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Bruce Craig

 
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  • Unthinkable, Unimaginable And Unspeakable: Why Wall Street Clings To The Herbalife Myth [View article]
    An excellent article, by one who has spent the past seventeen years examining the underlying elements of a business proposal which now annually grosses $150 billion.

    The substantive arguments and factual presentations made in the article make a compelling case for meaningful regulation and enforcement response. They also make a case for parallel analysis by the widely acknowledged high-ranking professional analysts in investigative journalism, law, regulatory policy, marketing, and finance. These professed experts have been notably silent, or, rather, focused more on the perceived antics of hedge fund titans than on the underlying massive losses incurred, here and abroad, by those invisible victims with no political currency or public traction. Wm. Keep and a few others excepted.

    Among this group of silent witnesses, I include ProPublica, the Investigative Reporting Program at the Graduate School of Journalism at UC Berkely, the New York Times, the law school at Harvard which enabled the Amway program in the Harvard School of Business without, to my knowledge, informative due diligence analysis, all traditional business publications, the Federal Trade Commission, and all university marketing departments.

    I find it stunning that a $150 billion/yr business proposal which has been substantively questioned as to its legality, and evidenced consumer losses for 99% of its participants, has not warranted more than passing comment.

    Whether you agree with Mr. Fitzpatrick or not, you owe it to yourselves to read this article and ask why no meaningful answers to the issues raised have surfaced over the past 30 years.

    At some time, there exists the real possibility that pyramids will fall from their own weight, government involvement or not. When, and if, this happens there will be a lot of questions why none of the leading journalists, experts, and academics spoke authoritatively on what may well be the largest consumer fraud in history.
    Sep 16 02:31 PM | 15 Likes Like |Link to Comment
  • Something's Rotten In The State Of Missouri - Is Mr. Stiritz On The Wrong Side Of The Trade? [View article]
    here's the link to the Pitofsky letter, but there seems to be a problem with it. Hope this works

    http://bit.ly/15trz4s~emerald/files/FTCPito...
    Aug 17 03:12 PM | Likes Like |Link to Comment
  • Something's Rotten In The State Of Missouri - Is Mr. Stiritz On The Wrong Side Of The Trade? [View article]
    Cestlavie
    You reference a 1979 Supreme Court ruling involving Amway, as you have done in a number of other comments on Seeking Alpha. To my knowledge, no such ruling exists. The 1979 Amway decision was an administrative ruling by the Federal Trade Commission. The final decision in this case was rendered by FTC Commissioner Robert Pitofsky http://bit.ly/1pUIV7b – now Dean Emeritus at the Georgetown Law School and former Chairman of the FTC. This decision was notable from two standpoints. First, it gave life to Amway, sued as a pyramid, and its “Rules” which purported to protect participants from victimization and loss – as was itemized in two previous FTC decisions involving Koscot and Holiday Magic. Second, it was based not on the documented efficacy of these “Rules” but on the undocumented, and unchallenged, testimony of Amway officers. I know of no other FTC consumer case where the outcome was based on the testimony of defendants. I still cannot understand how Professor Pitofsky justified a ruling of this magnitude.

    I did write then FTC Chairman Pitofsky http://bit.ly/15trz4s~emerald/files/FTCPito... in 2000 and asked that he conduct a preliminary inquiry into whether the Amway “Rules” had in fact achieved, and continue to achieve, the benign results predicted by Amway and the Pitofsky ruling. I did not receive a reply from him, but did receive a reply related to this request from FTC attorney James Kohm who, while declining my request for an inquiry into these “Rules” – did indicate that “The FTC continues to explore avenues for halting pyramid schemes that fleece millions of dollars from consumers, including the clarification of legal standards in this area.” Attorney Kohm presently heads the Enforcement Division of the FTC’s Bureau of Consumer Protection.

    To put this issue into perspective, a recent publication of Pyramid Scheme Alert President Robert Fitzpatrick http://bit.ly/1pUIVUP
    discloses, from public information, at page 10, that the average annual income of 99% of the “Active” or “leader” Amway distributors was $1375, or $26.44 per week, while the top .97% had average annual incomes of $108,675 (p.5). Perhaps it is time to revisit this question in a substantive manner.
    C’est dommage.
    Aug 17 01:15 PM | 4 Likes Like |Link to Comment
  • Dear John Hempton: It's Not A Weight Loss Cult, It's A Confidence Game [View article]
    ERS
    "Once an investigation of an MLM company starts, the big recruiters start thinking about the probable outcome. The biggest money makers well stay put for a while because they're making too much money not to. But coincident with the investigation big recruiters from rival companies start circling like vultures over a wounded animal, trying to recruit those who are getting scared and contemplating moving to another company."

