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  • The American Long Con, From Chain Letters To Multi-Level Marketing [View article]
    Excellent article. It points out systemic flaws in the MLM/pyramid offering, flaws which are not discussed by the financial press, stock advisers, or those including listed MLMs in their mutual or pension fund offerings.

    According to the US Postal Inspector "Chain letters don't work because the promise that all participants in a chain letter will be winners is mathematically impossible." This doesn't mean that we have to wait and see if the entire world gets involved, it means that the statement is inherently deceptive - as pointed out by the FTC in the Koscot decision.

    The problem is that an endless 'chain' style offering has attractive elements i.e. that you can offer your recruits the ability to recruit others, for profit, and they can tell their recruits the same thing, ad infinitum. Participants are essentially gambling that they can make their money before implosion. That is why they should be illegal. Disclosure of inherent impossibility doesn't help because the rewards, like with gambling, are attractive. Consider what would be the case if new recruits might, or might not, be entitled to recruit others for profit. No one would join because those they recruit would know that they might not be able to recruit others.

    General saturation is already evident by the fact that 80% of MLM business is now done in other countries. When it reaches end-stage, as with Madoff, a lot of professionals are going to be asked why these flaws were not, at a minimum, at least pointed out to potential investors.

    For some reason, more public attention has been focused on those who took a stance on legality, specifically Wm. Ackman, than on the underlying issues raised by Mr. Fitzpatrick. Before Ackman spoke up, the matter had been in functional dormancy since the 1979 Amway decision.

    Here are some people who should be writing about this matter, but haven't. Maybe send them a copy of this article.

    Jesse Eisinger, ProPublica
    Frank Partnoy, University of San Diego School of Law.
    Steven Davidoff Solomon - NY Times, Dealbook, and Univ. of Cal Berkeley Law
    Roger Parloff and Peter Elkind, Fortune Magazine
    Alexandra Stevenson and Gretchen Morgenson, NY Times

    You can get their emails from the web.
    Nov 4, 2015. 02:11 PM | 9 Likes Like |Link to Comment
  • Unsustainable, Fragile, Overvalued And Under Attack: The Case For Going Short Herbalife Now [View article]
    Powershake, looks like you're right. I stand corrected.
    Oct 7, 2015. 02:12 PM | 2 Likes Like |Link to Comment
  • Unsustainable, Fragile, Overvalued And Under Attack: The Case For Going Short Herbalife Now [View article]

    interesting picture of inventory
    Oct 7, 2015. 12:15 PM | 3 Likes Like |Link to Comment
  • With FTC Pulling Out Of A Skid In The Vemma Case, MLM Industry Put On Notice [View article]
    Excellent article. Re-phrasing the retail sales question into whether the product would sell, at commercial levels, if the opportunity to recruit is removed, is an excellent start in the right direction. Congratulations to experts Bosley and Vander Nat, and the author, for bringing this to the surface.

    The other significant element of the Vemma case is the following quote:

    "Vemma contacts only 15 of its over 90,000 Affiliates a month to ask if at least 70% of their sales were for consumption or retail.

    And Vemma’s Vice President of Legal Affairs admitted in her testimony that the script for those calls does not really investigate the reason an Affiliate purchased product or check for inventory loading.

    Moreover, the Receiver found that, in practice, Vemma is five months behind on its inventory loading audits and has never suspended or disciplined an Affiliate who failed to make the requisite sales to ultimate users.

    And Vemma does not even attempt to apply a rule similar to the ten customer rule that was found to be a reliable way to control inventory loading in Amway."

    Since many of the Vemma top end people appear to be Herbalife and Amway alumni, this reflects the likelihood that few MLMs take compliance with the "Amway Rules" seriously - even though the Amway case declared that the existence and enforcement of those rules protected all participants from improvident 'inventory loading' and thus rendered an illegal pyramid, as Amway was charged, legal.

