, the presence of this second element, recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed. Cf. Twentieth Century Co. v. Quilling, 130 Wis. 318, 110 N.W. 173, 176 (1907)."

    "Indeed, even where rewards are based upon sales to consumers, a scheme which represents indiscriminately to all comers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those at the bottom who can find no recruits capable of making retail sales. [FN3]"

    "At the very least we would conclude that a company which offers its distributors substantial rewards for recruiting other distributors, and charges them substantial amounts for this right, creates overwhelming barriers to the development of a sound retail distribution network and resultant meaningful retail sales opportunities for participants."

    "What compels the categorical condemnation of entrepreneurial chains under Section 5 is, however, the inevitably deceptive representation (conveyed by their mere existence) that any individual can recoup his or her investment by means of inducing others to invest. That these schemes so often do not allow recovery of investments by means of retail sales either merely points up that there is very little positive value to be lost by not allowing such schemes to get started in the first place."

    "A discussion of 'inherent' illegality and capacity to deceive may seem pointless given the more than 4000 pages of transcript detailing the actual deception and injury in which the Koscot plan resulted. Nothing could be further from the truth. It is regrettably clear that responsible authorities, including this Commission, have acted far too slowly to protect consumers from the manipulations of respondents and others like them. "

    At the time Koscot came down there was little doubt that the offerings described in the decision, as previously quoted - including the 'consummated' sales requirement - were illegal and 'inherently deceptive".

    The matter was considerably confounded by the FTC's 1979 Amway case, which held that certain internal rules could absolve a pyramid from the 'illegal' label. That case led to confusion about retail sales and other purported exculpatory factors. It also led to 34 years of an ambiguous legal status, fostered by the FTC and within which the MLM industry prospered. This status has yet to be formally resolved by the FTC. This topic is for another article, but it is clear that the Koscot case, often currently cited as the fundamental ruling, said what it meant and meant what it said.

    For the most part it has been ignored, except for the narrow language cited.
    Dec 29, 2014. 12:59 PM | 3 Likes Like |Link to Comment
  • Why Bill Ackman Will Be Proven Right On Herbalife Soon [View article]
    Ben N
    "So, if I may sum up your point ... You agree that the 2nd prong of Koscot must be met first and the burden of proof is on the accuser, and once that burden of proof is satisfied, then the defense might be able to convince the court that the MLM has rules in place to prevent inventory loading and a buy back program that sufficiently protects participants.
    In that, we agree."

    Actually we don't agree. Koscot said the only sales which would exempt a direct seller from pyramid status would be 'consummated' retail sales to non participants. This consummated element would have to be reflected in company documents as the method of compensating distributors, or, at a minimum, via a formal process of corporate retention of all consummated sales to non-participants. That's why Koscot said that this process could be 'readily monitored'.

    You clearly point out, accurately, "The call for Herbalife to provide all retail sales records to "prove" they are not a pyramid scheme is nonsense." If that is the case, and it is - Herbalife has no records - then either the Koscot court was dead wrong in its conclusion that the retail issue could be 'readily monitored' or the method of monitoring it had in mind was one involving corporate procedures and readily available consummated sales records.

    Since you, and most experts, rely on Koscot it would seem reasonable to conclude that it had a meaningful enforcement mechanism in mind, rather than 'nonsense'. You can't have it both ways.

    On the issue of documentation and the retail sales question, there is an excellent article on SA today, by Robert Fitzpatrick, on that point. For some reason it is not indexed for HLF subscribers. It is definitely worth viewing

    http://seekingalpha.co...
    Dec 25, 2014. 03:38 PM | 2 Likes Like |Link to Comment
  • Why Bill Ackman Will Be Proven Right On Herbalife Soon [View article]
    see my reply to Nimaj, above
    Dec 24, 2014. 10:22 AM | 5 Likes Like |Link to Comment
  • Why Bill Ackman Will Be Proven Right On Herbalife Soon [View article]
    Ben Nimaj
    "As you know, the 2nd prong of koscot (the Sine Qua Non of a pyramid scheme) must be first be proven for an MLM's structure to be found to be a "pyramid structure" and the burden of proof lies with the accuser. Should a court rule that the 2nd prong has been satisfied, then the defense might be able to convince the court that the MLM has rules in place to prevent inventory loading and a buy back program that sufficiently protects participants."

