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Douglas Brooks  

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  • Red Flags In Herbalife's Shipping And Handling Revenues [View article]
    This is an excellent article, and very timely. In the Bostick class action, pending in the U.S. District Court in Los Angeles, Herbalife is seeking to have the federal court bless this change in its S&H policies as part of the proposed class action settlement. In other words, Herbalife wants the Court to order it to continue its grossly unfair and deceptive S&H policies, as if they benefit its distributors. I hope the U.S. District Court and the FTC see through the charade.
    Feb 4, 2015. 12:10 PM | 11 Likes Like |Link to Comment
  • Herbalife And Multilevel Marketing: Signs Of Checkmate [View article]
    Jonathan - congratulations on a superb, thoughtful and entirely original work of research. Your creation of the concept of "proprietary density" is particularly important. MLM distributor agreements are deceptively presented as "simple" one or two-page, pre-printed forms with "standard" clauses. However, most of the MLM agreements that I have reviewed (including the Herbalife distributor agreement) incorporate by reference a voluminous set of rules (Herbalife's is over 120 pages long) and the distributor compensation plan, all of which can be unilaterally modified by the MLM firm at will. The incorporation by reference of additional documents into the MLM distributor agreement results in a sophisticated commercial contract that rivals franchise agreements in length, detail and complexity. There is a stark difference, however. Franchisees are entitled to receive a disclosure statement before they buy a franchise, which must be written in plain language. There is no such requirement for prospective MLM distributors, due to the FTC's decision to exempt MLM from the Business Opportunity Rule (a decision made after a multi-million dollar lobbying campaign by the MLM industry). Your "PD" metric is a valuable tool and a compelling demonstration of the need for federal and state regulators to protect consumers from predatory MLM firms like Herbalife.
    Dec 2, 2014. 09:11 AM | 21 Likes Like |Link to Comment
  • Mr. Stiritz' Passion For Shake Mix Costs POST Shareholders [View article]
    I had a different take on the irony of Herbalife's press release regarding sun block. It relates to a famous statement by Justice Louis Brandeis that "Sunlight is said to be the best of disinfectants;" this was from a 1913 article he wrote for Harpers Weekly about the need for better disclosures in the securities industry (this was long before the formation of the SEC). We could use a little sunlight on Herbalife. How about disclosure of the attrition rates of distributors and "members" at each level of the Herbalife compensation plan? Or disclosure of the actual net earnings or losses of Herbalife distributors at each level of the compensation plan? Or the percentage of Herbalife products that are profitably sold to consumers who are not participants in Herbalife? Instead we get a silly press release about the need to use sun block, pumping a Herbalife product which would be a poor substitute for any of dozens of similar products easily available at thousands of pharmacies across the country.

    The first two sentences of the Brandeis article are as follows:

    "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. And publicity has already played an important part in the struggle against the Money Trust."
    Nov 25, 2014. 11:48 AM | 14 Likes Like |Link to Comment
  • Are Herbalife Members Really Just Discount Buyers? [View article]
    Thanks for a thoughtful analysis. Herbalife has never explained why it stopped using the terminology for non-sales leaders after 2010, but it appears that these designations were merely arbitrary. That is, ALL participants at the 25% discount level were called "discount buyers," ALL participants at the 35% level were "small retailers" and ALL participants at the 42% level were "potential supervisors." For a discussion of how the use of such conventional business terms by Herbalife is deceptive, see Robert Fitzpatrick's latest article on the subject:
    The real problem with using Herbalife's terminology is that it obscures the fact that these are not static groups of distributors. In fact, the lower levels of Herbalife's distributor/member groups are constantly churning masses, some of whom are rising in the ranks but the vast majority of which will drop out within a year or two. Some of last month's "discount buyers" will be some of next month's "small retailers," and so on, with most destined to become former participants. Herbalife no longer discloses the attrition rates of its non-Supervisor "members" but the last time it did - in 2005 - the rate was over 90% a year. In contrast, Morningstar reports that the renewal rates for Costco members - true "discount buyers" - are in the mid to high 80%. Herbalife either does a lousy job of retaining its discount buyers, or these folks really aren't discount buyers at all, but are hopeful business persons, doomed to failure.
    Sep 17, 2014. 10:24 AM | 7 Likes Like |Link to Comment
  • Confessions Of A Former Herbalife Distributor: Ousted For Success [View article]
    Matt - Congratulations on a great story. This is your best yet.
    Sep 5, 2014. 08:17 AM | 31 Likes Like |Link to Comment
  • Herbalife: What The FTC Has To Work With [View article]
    Rogier - Another excellent article. I agree (and have been arguing for decades) that deceptive earnings claims are one of the many serious problems with MLM, and that the FTC should never have exempted MLM programs from the Business Opportunity Rule. But I have to point out that the current incarnation of the Biz Op Rule is seriously flawed, in that sellers of a Biz Op can check off a box on the disclosure form indicating that they do not make earnings claims. Of course, business opportunities are always sold with earnings claims, so the check off box will simply force the seller to use proxies (like the high level "independent" Herbalife distributors who operate lead generation systems) to make the necessary deceptive earnings claims.

