Seeking Alpha

Bruce Craig

 
View as an RSS Feed
View Bruce Craig's Comments BY TICKER:
Latest  |  Highest rated
  • Herbalife CEO Exasperated On Three-Ring Circus Conference Call [View article]
    ben-nimaj

    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 | 4 Likes Like |Link to Comment
  • Dark Days Ahead For Herbalife Longs [View article]
    http://bit.ly/1b64dVK
    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 http://bit.ly/1aG82Ve
    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. ”

    http://1.usa.gov/1aG82Vg
    Jan 15 11:01 AM | Likes Like |Link to Comment
  • Is The Federal Trade Commission Stating Its Current Enforcement Posture On MLMs? [View article]
    j. ricci
    "Therefore, to all the naysayers,relative to HLF,your best case scenario(i.e shutting down this so-called pyramid scheme),if all goes well for you-is a decade away-that's right-a decade away.I would welcome the author's response to this post relative to the accuracy of my timeline"

    The whole purpose of my article was to point out the possibility that the FTC may be acting in a more efficient and timely manner than in the past. I sincerely hope this is the case. Starting an action, such as FHTM, eleven years after the company started doing business is not an efficient enforcement approach. I believe that reality is beginning to set in, as it did in Madoff, and the Commission realizes that it cannot piecemeal its enforcement response in the manner you indicate. It will have to defend its actions, or inaction, at some time in the near future, with adverse political implications.The public is beginning to respond to this deficiency, as per the recent plea from Latino groups, and the likelihood of functional saturation may well be just around the corner.

    I agree that politics has a good deal to do with everything that happens in Washington. My hope, given the documented victim losses over the past 30 years and the delays you predict, is that the Commission has come to realize, for political or non-political reasons, that it faces an intractable process unless it, in the near future, establishes an explicit regulation prohibiting pyramid schemes along the lines of the Koscot decision.

    The Amway scenario, which I see as fundamentally impractical, would be fact intensive - to the extent that no MLM I have ever encountered would be able to come anywhere close to proving that which Amway purportedly proved back in 1979. I don't know about watersheds, but my point was that even though many current MLMs rely on Amway as a basis of legality, the actuality of Amway repeating itself in a subsequent case is extremely unlikely. Thus my view that this case is functionally irrelevant to the current situation.
    Jan 3 09:35 AM | Likes Like |Link to Comment
  • Is The Federal Trade Commission Stating Its Current Enforcement Posture On MLMs? [View article]
    You raise a valid point about the 1986 injunction, which includes "(3) to persons who, although desirous of becoming or who are a part of defendants' marketing plan or distribution system are buying for their own personal or family use."

    My first response is that the ruling is inconsistent with pyramid law Cal. PC327, which states "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" I just don't know how this provision made it into the order.

    However, the paragraph preceding the one cited above sec B,

    " defendants shall be in compliance with this Section 5, as long as a verification or documentation system they implement allows them, at any given point in time, to verify or: document to plaintiffs that any and all participants who receive commissions, bonuses, overrides and/or advancement from defendants in defendants marketing program, after entry of this judgment, are based on retail sales made by or through such participant(s) or others introduced directly or indirectly under participant(s)."

    This would seem to put Herbalife in the situation faced by Amway, where they would, upon request, have to verify the accuracy of a claim that sales were made " for their own personal or family use." They just couldn't claim it but would have to prove the personal and family aspects of their claim - information Herbalife says it doesn't have.

    Good question though. Not sure how that would play out in California. I suspect Herbalife would be reluctant to begin collecting retail sales data.
    Jan 2 05:28 PM | 1 Like Like |Link to Comment
  • Is The Federal Trade Commission Stating Its Current Enforcement Posture On MLMs? [View article]
    the ruling in Amway established that the defendant in that case had proven, within that legal proceeding,and through direct testimony and demonstrable evidence, that it's 'rules' prevented the consumer injury explicitly referenced in Koscot and a number of other cases. The precedent in this case is that if any company is sued by the government as a pyramid scheme, as was Amway, that the defendant has the opportunity and obligation to prove, through direct evidence, that it's rules have prevented consumer injury,

    To my knowledge, no pyramid has been able to demonstrate with legally sufficient evidence, in court or out, that its rules have prevented the losses inherent in pyramid offerings. In fact, the DSA successfully opposed a FTC rule that would have enabled these companies to demonstrate their innocence, as did Amway. Further evidence exists that the companies involved do not even have in their possession the kind of evidence, such as the existence of provable retail sales outside the organization, that absolved Amway.

    If there is any deviation from the legal 'precedent' involved it is that pyramid schemes have claimed legal status because they follow the 'Amway Rules' even though they have met none of the legal evidentary standards required in the Amway case.

    My view is that pyramids are inherently deceptive, as stated in the Koscot case. But if one wants to rely on the Amway precedent then adherence to the standards of that case, i.e. full disclosure at trial, then they would be, arguably, entitled to replicate the Amway facts in that case and obtain court absolution. That would be limiting the Amway case in the manner I indicated. Claiming that one follows the 'Amway Rules' would not be part of that process.

    The Amway ruling is further functionally limited by the demonstrated inability, over the past 30 years, of any pyramid style company to prove its innocence as did Amway. Loss ratios in excess of 90% in all known pyramid offerings make such an event extremely unlikely, thus my reason for considering that case irrelevant in the current context.

