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  • 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
  • Are Pyramid Schemes Inherently Fraudulent? [View article]
    The Koscot case is recognized by the FTC as primary and controlling in respect to pyramid issues. The decision is somewhat long, but it says two things which are important to this discussion.

    "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.”

    "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.

    On the topic of retail sales, Koscot makes it clear in its injunction, retail sales which would render a pyramid legal involve only ‘actually consummated’ sales made at the time upline commissions are paid. This is the traditional ‘override’ payment made to persons with a sales crew, and it is only paid when a completed retail sale is documented. According to the decision, this applies to “all” sales, not just a percentage.

    "2. Offering, operating, or participating in, any marketing or sales plan or program wherein a participant is given or promised compensation (1) for inducing another person to become a participant in the plan or program, or (2) when a person induced by the participant induces another person to become a participant in the plan or program; 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 resell them.

    The California law PC 327 states as follows:
    As used in this section, an "endless chain" means any scheme for the disposal or distribution of property whereby a participant pays a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme or for the chance to receive compensation when a person introduced by the participant introduces a new participant. Compensation, as used in this section, does not mean or include payment based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme.

    Read literally, is exempts payments based upon sales “made’ to persons not participants. This is in the present tense and does not refer to ‘sales which might be made sometime in the future’.

    There has been a good deal of confusion about the definition of a pyramid. It probably is time for the FTC, if it continues to recognize the Koscot case as precedent, to make a formal declaration on this point – probably in the form of a regulation. This would avoid all the confusion.
    Mar 10 01:59 PM | 3 Likes Like |Link to Comment
  • Herbalife CEO Exasperated On Three-Ring Circus Conference Call [View article]

    two points,

    First I am sure there are lower levels where product and sales kits are purchased without a related right to recruit others for profit. The legal concern is when a person buys inventory for the right to profit from a comparable inventory purchase made by his recruit.

    Second, you bring up the 70% rule and the by-back rule. Amway was found not to be an illegal pyramid because it proved to the FTC that not only did it have these rules but that they effectively resulted in 70% of all distributor sales being made at retail or to a sub-distributor who made such retail sales. They also convinced the court, with testimonial evidence, that the buy-back rule prevented consumer losses predicted by the judge in the Koscot case. Although I totally disagree with the Amway decision, as it took the unchallenged testimony of company officers that the rules actually worked, without any documentary evidence showing that they did work across the board, then and now. But at least it was up to Amway to 'prove' its case with courtroom evidence. This does not mean a study, but proof that all distributors actually sell at retail. Herbalife should be able to prove it's 'rules' either in court or in response to a formal subpoena - which would involve the extensive documentation necessary to qualify for an Amway exemption.

    My thought, as a first step, is that the FTC require of Herbalife, and others, actual proof that all distributorships meet the retail rules and that the buy-back rules are effective in preventing consumer injury. I don't think that 'retail' sales make a pyramid legal, but at least the Commission will be able to gather a factual base about the actual retail experiences of its distributors, including the number and identity of distributors that claim interest only in consumption, a point rejected in recent decisions, and the number,identity, and documentation of sales made outside the organization. Or, the FTC could simply sue Herbalife and request the proof that Amway supposedly provided.
    Feb 19 06:05 PM | 1 Like Like |Link to Comment
  • Herbalife CEO Exasperated On Three-Ring Circus Conference Call [View article]
    sounds ok, as long as these 'members' aren't given the right to recruit. Of course all the existing distributors, who signed up for the right to recruit as well as purchasing product can't be retroactively classified as members, since they joined not only to purchase product but, hopefully, recruit others.
    Feb 19 05:30 PM | Likes Like |Link to Comment
  • Herbalife CEO Exasperated On Three-Ring Circus Conference Call [View article]
    There's a good deal of discussion about many HLF distributors joining primarily for the purpose of using the products for themselves and their family and buying at a discount. There doesn't seem to be a problem with that, but why doesn't Herbalife offer a membership where that is the sole purpose?

    The problem arises when purchase for personal use and the opportunity to recruit others is linked in the same distributorship. Given known failure rates at about 99% and churn every two years, or less, it appears that many join initially for the profits from recruiting and when that doesn't turn out the distributor, perhaps to save face with all those he or she contacted in an attempt to recruit, says that he actually joined just to buy product and lose weight, even though most of these persons drop out within two years.

    Legally, when the opportunity exists, upon required inventory purchase, to recruit others for profit and pass that opportunity to recruit on down to those who make the required investment in an endless chain, there is a real possibility that the offering is part of a pyramid scheme. People are joining for the right to recruit others in this endless chain. Why not just have a new membership just for buying the product for personal use? At least that part of the plan would avoid legal challenges and, if company claims are correct that most join for personal use, this would take care of most of the problem - leaving only the distributorships purchased for the right to recruit with a legal problem.