    Given the functional impact of the Amway case of rendering all MLMs that purportedly have "rules" as legal MLMs, it would seem incumbent on the FTC (after 35 years) to use its investigative authority, as it apparently did in the Vemma case, to determine whether these rules have been enforced and are effective, keeping in mind that thy are intended on protecting ALL participants from losses in a pyramidal proposal once declared 'inherently deceptive'.

    Also to be considered is the fact that 80% of MLM business is now done overseas. Even if rule enforcement is supposedly enhanced in the US, will this be applied in other countries - or simply be used as a device to maintain US legitimacy sufficient to permit continued operation in other countries - where most of the money is made?

    My suggestion to the FTC is that it confer with staff, and regional, attorneys who have actually litigated its pyramid cases on the development of enforcement policies that would have a greater impact than those implemented to date by its Division of Marketing Practices.
    Sep 22, 2015. 01:17 PM | 6 Likes Like |Link to Comment
  • Herbalife, MLMs And The FTC: Some Questions And A Challenge For Market Analysts And The Financial Press [View article]
    to Lapoonski and Steadson
    I don't know whether I'm a crack lawyer or not, but I am capable of reading.

    Commissioner Pitofsky, in the Amway case, stated:
    "The Commission had described the essential features of an illegal pyramid scheme:
    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. . . . 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. In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1180 (1975) (emphasis added), aff'd mem., sub nom. Turner v. FTC 580 F.2d 701 (D.C. Cir. 1978)."

    MLM transactions involve inventory purchases both as a qualifying factor in entitling a 'direct' distributor to profit and the purchase when one of his recruits buys inventory which generates the profit to the recruiter and entitles the now qualified recruited distributor to repeat the transaction, and profit, when someone he recruits buys inventory. Thus the 'endless chain' of concern to the FTC.

    There is nothing within these inventory transactions that indicates, on their face, that any of these purchases are for the purpose of retail consumption - this creates the situation stated by the Judge in Amway - without proof that these transactions are "related to product sales" the company is presumptively a pyramid scheme. Because of this, Amway was initially charged with being a pyramid scheme.

    This shifted the 'burden of proof' to Amway to show that it had rules which would assure that those seeking to profit from recruiting didn't just put the product in their garage and hope to make more money from recruiting than selling at retail.

    Here's the quote on burden of proof from my article, quoting the Gold Unlimited case, for those crack commentators who bothered to read it.

    "We find it more appropriate, however, that a defendant carry the burden of establishing that it has effective anti-saturation programs. Given the grave risks imposed on investors in illegal schemes, the government should have to do no more than prove that the program satisfies the definition of Koscot. See, e.g., Amway, 93 F.T.C. at 699 (“There is little doubt that a pyramid distribution scheme should now be condemned even without the demonstration of its economic consequences. The Commission has studied the effects of such ‘entrepreneurial chains' and seen the damage they do and a per se rule should be used.”) (initial decision, affirmed by the FTC opinion, 93 F.T.C. at 735); Koscot, 86 F.T.C. at 1182 (“To require too large an evidentiary burden to condemn these schemes can only ensure that future generations of self-made commercial messiahs will dare to be great and dare anyone to stop them.”). The alternative—placing the burden on the government—forces the government to wait until after the collapse, as that alternative permits operators to maintain that the absence of collapse proves the success of the anti-saturation policies."

    Amway claimed to meet this ‘burden of proof’ with its rules and the Amway Judge accepted this proof. Mr. Steadson asked, as to verification of these rules, “How would you suggest this be done? Searching their house for unsold and unused products?”

