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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, 2014. 02:31 PM | 15 Likes Like |Link to Comment
  • 18 Reasons Herbalife Is Still A Great Short: Target $0 [View article]
    Fan, well stated. I understand this is an investment site and not one for Mother Theresa and her ilk, but at some time one has to take a look at what is happening.

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

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

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

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

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

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

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

    Nice job.
    Oct 23, 2014. 12:30 PM | 10 Likes Like |Link to Comment
  • Why Bill Ackman Will Be Proven Right On Herbalife Soon [View article]
    to Ben Nimaj
    "The reality is that anyone claiming that Herbalife is a pyramid scheme will have to show that Herbalife satisfies the Koscot/Omnitrition test. Since internal sales CAN be a valid sale to the ultimate consumer, the data that Ackman, and evidently you, demand is in fact is NOT relevant."

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

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

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

    Given all the uncertainty here, it would seem a good idea that this documentation be requested of all MLMs as soon as practically possible, and not wait another another 34 years.
    Dec 23, 2014. 03:42 PM | 9 Likes Like |Link to Comment
  • Myth Of Direct Selling Blinds The Bulls And Believers At Herbalife [View article]
    "In my experience, those who served on staffs in state AGs office studiously avoid the law when leveling accusations. A sad state of affairs in this country, no doubt."

    Mr. Casbus7, No bad at all. Thanks for the support. In my 30 years in an AG's office it was a real challenge in bringing a number of major cases while studiously avoiding the law when leveling these accusations. We need more informative comments such as yours to help the public understand how we public servants do our job.
    Dec 1, 2014. 02:52 PM | 8 Likes Like |Link to Comment
  • Dear John Hempton: It's Not A Weight Loss Cult, It's A Confidence Game [View article]
    "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, 2014. 08:21 PM | 8 Likes Like |Link to Comment
  • If Herbalife's Recent Press Release Seems Too Good To Be True, It's Because It Is [View article]
    Whatever else is going on, this does not look like a company whose primary concern is helping obese people around the world. I don't understand all the discussion about the recent press release concerning CEO Johnson but it does seem that he is spending a lot more time and energy on PR than on the obese victims in Cambodia, Vietnam, or Queens.
    Nov 27, 2014. 11:31 AM | 7 Likes Like |Link to Comment
  • 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, 2014. 12:49 PM | 7 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
  • Herbalife And The 1986 State Of California Final Judgment: An Update [View article]
    It is important to note that New York’s Attorney General Eric Schneiderman has a potential conflict similar to General Harris’, according to reports by Michelle Celarier in the New York Post
    Louis Flores in Progress Queens
    and a recent article in Seeking Alpha by Rogier van Vlissingen.
    “Attorney General Schneiderman's reported investigation of Herbalife is taking place as other prosecutorial or regulatory offices are investigating the company for questionable business practices, including allegations that Herbalife operates as a pyramid scheme. To push back against the investigations, Herbalife has retained a national law firm, public relations firms, and other consulting firms to lobby prosecutors and regulators. One of the consulting firms retained by Herbalife is SKD Knickerbocker, the consulting firm that employs Attorney General Schneiderman's ex-wife, Jennifer Cunningham, who remains a close adviser to Attorney General Schneiderman. Herbalife claims that Ms. Cunningham does not work on the Herbalife account at SKD Knickerbocker. However, government reform advocates question how Ms. Cunningham's firm could represent a company that is accused of operating as a pyramid scheme when she herself is advising the state's top law enforcement official.” (Quote from Progress Queens)

    In conjunction with this is the recent article by Eric Lipton of the New York Times concerning the extensive lobbying influence exerted on Attorneys General in other states as well.
    Dec 9, 2014. 01:01 PM | 6 Likes Like |Link to Comment
  • 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 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, 2014. 11:11 PM | 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
  • Why Bill Ackman Will Be Proven Right On Herbalife Soon [View article]
    see my reply to Nimaj, above
    Dec 24, 2014. 10:22 AM | 5 Likes Like |Link to Comment
  • Herbalife Executives' Latest Denials Ring Hollow [View article]
    Is there any documented support for the claim that "Edith Ramirez has been friends with Michael Johnson for years and she heads the FTC" ? This is an extraordinary allegation.
    Oct 8, 2014. 12:46 PM | 5 Likes Like |Link to Comment
  • Something's Rotten In The State Of Missouri - Is Mr. Stiritz On The Wrong Side Of The Trade? [View article]
    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 – 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 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
    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, 2014. 01:15 PM | 5 Likes Like |Link to Comment