    In fact, the legal problem with recruiting type distributorships could be avoided simply by not charging for the right to be a recruiting distributor through a required inventory purchase. This would make sense anyway because the company could select those who were good at either selling the non-recruiting memberships or finding others who were good at recruiting actual salesmen. Commissions to these recruiters would be based on completed, 'consummated' direct sales by those they recruit, as the law permits. This is the traditional method of direct selling, it results in qualified distributors, selected on merit by the company, and an absence of overlapping sales territories - caused by next door neighbors recruiting the same person - and unqualified distributors who may make excessive and illegal earning claims. The company's products would be sold on their merits, not on the hope of profiting by recruiting others.This would be direct selling in the traditional format without the endless recruiting, which has shown itself to result in these 99% distributor loss rates and two year churn.
    Feb 19 04:28 PM | 4 Likes Like |Link to Comment
  • 5 Ways Herbalife Is Like A Penny Stock [View article]
    "QTR raises an issue that has not been effectively dealt with, meaningful retail sales data. The FTC sued Amway as a pyramid. Amway executives testified that it had rules in effect which assured that retail sales would take place (to prevent inventory loading) and that the rules in fact worked.   The FTC accepted the conclusory testimony of Amway’s executives without requiring documentation of actual retail sales, and concluded from this inadequate proof that Amway was not an 'illegal' pyramid.
    The Amway case and subsequent authorities support the proposition that a firm which employs an MLM distribution model bears the legal responsibility to show, through direct courtroom testimony and documentary proof, that it only pays compensation based on actual retail sales.   I understand that the Chairwoman of the FTC is meeting with Latino representatives on pyramid issues in the near future. I would sincerely hope that, in response, the FTC would make the simple investigative request that Herbalife submit documentary proof of actual retail sales.   This is especially important in light of the conflicting responses on this issue by Herbalife officers. Given that the company had over $4 billion in sales last year ($800 million US), it is time that the FTC began to seek actual data on this critical issue.
    Having said that, I want to make it clear that controlling FTC cases, such as the one against Koscot Interplanetary, make only one exception in respect to retail sales, that they be 'consummated' at the time purchase is made by a distributor and upline commissions are paid - not that they be wholesale transactions where the products eventually might be sold at retail. This type of transaction can be legally verified by regulatory authorities. 
    My personal opinion is that the Amway case was deeply flawed in that the court ignored the 'consummated' language stated as precedent in the Koscot case. However, requesting verifiable retail sales data from Herbalife would be a first step in documenting the underlying realities of these billion dollar ventures - and help explain why the number of distributors losing money is well above 90% and why the Koscot case declared pyramid offerings 'inherently deceptive'. The FTC has lived in the dark for over 30 years, it is time that hard data be developed, industry wide, on this critical issue - and Herbalife would be a good place to start."
    Feb 4 05:28 PM | 5 Likes Like |Link to Comment
  • Nu Skin Falls Under Media Microscope [View article]
    A very helpful insight from a veteran reporter with extensive China experience. I find his reference to "Chinese consumers who often put too much trust in products with foreign brand names" particularly relevant. China has, to some extent, welcomed MLM type offerings, perhaps even taking a tolerant view of recent marketing efforts of Nu Skin, Herbalife and the Amway Corporation.

    One of the problems of placing too much trust in a pyramid style proposal is that its structure encourages the extensive use of recruiting practices that seek more and more recruits. The natural extension of this is the 'cult' type meeting which lures participants into making improvident career choices and expenditures. If experience in the United States is any guide, published data indicates failure rates in excess of 90%.

    If the citizens and government of China begin to believe that their trust has been exploited, I sense that the response will be more immediate and strident than the permissive attitudes currently in place in the United States. There are billions of dollars and millions of victims involved in these offerings, I hope the author of this article will continue to examine the full implications of the recent Nu Skin episode.
    Jan 21 11:21 AM | 2 Likes Like |Link to Comment
  • Nu Skin, An American Pyramid In China? [View article]
    A well researched and comprehensive article. You raise the critical point whether Nu Skin, and other MLMs such as Amway and Herbalife, could actually operate and profit in China if they strictly adhered to its legal requirements.

    While I may disagree with many of the political activities in China, it does appear that it is ahead of the curve in recognizing the victimization inherent in pyramid style offerings - and perhaps the related accumulation of political power able to adversely affect the enforcement of local laws.

    The FTC should take note of the abuses apparently in place in China and ask itself whether they exist as well in the United States - a country which holds itself out as the pre-eminent leader in the Western world.
    Jan 19 05:04 PM | 3 Likes Like |Link to Comment
  • Dark Days Ahead For Herbalife Longs [View article]
    Jan 16 11:01 AM | 2 Likes Like |Link to Comment
  • Is The Federal Trade Commission Stating Its Current Enforcement Posture On MLMs? [View article]
    I haven't studied the Primerica plan in an MLM context. However former FTC chairman Timothy Muris filed comments on behalf of Primerica opposing MLM inclusion in the FTC's Business Opportunity Rule.

    A web posting by Ethan Vanderbuilt
    seems to think Primerica is an MLM and he quotes Mr. Muris comment to the Rule

    For those who believe that Primerica is not an MLM company, Primerica says they are an MLM company when they make comments to the FTC.

    “Second, Primerica suggests … the Rule exclude multi-level marketing opportunities like those offered by Primerica and by many members of the Direct Selling Association. ”
    Jan 15 11:01 AM | Likes Like |Link to Comment