    Perhaps reading the Herbalife Rules, also cited for those who actually read the article, would help. They indicate:
    “Rule 18-E:
    Maintenance of Records Distributors must maintain records of all their product distribution for a minimum of two (2) years. The records must contain the name, address and telephone number of the customer or Distributor to whom products were sold, complete information on products bought, and amount and method of payment. These records must be provided to Herbalife immediately upon request. Herbalife maintains the right to contact retail customers and downline Distributors to confirm these transactions and the level of service provided by the Distributor”

    It would be of value to everyone if the Federal Trade Commission would require that Herbalife produce a significant number of these records, selected at the Commission’s direction as to number and source, for the purpose of determining their existence, accuracy and veracity. The FTC could make the appropriate contacts with the customers identified in them, and the distributors who submitted them, to make these decisions. This inquiry would also answer the question whether all Herbalife distributors submit these records, as required.

    This data, after full verification, would have a significant impact on the question of the identity of primary consumer of ‘retail sales.’ My only concern is whether the reports submitted would contain sufficient data on 'purported 'self-consumption and distinguish between sales to another distributor as opposed to an actual retail customer – the question asked by Mr. Einhorn. The Commission would have to be able to determine the relative quantities within each of these categories in order to make an accurate determination on the issue of inventory loading and related issues involving pyramid schemes, otherwise the concept of protecting participants with ‘rules’ would be lost in non-specific data and would fail to meet the company's 'burden of proof". It would also create the impression of 'legality' when none existed
    Aug 2, 2015. 10:31 AM | 2 Likes Like |Link to Comment
  • Herbalife, MLMs And The FTC: Some Questions And A Challenge For Market Analysts And The Financial Press [View article]
    The basis of the Amway ruling was 'evidence' that its rules were enforced and prevented losses predicted by the Koscot case.

    Enforcing a rule has to be more than just accepting a form affidavit from an independent distributor and filing it in a drawer.

    It would require the company to enact procedures which would enable it to verify the veracity and extent of the contents of the affidavit and conclude that participants are, in fact, being protected - as Amway told the FTC they were. It would also have to prove that the rules were enforced as to all participants, not just some - otherwise there is no protective value.

    The burden of proof previously discussed would require the company to use data acquired by its rules to fully and adequately document, to the FTC, that all participants were in fact protected

    Just having a set of 'rules' does not immunize a MLM from a pyramid charge. An affidavit from a distributor is merely the first step in a MLMs defense of its 'rules'. If the affidavit is not verifiable by an enforcement agency, in the context of issues such as 'inventory loading,' then it is worthless - or worse, deceptive.

    I do not think that a distributor who files a false affidavit would feel comfortable if the matter of assisting in defrauding a Federal agency is raised.
    Jul 31, 2015. 02:03 PM | 3 Likes Like |Link to Comment
  • Herbalife, MLMs And The FTC: Some Questions And A Challenge For Market Analysts And The Financial Press [View article]

    The article referenced a legal requirement in the context of pyramid schemes, it is called "burden of proof' - there is a section on it. Check the legal language in the Gold Unlimited Case. Amway, sued as a pyramid, also recognized that it had to 'prove' to the court that its rules protected against abuses 'inherent' in pyramids. Take a look at the Koscot case cited in the article - it is still cited as controlling authority and is recognized as such in the Amway case - and states the reasons for a need for protections related to inventory.

    Amway type rules require specific information, which is intended to show that product purchases were not primarily intended for the acquiring the right to recruit others and profit from their product purchases. If a company can't prove from data acquired via its rules that product purchased were primarily for retail, then it is, remains, a pyramid. That is the legal premise of 'burden of proof.'

    Perhaps Herbalife has documentation required by its rules to prove that purchases were made in the context of actual retail sales. Perhaps not.
    Jul 30, 2015. 03:28 PM | 3 Likes Like |Link to Comment
  • Herbalife, MLMs And The FTC: Some Questions And A Challenge For Market Analysts And The Financial Press [View article]
    I should know better than to get into the middle of this, but Steadson’s point, regarding the Amway case,
    stating that “the ALJ found that the buy­back rule, the 70 percent rule, and the ten customer rule are enforced, and that they serve to prevent inventory loading and encourage retailing” is at the heart of this entire matter. (I note the link to the Amway case in the article is no longer operative, the above link will lead to the Amway decision)