    Never thought much about this part of the business, but it makes sense. It does help explain why a lawsuit by the FTC against a particular company has virtually no adverse impact on the industry as a whole - or those who work in these upper regions. If anything, activity increases - likely because all involved figure that there won't be another case, at least for a couple of years.

    This is a broken enforcement posture. It is of no value to current or future victims who, increasingly, come from low income or ethnic sectors - groups that have few to speak on their behalf.

    This has gone on long enough. Broad based enforcement, investigative inquiry, and regulatory efforts are critical if the public is to be protected from the increasingly aggressive tactics being implemented by these professional recruiters.
    Aug 7 08:21 PM | 8 Likes Like |Link to Comment
  • Herbalife So Far: Inefficient Market Hypothesis, Chapter 2 [View article]
    My comment, below, to your earlier article. Things may yet turn out well for Mr. Coyote.

    Herbalife - The Fog Of War, And Double Trouble [View article]
    "Wile E Coyote. That image and Mr. Icahn will stay in my mind for quite a while."

    I think your current article reflects a growing awareness that the absence of any legally succinct FTC regulatory standards for pyramid schemes is creating an unstable platform for investors on both sides of the issue.

    Also, I've wondered why HLF, in business since 1986, has 60% of its customer base Latino. Whatever happened to all its Anglo customers over the years? Saturation, or have they all slimmed down?
    Jul 31 11:22 AM | 4 Likes Like |Link to Comment
  • Herbalife: POOF! There Goes The Bull Case [View article]
    I know very little about the stock market but, for the most part, it seems to mainly run on rational analysis of public information – since it involves the investment of one’s money. Disputes range across the spectrum, ego and hyperbole are present, but, in the end, intelligent thought should keep things within a reasonable range – barring some unexpected critical development or event.

    Herbalife has been publicly traded since 1986 and its corporate data and method of business available to the market. The company has a number of highly reputable pubic figures on its payroll, including – to my amazement – Madeline Albright.

    How is it possible that the price of Herbalife stock could jump about 30% before, during, and after the publicly announced presentation of William Ackman on nutrition clubs last Tuesday and, today, swing between $69 and $59 based on a routine earnings report? To add to the uncertainty, an article by Herb Greenberg today raised questions about China’s view of another MLM company USANA. Your chart on second quarter HLF metrics shows a positive 38% year to year change in China (and a 1% drop in the US).

    It seems to me that the vaunted US investment community hasn't the slightest idea about the legal integrity of a company in which it is investing its, and other people's, money – a company that has been on the public market, with essentially the same marketing plan, since 1986.

    It has been my contention http://seekingalpha.co... that the regulatory authorities, namely the Federal Trade Commission, have failed to provide even a rudimentary legal standard by which Herbalife, and other similar offerings, could be rationally evaluated. It is difficult for me to understand why greater clarity has not been demanded in respect to an industry that brings in $30 billion in annual revenues and $150 billion internationally, with reported loss ratios approaching 99%.

    My concern is not so much for the investment community as for the victims of these pyramid schemes, who burn while Wall Street fiddles. My hope is that those on either side of this issue will demand an immediate regulatory response, one is which overdue by about 30 years. Case law exists which, if properly evaluated in a context of protecting vulnerable victims, could provide the applicable legal standards - which should also be of value to investors that would rather profit from meaningful information rather than hype. The Obama Administration owes nothing less than full attention to this exploitative process of the most vulnerable.
    Jul 28 11:11 PM | 5 Likes Like |Link to Comment
  • Amorality, Ligon, Omnitrition And A Diamond Studded Fraud [View article]
    When I submitted my article to SA on Monday, http://seekingalpha.co...
    quoting a letter asking the FTC to create some explicit standards regarding pyramid offerings, I didn't realize its relevance to the Ackman presentation on Tuesday. My general thought was that HLF would drop significantly after the presentation but that the overall issue of pyramid illegality would be lost in the shuffle and, with a blip, business would continue as usual.

    In fact the stock, starting -5% down, jumped about 30%. One very clear message delivered is that the market is totally confounded when it comes to the issue of the legality of pyramid offerings. From an investor’s standpoint, this should be unacceptable. Given that pyramid plans bring in about $30 billion annually, and many are listed on US stock exchanges, it would seem derelict that the Federal agency charged with overseeing these offering has failed to provide clear legal standards. It has had over 30 years, and full statutory authority, to do so.

    As stated in my article, the FTC has maintained an ad hoc position on pyramids, in other words it has no specific criteria or standards which define the ‘bright line’ of illegal conduct in this area. It more or less says that it will look at a particular company and decide after in-depth investigation whether it is a pyramid. This creates several problems.

    First, the practical effect is that any company not pursued by the FTC is presumed legal, since there is no objective way to determine otherwise. Most major companies, such as Amway, Nu Skin and Herbalife operate under this presumption.