    Here's the full statement in the Koscot ruling

    “Such schemes are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users. In general such recruitment is facilitated by promising all participants the same 'lucrative' rights to recruit.”

    This statement was codified in the Koscot court's injunction, par. 2, p.1186

    " "2. Offering, operating, or participating in, any marketing or sales plan or program wherein a participant gives or agrees to give a valuable consideration in return (1) for the opportunity to receive compensation in return for inducing other persons to become participants in the plan or program, or (2) for the opportunity to receive something of value when a person induced by the participant induces a new participant to give such valuable consideration, Provided, That the term 'compensation,' as used in this paragraph only, does not mean any payment based on actually consummated sales of goods or services to persons who are not participants in the plan or program and who do not purchase such goods or services in order to participate in the plan or program."

    In other words, an offering as described above is an illegal pyramid unless 'compensation' is based on "actually consummated sales of goods or services to persons who are not participants" Since all MLMs that I know of pay compensation to upline participants on the wholesale purchases of their downlines, not on ‘consummated retail sales’, they are presumptively illegal pyramids. A prima facie case on the part of the government as soon as it shows, from company documentation, that compensation is paid on downline wholesale purchases. That is why Amway was sued, from the start, as an illegal pyramid. It fit within the Koscot prohibitions - and that is why it was up to Amway to prove that it had protective devices in place that actually prevented participant injury.

    In this respect, pyramids are comparable to Ponzi schemes, they are illegal on their face. The Amway case confused this issue in the sense that a defendant pyramid would be permitted to show that it had ‘rules’ in effect that precluded participant injury. As much as I disagree with this ruling, the fact remains that Amway held that it is the defendant pyramid’s burden of proof to show an absence of consumer injury, not the government’s.

    To further clarify Koscot, the court indicated it’s reasoning in respect to the "consummated’ sale requirement, at pp. 1183-84, by stating “requiring that compensation for recruitment be based in all cases upon retail sales by those recruited, the order provides a readily monitored means to ensure that recruitment of distributors is based on market demand, which is the goal of any legitimate business enterprise. [FN4] “

    An MLM/pyramid offering can thus be “readily monitored” simply by examining the company’s compensation plan. Amway’s plan paid on downline wholesale purchases, not consummated sales, and that is why it was sued as an illegal pyramid.

    This is not to say that the FTC has fully followed this analysis, although it indicates that Koscot is the primary ruling on the matter. For some reason, it has taken it upon itself to prove each pyramid case through documented consumer injury - as it did in the recent FHTM case, 10 years after the company commenced business and 350,000 victims recruited.
    http://1.usa.gov/1jcYVk5

    It is well time that the FTC re-evaluate its enforcement policy in respect to pyramid schemes.

    The full Koscot statement is quoted below,at pp. 1183-84

    " Miscellaneous
    Complaint counsel urge that Paragraph I(2) of the law judge's proposed order be reformulated so as to prevent in all cases the use of bounty-seeking 'headhunters,' individuals who would receive compensation based upon the number of others they could induce to participate in respondents' sales program. As now formulated, the law judge's order would permit respondents to enlist certain individuals as headhunters, provided they were not required to pay a valuable consideration for that right. The revised order would still permit payment of compensation to headhunters provided it was based upon actually consummated retail sales by recruits.
    Respondents have not objected to this change and we believe it is warranted under the circumstances. As complaint counsel point out, while the order prevents respondents from requiring an initial payment for participation in a plan, it does not prevent participants from making initial inventory purchases if they so desire. Thus there remain incentives for indiscriminate recruitment by headhunters, and incentives for headhunters in any program to ignore other requirements of the order designed to ensure that recruitment is undertaken honestly. By requiring that compensation for recruitment be based in all cases upon retail sales by those recruited, the order provides a readily monitored means to ensure that recruitment of distributors is based on market demand, which is the goal of any legitimate business enterprise. [FN4] "
    Dec 24, 2014. 10:17 AM | 4 Likes Like |Link to Comment
  • Why Bill Ackman Will Be Proven Right On Herbalife Soon [View article]
    to Ben Nimaj
    "The reality is that anyone claiming that Herbalife is a pyramid scheme will have to show that Herbalife satisfies the Koscot/Omnitrition test. Since internal sales CAN be a valid sale to the ultimate consumer, the data that Ackman, and evidently you, demand is in fact is NOT relevant."