    The Judge's findings on the “Amway Rules” are cited in the body of my article, copied from the Amway ruling. They recite the persons who testified on the rules, for example:
    “73. To ensure that distributors do not attempt to secure the performance bonus solely on the basis of purchases, Amway requires that, to receive a performance bonus, distributors must resell at least 70% of the products they have purchased each month. (RX 331, pp. 16-B to 17-B) The 70% rule has been in existence since the beginning of Amway. (S. Bryant, Tr. 4086) Amway enforces the 70% rule. (Lemier, Tr. 192-93; S. Bryant, Tr. 4056-59; Halliday, Tr. 6497)”

    My problem with the Judge’s conclusion is that it appears to be based solely on the testimony of Amway officers or employees. There is no indication of independent documentation or evidence that the rules, on an ongoing basis, actually work, and worked, as intended, i.e. resulted in the distributor retaining no more than 30% of the inventory purchased, a process intended to prevent “inventory loading” - as referenced in the opinion.

    Normally a Judge would not take the testimony of a defendant as the primary, or sole, basis for declaring innocence and, concurrently, would recite the factual basis for his conclusion that “Amway enforces the 70% rule.” I have seen no evidence, from any source that would support this conclusion. My understanding is that distributor certifications of compliance with “Amway rules” (by Amway or other MLMs) is token at best and virtually non-existent, at least from the standpoint of preventing the victimization fully set forth in the Koscot case. Documentation to the contrary would be invaluable in resolving current disputes concerning retail sales and inventory loading.

    In February of 2000, I made an explicit inquiry to the Chairman of the FTC on this point, i.e. whether the rules are enforced, on a continuing basis, and result in the intended prevention of “inventory loading.
    This was not done, the only explanation provided me, in July 2000, by James Kolm, then an FTC attorney in the BCP Marketing Practices Division, recited pyramid cases brought by the Commission and stated 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.”

    Given the fact that Judge Timony’s conclusion resulted in a declaration that Amway, sued as a pyramid, was not an illegal pyramid because of these rules, and their continuing existence and effective application, the basis for this ruling is at the heart of the current situation – where all MLMs, including Herbalife, have “rules” that purport to insulate them from prosecution under the Amway ruling. I have yet to see any independent documentary proof, normally the basis for a legal decision of this import, which indicates that the “rules” are actually enforced and work as intended by Judge Timony.
    Jul 30, 2015. 12:26 PM | 4 Likes Like |Link to Comment
  • Unregulated, Unexamined And Unchecked, Multi-Level Marketing Has Reached Saturation [View article]
    Excellent article. It's topic, Saturation, is one, as you state, which has been more or less ignored by the financial press and market analysts, even though geometric progression is at the heart of all MLM offerings. To some extent saturation has been delayed because of the substantial participant failure rates you mention, making room for new entrants that wouldn't be there if everyone was successfully retailing products. But, as you state, word is getting out.

    I have a strong feeling that the market experts and press commentators are going to exhibit a much greater interest in this topic, and your data, in the near future. Neither want to be in a "Madoff" situation or one where the information was there but, for other reasons, was ignored. Sifting through the ashes after downfall is not where they want to be.
    Jul 7, 2015. 04:04 PM | 12 Likes Like |Link to Comment
  • What's Going On With Herbalife's Bankers? [View article]
    I'm wondering how the big discussion tonight will factor in the hard reality that two of the most prominent experts in the area of MLM/pyramid issues, former FTC economist and pyramid expert Dr. Peter Vander Nat
    and colleague Professor William Keep. have both called for an explicit regulation dealing with pyramids.

    Any FTC regulation, or modification of enforcement policy, which would begin to require specific documentation of critical issues such as 'retail sales' and some of the other "Amway Rules" would begin to bring some sunlight into these areas, which have remained in the fog for the past 30 years.