    The second problem is that prospective participants and investors have no practical means of determining whether or not they are participating or investing in a legal enterprise, a fact made clear by yesterday’s 30% jump (and today’s 3% drop). The FTC has stated that there is no 'bright line' so it leaves decision information, unless there is litigation, to promoters, on either side of the issue, who often have the resources to affect investor opinion.

    The third problem is that even if a company is eventually declared illegal, significant funds have already been lost by participants and investors - most of which can never be recovered. This would not be the case if there were clear standards and enforcement efforts were initiated early in the process. The FHTM example in my article spells this out – an FTC case involving 300,000 victims, which was brought 12 years after it started business.

    For those interested in investing, or participating, in a pyramid style offering it would seem critical that clear legal standards be the basis for these decisions, although, based on prior conduct, I am concerned that industry influence on the FTC could result in significantly flawed standards. I hope not.

    On the merits of the Ackman presentation, I have to state that the examples presented, if accurate, depict one of the most exploitative offerings, along with payday loans, that I have encountered in my years as a consumer lawyer. Matt Stewart’s posting of a video of a new Spanish speaking Club 100 prospect and stating that translation was not necessary was tragically accurate.
    Jul 23 10:29 AM | 4 Likes Like |Link to Comment
  • The History Of The Endless Chain From Commercial Virus To Marketplace Miracle [View article]
    "For starters how about offering a true discount only membership where the member can't participate in the business opportunity? We'll find out quickly who are the real retail customers."

    Good point. I've always wondered about this option. If many join only to use the product, or buy it for neighbors and friends, why not an offering without an opportunity to recruit others, sort of like Costco.

    This certainly would avoid legal scrutiny on what the 'primary' purpose of this particular offering is, and prove to regulators just how many join only for the product.

    I'm still unclear why those who join leave within two years if they're satisfied with the product.

    Robert Fitzpatrick has provided a comprehensive analysis and discussion on the topic of 'endless' pyramids. His comments are well worth considering.
    Jun 13 03:31 PM | 4 Likes Like |Link to Comment
  • ABC Joins FTC, DOJ, AGs And FBI Undercover [View article]
    good
    Apr 24 08:47 PM | Likes Like |Link to Comment
  • Is Herbalife A Pyramid Scheme? A Simple Question Of Law [View article]
    lastein points out the pending BurnLounge case in the 9th Circuit. Among the questions faced by that court is whether internal sales qualify to meet the 'retail sales' requirement.

    I raised this legal issue in an earlier comment and quoted the 9th Circuit's Omnitrition opinion to the effect that "In addition, plaintiffs have produced evidence that the 70% rule can be satisfied by a distributor's personal use of the products. If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to “ultimate users” of a product."

    The author, in reply, states that I misunderstood Omnitrition "The question the court was addressing in Omnitrition is whether the plaintiff offered enough evidence that Omnitrition *might* be a pyramid scheme that the plaintiff is entitled to a trial." He places this in the context of an appeal from a lower court decision in favor of Omnitrition and that the circuit court's statement was limited to a review of the sufficiency of evidentiary factual issues presented by the lower court's ruling.

    However this review involved Omnitrition's statement that "the 70% rule can be satisfied by a distributor's personal use of the products." The court was not dealing with the adequacy of a factual issue as to what 'personal use' in fact meant, or to what degree the distributor consumed his own product. It was dealing with a legal issue, and declared how it interpreted the Koscot ruling in the context of Omnitrition's statement that "a distributor's personal use of the products", i.e. a sale to himself, would legalize it's offering. The Court explicitly replied "If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to “ultimate users” of a product."

    Contrary to the author's assertion, this appears to state the 9th Circuit's legal opinion on the issue of 'personal use. While it might change its mind, it seems likely to reflect this opinion in it's upcoming BurnLounge decision.
    Mar 30 11:36 AM | 1 Like Like |Link to Comment
  • Herbalife's Gold Standard Guarantee Is 'Fool's Gold' [View article]
    Toolman: global policy

    Thanks. Does Herbalife have, or plan to have, documentation of its implementation of the new buyback rules globally? Without that documentation, which is verifiable here in the US and which demonstrates an absence of participant injury, we may not be any further than we were before.
    Mar 26 01:09 PM | Likes Like |Link to Comment
  • Is Herbalife A Pyramid Scheme? A Simple Question Of Law [View article]
    Here's a further quote from Omnitrition, it seems to say that sales to a downline or for a distributor's own use are not valid.