    Actually, if a MLM has a pyramid structure it is it's obligation to prove to enforcement authorities that it, in fact, has rules in place to prevent inventory loading and, through buy back procedures, a buy back program -both of which effectively prevents participant loss.

    While I disagree with the conclusions in the FTC Amway case, it clearly held that Amway would have been found to be a pyramid save for the fact that Amway 'proved' that it's retail sales rules and buy back provision were demonstrably effective in preventing participant loss. I have yet to see any MLM/pyramid document with actual sales records, as Amway purportedly did, that its 'rules' are effective in preventing the consumer damage well documented and spelled out in the Koscot case.

    I don't really know why this information hasn't been requested of all major MLMs - I'm assuming that it is currently being sought from HLF and that a couple of studies won't do the trick.

    Given all the uncertainty here, it would seem a good idea that this documentation be requested of all MLMs as soon as practically possible, and not wait another another 34 years.
    Dec 23, 2014. 03:42 PM | 9 Likes Like |Link to Comment
  • Herbalife And The 1986 State Of California Final Judgment: An Update [View article]
    It is important to note that New York’s Attorney General Eric Schneiderman has a potential conflict similar to General Harris’, according to reports by Michelle Celarier in the New York Post http://bit.ly/1gxZoed
    Louis Flores in Progress Queens http://bit.ly/1z3c2cE
    and a recent article in Seeking Alpha by Rogier van Vlissingen. http://bit.ly/1wXpKj4
    “Attorney General Schneiderman's reported investigation of Herbalife is taking place as other prosecutorial or regulatory offices are investigating the company for questionable business practices, including allegations that Herbalife operates as a pyramid scheme. To push back against the investigations, Herbalife has retained a national law firm, public relations firms, and other consulting firms to lobby prosecutors and regulators. One of the consulting firms retained by Herbalife is SKD Knickerbocker, the consulting firm that employs Attorney General Schneiderman's ex-wife, Jennifer Cunningham, who remains a close adviser to Attorney General Schneiderman. Herbalife claims that Ms. Cunningham does not work on the Herbalife account at SKD Knickerbocker. However, government reform advocates question how Ms. Cunningham's firm could represent a company that is accused of operating as a pyramid scheme when she herself is advising the state's top law enforcement official.” (Quote from Progress Queens)

    In conjunction with this is the recent article by Eric Lipton of the New York Times http://nyti.ms/1z3c2cH concerning the extensive lobbying influence exerted on Attorneys General in other states as well.
    Dec 9, 2014. 01:01 PM | 6 Likes Like |Link to Comment
  • Myth Of Direct Selling Blinds The Bulls And Believers At Herbalife [View article]
    "In my experience, those who served on staffs in state AGs office studiously avoid the law when leveling accusations. A sad state of affairs in this country, no doubt."