    They could actually give the investment community some valuable information in respect to this particular type of offering and the advice they give their clients. Remember Madoff?
    May 5, 2015. 12:09 PM | 7 Likes Like |Link to Comment
  • Multilevel Marketing: The Long And Short Of It [View article]
    You recommend "proper and aggressive regulation" Amen. Your colleague, retired FTC economist and pyramid expert Dr. Peter Vander Nat, has recently made the same request. I take these comments as a rejection of the current FTC position that there cannot be a 'bright line' defining a pyramid and that cases should be brought only after the company in question has operated for a period of time sufficient to develop conclusive evidence of public harm. In the meantime, as indicated by Dr.Vander Nat, those not charged are presumed legal - as in his example that a traffic cop stops one speeder and the others drive by unhindered.

    A law or regulation has to exist which enables the detection and prosecution of a pyramid offering at or near the time of commencement of business. This will require extensive investigative authority to examine, at inception, the structure of the business opportunity offered and the relevant nature of 'retail sales' and other exculpatory factors.

    Failure rates in excess of 95% and 2 year 'churn' rates signify billions of dollars of loss at the hands of the millions of victims of these schemes, here and abroad - where 80% of business is currently conducted. It is hard to imagine a business practice which is in greater need of extensive and intensive regulation.

    That stated, I have little confidence in the FTC taking such an enforcement stance on its own - it recently exempted MLM from its business opportunity rule, even though it is virtually the only non-franchise business opportunity in existence.

    The Obama Administration, perhaps concerned that de-facto saturation could bring down this entire house of cards on its watch, may well conclude that more aggressive enforcement efforts are warranted, soon. Dr. Vander Nat, and you, have all the substantive evidence and expertise, developed over the past 20+ years, to support the enactment of such a regulation in the very short term. Doing nothing could well result in an outcome similar to the Madoff situation - except by an order of magnitude.

    Questions concerning inherent illegality of MLM offerings, such as those raised by Mr. van Vlissingen, and the subject of your disagreement, are important- but not as important as the immediate need for a substantive regulation, the terms of which, hopefully, could prevent, to a meaningful extent, the massive losses incurred by victims around the world.

    There are well meaning and competent people at the Federal Trade Commission, what they need is the support of the pubic, the press, and those within the Obama Administration who may well be concerned about the largest consumer fraud in history being dropped in their lap.
    May 4, 2015. 07:02 PM | 3 Likes Like |Link to Comment
  • Herbalife's Top Distributors Hold Warehouses Full Of Product In Mexico - Why? [View article]
    You cite Herbalife's 70% rule 18-C. This more or less matches one of the 'rules' Amway cited in its successful 1979 defense to the FTC charge it was a pyramid scheme.

    In other words, Amway would have been an illegal pyramid scheme but for the existence, and enforcement, of these rules.

    Herbalife rule 18-C states:
    "If the Distributor fails to timely certify to Herbalife that they
    have sold or consumed 70% of the product purchases made
    that Volume Month, Royalty Overrides, Production Bonuses,
    and other bonuses will not be paid to the Distributor."

    Given the critical importance of these rules in shielding a company from a pyramid scheme charge, my question - to one who has done more in-depth research on this company than anyone else - is whether the company, or any enforcement agency, such as the FTC, has ever made any substantive inquiry into the existence of these 'certifications' to Herbalife - and their veracity?

    This would seem to be a threshold issue in respect to any determination in respect to the important question of whether a company is a pyramid or not. I would assume that the investment market would deem this a critical matter in the context of recommending investment in the company.

    As an ancillary question, does Herbalife claim that its business rules exist, and are enforced, in all the countries that it operates? Has this ever been verified?
    May 1, 2015. 11:04 AM | 6 Likes Like |Link to Comment
  • 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.
    Jan 2, 2015. 01:03 PM | 2 Likes Like |Link to Comment