    "Second, Omnitrition produced no evidence of enforcement of its 70% rule. It merely states that, in order to place further orders IMAs must “certify” that they have sold 70% of the product they previously ordered. There is no evidence that this “certification” requirement actually serves to deter inventory loading. Importantly, the requirement can be satisfied by non-retail sales to a supervisor's own downline IMAs. This makes it less likely that the rule will effectively tie royalty overrides to sales to ultimate users, as Koscot requires.
    In addition, plaintiffs have produced evidence that the 70% rule can be satisfied by a distributor's personal use of the products. If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to “ultimate users” of a product."

    This would seem to clearly preclude a distributor as an 'ultimate user.' The quote further cites Koscot as the controlling precedent. The injunctive language in Koscot prohibits compensation being paid to a qualified distributor on inventory purchases made by a distributor's recruit. I.e. wholesale purchases. The only exemption is payment for 'actually consummated' retail sales made concurrent with the payment of 'compensation.' That is the referenced quote as to 'ultimate users'.

    The Koscot quote reads:

    "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.

    Both these rulings make sense. If one of the purposes of retail sales requirements is to prevent 'inventory loading' then permitting a distributor to sell inventory to himself, i.e. the inventory he has acquired in order to gain the right to recruit others, then the 'retail sales' requirement becomes meaningless since there is no way to tell the difference between 'loaded' inventory and inventory for personal use. It is also likely that a distributor will claim personal use because if he doesn't then he might well be in violation of the company's 70% rule. To adopt a personal use exemption is to create a legal standard which is incapable of verification.

    It would seem that if a company offered a form of distributorship which involved only the right to purchase at a discount, and did not include the right to recruit others for profit, then there shouldn't be a legal problem.
    Mar 26 12:49 PM | 7 Likes Like |Link to Comment
  • Herbalife's Gold Standard Guarantee Is 'Fool's Gold' [View article]
    My question is whether Herbalife's new 'buy back' provisions apply, with the same terms, worldwide or only in the United States?

    I don't know Herbalife's experience, but in the MLM industry it is reported that about 80% of it's sales now take place overseas. With the possible exception of China, it is quite likely that other countries have accepted Herbalife, and other similar offerings, because they are listed on a US stock exchange and are, by some, considered legal in the United States. If a company was declared illegal in the US it seems quite likely that other countries would react accordingly.

    If, in fact, Herbalife does not offer the same 'gold standard' abroad, it could be argued that doing so in the US, if that resulted in a declaration of legality by US authorities, could be of value even if implementing the US buyback standard could be more costly to the company than its earlier version.

    Related to this, and the question of retail sales, is whether a company has completely transparent and accurate documentation of these transactions, transparent at least to the government, so that the value and implementation of these protections can be accurately determined and evaluated in time to protect existing and prospective distributors.

    Without this documentation, a company could continue for a significant period of time without any effective oversight - not a good solution for an industry that brings in billions of dollars in purchases from persons that could benefit from an enforcement analysis of these protective provisions.

    While I disagree with the concept of after-the-fact analysis of the legality of an MLM, at least a company should be required to do what Amway did in it's FTC case in 1979 - prove to the court, with explicit testimony and documentation, that its 'rules' actually prevented inventory loading and consumer loss which was stated of express concern in the earlier Koscot case.
    Mar 26 11:51 AM | 3 Likes Like |Link to Comment
  • Argumentum Ad Hominem Shows Herbalife Desperation [View article]
    van Vlissingen

    The New York Times article on Ackman contained some troubling references involving his attempts to influence politicians and the public. News reports indicate that all sides of this conflict have engaged in tactics that may well be common in the heady atmosphere of hedge funds and political influence. I wish this weren't the case, on both sides.

    Rogier does touch on a related issue concerning the Times - a complete failure on the part of the most prominent newspaper in the country to report on the critical issues concerning the legality of pyramid type offerings and government inaction. The MLM industry has annual revenues of about $150 billion, an ambiguous legal atmosphere, and loss ratios reported in excess of 90%. This would seem sufficient reason to write something about the subject that goes beyond machinations in the hedge fund market and recitations concerning the Battle of the Titans. I have, contacted a number of New York Times reporters and asked them to cover this important topic, they include Jesse Eisinger, Steven Davidoff, Andrew Sorkin and Gretchen Morgenson - nothing has been forthcoming.

    A legal and public issue such as this should have significant public coverage that is not influenced by personal economic interests. The Times has not lived up to its promise to publish all the news that's fit to print.
    Mar 11 11:20 AM | 3 Likes Like |Link to Comment
  • Are Pyramid Schemes Inherently Fraudulent? [View article]
    not sure about the legal implications of this distinction between deception and fraud. Deception can exist not only by what is said but what is not said, if the silence results in deception - at least that's the way I understand it. The Koscot court also referenced "inherent illegality" which is probably a better concept.

    "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."
    Mar 10 04:29 PM | 2 Likes Like |Link to Comment
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