    Mr. Casbus7, No bad at all. Thanks for the support. In my 30 years in an AG's office it was a real challenge in bringing a number of major cases while studiously avoiding the law when leveling these accusations. We need more informative comments such as yours to help the public understand how we public servants do our job.
    Dec 1, 2014. 02:52 PM | 8 Likes Like |Link to Comment
  • If Herbalife's Recent Press Release Seems Too Good To Be True, It's Because It Is [View article]
    Whatever else is going on, this does not look like a company whose primary concern is helping obese people around the world. I don't understand all the discussion about the recent press release concerning CEO Johnson but it does seem that he is spending a lot more time and energy on PR than on the obese victims in Cambodia, Vietnam, or Queens.
    Nov 27, 2014. 11:31 AM | 7 Likes Like |Link to Comment
  • 18 Reasons Herbalife Is Still A Great Short: Target $0 [View article]
    Fan, well stated. I understand this is an investment site and not one for Mother Theresa and her ilk, but at some time one has to take a look at what is happening.

    "Churn" may be a financial term but it reflects a massive number of persons, here and abroad, who saw the Cadillacs, the "Universidad", big homes etc and spent savings, maxed credit cards, recruited family members, left jobs, and ultimately, at a rate of 99%, failed - economically and personally.

    My only claim in this spat is that I was around when it started in 1968, and nothing has changed. Our 1982 Wisconsin Amway case documented, from tax returns not surveys, that the top !% of Wisconsin distributors (200 of 20,000) had annual incomes of -$900. At the time, I spoke to a number of victims, or members of their families, and learned first hand the damage done.

    There is now an abundance of evidence that pyramid style offerings are inherently destructive and deceptive. In addition to the personal impact involved, those retailers and others marketing similar products are faced with competition based on an 'inherently deceptive' market concept - to the tune of $150 billion each year.

    According to Stewart, the metrics are beginning to show the saturation inherent in a chain offering. Unfortunately, this could take a while and, in the meantime, more victims will fail. It really is time for government enforcement to take an unequivocal stand on this matter.
    Nov 10, 2014. 11:34 AM | 10 Likes Like |Link to Comment
  • Through Herbalife's Venezuela Looking Glass... And Back Again [View article]
    Ms. Richard, I'm impressed. This article, and the one your wrote in September,
    http://bit.ly/1tlmV8B
    provide a picture of a company that utilizes practices which should raise significant questions about the integrity of the balance of its business operations - a critical matter given annual revenues well over $4 billion and the fine, but ambiguous, line currently drawn between 'inherently' illegal pyramid offerings and MLM operations.

    As a former enforcement attorney that dealt with a number of these companies, my legal approach has focused on the premise of saturation, one adopted by early FTC cases such as Koscot - which continues to be cited as controlling in current litigation. A focus on foreign operations, such as Venezuela, highlights the fact that 80% of current MLM business is done overseas, with China as a major, and unpredictable, participant. I was troubled to learn that HLF operates in Cambodia, where the GDP per capita is under $1000
    http://bit.ly/1yq0kIi
    http://bit.ly/1yq0kIn

    US business has shifted to ethnic minorities, such as Latinos. 60% of HLF US customers are Latino but they make up only 17% of the population. Where are all the Anglo customers, other than those at the top of the heap?

    Shifting to new markets, and an ambiguous Federal enforcement attitude, can delay saturation, but my sense is that some of the extreme measures you document are a sign that things may be changing and evidence of efforts to maximize revenues for those at the top before things crumble.

    Nice job.
    Oct 23, 2014. 12:30 PM | 10 Likes Like |Link to Comment
  • Report: Herbalife expects disciplinary action from FTC, but no shutdown [View news story]
    "Edith Ramirez has been friends with Michael Johnson for years and she heads the FTC and Obama is friends with HLF as well"

    This a quote of yours from a comment to an article posted yesterday
    http://seekingalpha.co...

    This is a serious matter and I had asked in a comment to this article for some documentation of this relationship. I received none, so I am asking again. Where did you get this information.
    Oct 9, 2014. 09:36 AM | 3 Likes Like |Link to Comment
  • Herbalife Executives' Latest Denials Ring Hollow [View article]
    Is there any documented support for the claim that "Edith Ramirez has been friends with Michael Johnson for years and she heads the FTC" ? This is an extraordinary allegation.
    Oct 8, 2014. 12:46 PM | 5 Likes Like |Link to Comment
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