    Finally, on the issue of Amway innocence, I made a formal request of the Chairman of the FTC, Robert Pitofsky, that he revisit Amway and ask for proof that these rules continued to protect the public as originally concluded. This request was denied and, to my knowledge, no similar inquiry has been made of the larger MLMs that now claim millions of customers and where 90% failure rates have been demonstrated. The same year that Amway testified before the FTC, 1979, Wisconsin demonstrated, through tax returns made part of its case against Amway, that the top 1% of Wisconsin's 20,000 Amway distributors had an average annual net income of minus $900. This may explain my skepticism about the FTC Amway decision and doubts that the 'Amway Rules' have any viable value.
    Jan 2 04:01 PM | 1 Like Like |Link to Comment
  • Herbalife, Moelis mount offensive in Ackman battle [View news story]
    Columbia Professor John Coffee Jr. comments “All’s fair in love and activism,” in respect to Moelis & Co., efforts to convince investors to pull their money from Wm. Ackman's Pershing Square in response to his aggressive posture in respect to Herbalife (HLF), a Multi-Level Marketing company. Ackman claims Herbalife is a pyramid and that participant losses are significant, particularly in the low income Latino community.
    http://buswk.co/J73n4z.

    This raises the question whether Professor Coffee's concept of 'fairness' is limited to the tactics of active investors or whether it also involves the practices of the company in question, in this case Herbalife. I note Prof. Coffee's experience extends to his early efforts as a poverty law litigator and that one of his areas of expertise is corporate governance.

    Is Wall Street, and the academic community that studies it, supposed to be indifferent to the impact of the business practices of the firms it concerns itself with?

    I won't belabor the extensive discussion of significant loss rates, turnover of Herbalife distributors, and the absence of comprehensible enforcement standards. At a minimum, however, it seems that the subject deserves at least minimal examination before concepts of fairness are discussed at the higher academic levels.

    Ackman made an extensive presentation at the recent Robin Hood Conference about the fortunes of some Latino Herbalife distributors in Queens and set forth the existence of several clusters of Herbalife outlets in that borough.
    http://read.bi/J73nkN.

    It would present an interesting academic exercise for Prof. Coffee and some of his students to cross the river and visit these outlets to determine the success experiences of these low income investors. Herbalife, in the interest of public disclosure, should have no problem granting access for this academic exercise and providing relevant documentation concerning the success of these ventures.

    I'm not a corporate securities expert and perhaps I am in error in bringing up the concept of fairness in this context. As a former consumer fraud litigator I have witnessed the damage caused by some of these schemes and I certainly hope that this is not the case.
    Dec 9 10:28 AM | 2 Likes Like |Link to Comment
  • Is The Issue Of Illegal Saturation Of Concern To Investors? [View article]
    As a former Asst. Atty. Gen, I wish I could be more encouraging about this possibility, but the Office of State Attorney General has become much more politicized since I left office. Thus, I doubt most AG's with a 'smaller government' posture are going to do anything, particularly if they are planning on running for governor soon.

    There are some good AGs out there but they face the significant resources of the very wealthy MLM lobby, plus the local outrage of participants in the home state that are still on the kool-aid.

    This is a serious problem and may get worse, before saturation sets in and the losses mount even higher. At some time the politicians will have to face this, as well as those in the journalism and academic community that have ignored the problem, but long term thought does not seem to be in vogue at the present time.

    I think inaction at the Federal level is, in my opinion, reprehensible.
    Nov 18 08:27 AM | 1 Like Like |Link to Comment
  • Veneer Of Legitimacy Confuses Herbalife Longs [View article]
    You describe what I have come to view as "The Perfect Calm"

    This veneer of legitimacy has:

    1. Virtually eliminated victim complaints on the premise that since the offering was legal the failure must be because one did not work hard enough. This has greatly reduced the pressure on regulatory agencies to do something, other than a token lawsuit 10 or 1l years after commencement of business

    2. Enabled NYSE listing and the ability to post impressive profits and dividends. It has insulated these companies from the type of market based investigatory efforts and analysis that might have dug deeper into the substance of these marketing proposals. Your reference to Madoff is directly on point.

    3. Given virtual open access to other countries, which rely on implicit US approval. This may also facilitate, given the extensive funds in the possession of these companies, the ability to persuade regulators in these countries to accept this legitimacy without further question.

    4. Provided, at least for the time being, a solution to the problem of saturation of a market due to the exponential expansion inherent in these plans. There are two reasons for this. Within the US, absence of complaints and knowledge of prior failures enables victims to fall off the vine without alerting their successors. Second, the ability to move to other countries provides a fresh pool of new participants, although this appears to be diminishing. US based MLMs presently do about 20% of their business in this country, and 60% of that consists of Latinos. What happened to all the non-Latino US customers? Also, the fact that most victims of these US based companies are currently from other countries reduces the regulatory concern for this collateral damage and is the likely reason for limited press coverage. The Madoff victims, Zsa Zsa Gabor et al, got plenty of coverage.

    5. This veneer has, for reasons not fully understood by me, resulted in a virtual blackout of critical analysis by the investigative press and a total absence of substantive inquiry and study by the academic community. The academic sector's very purpose, in this context, is intended to examine a topic such as this, without economic or political pressures, within the marketing, economic, and legal domains. Harvard has done this to some extent, but it has been to sponsor an Amway funded program in China.
    http://bloom.bg/1ckgF6i

    I am personally most troubled by this lack of professional investigative and academic inquiry. MLM presently brings in about $150 billion annually, worldwide. This would seem to be an adequate amount to warrant inquiry, as it exceeds Madoff by an order of magnitude. As with Madoff, there will be plenty of coverage once the lid comes off, but then it will be too late. Sifting through the ashes, as done in Madoff and Enron, is not the sign of responsible journalism and academic inquiry. Why is it that most discussion of this topic is in Seeking Alpha, to whom I give credit for providing the forum?
    Nov 8 02:36 PM | 4 Likes Like |Link to Comment
  • 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.
    Nov 5 05:22 PM | 3 Likes Like |Link to Comment
COMMENTS STATS
68 Comments
134 Likes