    On the plus side, the Biz Op Rule does impose a 7-day cooling off period. I think it is very telling that many of the MLM opponents of the rule complained most bitterly about how a cooling off period would adversely affect their recruitment efforts. If you are really interested in recruiting an effective, committed sales force, a seven day cooling off period is not a serious obstacle.

    While disclosure and a cooling off period are essential, they won't solve the problem. There needs to be a serious effort to address MLM compensation plans which reward recruitment at the expense of retailing. My modest proposal is to prohibit the use of any form of purchase qualification for the right to earn commissions or to achieve a higher level in the plan. Such purchase qualifications are almost universally used in MLM compensation plans. But there is no legitimate, functional justification for these requirements. As the 2004 FTC staff advisory explained, "the most common means to achieve this goal [disguising fees paid by distributors to earn commissions] is to require a certain level of monthly purchases to qualify for commissions." In the Herbalife system, for example, this would require elimination of the "personal volume," "group volume," "matching volume" and similar requirements for qualifying to be paid commissions at various levels of the plan.

    Taking this step would not resolve all of the problems you have identified, and which are inevitable with any system that permits infinite recruitment. But eliminating product purchase qualifications for earning MLM commissions would go a long way toward eliminating the perverse incentives that cause the vast majority of MLM participants to lose their investments.
    Aug 5, 2014. 05:21 PM | 3 Likes Like |Link to Comment
  • White Collar Crime Expert Slams Herbalife: An Exclusive Interview With Sam Antar [View article]
    Kudos to QTR and especially to that [expletive deleted] Sam Antar for a pithy analysis of MLM from a unique perspective.
    Jul 14, 2014. 02:50 PM | 9 Likes Like |Link to Comment
  • The History Of The Endless Chain From Commercial Virus To Marketplace Miracle [View article]
    Matt -

    Good suggestions all, but my list would be shorter: (A) Prohibit payment of commissions other than on consummated retail sales. This was the rule in Koscot, and no case - not even Amway - has ever overruled it. Incidentally, enforcing this requirement would eliminate the uncertainty over the status of "internal sales," which was left unresolved by Burnlounge. (B) Eliminate purchase qualifications for earning commissions. In Herbalife, for instance, there are "personal volume," "group volume," "matching volume" and "total volume" requirements for earning various types of commissions and bonuses. If there really is retail demand for an MLM's products, there is no functional justification for such requirements. The effect of purchase qualifications is to create artificial demand for the products. One of the effects of eliminating purchase qualifications would be to eliminate the "breakage" and "roll up" features of MLM compensation plans which tend to enrich the top fraction of 1% of MLM distributors whose incomes are touted at recruitment meetings.
    Of course, none of these suggestions deals with the fundamental problem with endless chains, as Bob so compellingly demonstrates.
    Jun 13, 2014. 05:14 PM | 2 Likes Like |Link to Comment
  • Debunking 'The Retail Question' When An MLM Is An ELM [View article]
    Matt -

    You make a crucial point. In the FTC's Koscot case, which continues to be the leading case on defining pyramid schemes, the FTC recognized that endless chains are deceptive even if products are retailed. Here is a quote from the FTC's opinion:

    "Indeed, even where rewards are based upon sales to consumers, a scheme which represents indiscriminately to all comers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those at the bottom who can find no recruits capable of making retail sales." In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1180 (1975), aff’d mem. sub nom., Turner v. FTC, 580 F.2d 701 (D.C. Cir. 1978).

    Ultimately, in Koscot, the FTC decided to permit MLM programs where commissions were only paid on "actually consummated" sales to persons who are not participants. In its 1979 decision in Amway the FTC modified this rule (unfortunately, in my view) and allowed MLM programs to pay commissions on sales to distributors, provided that the program had rules in place (the "Amway rules") which ensured that the products were eventually sold to non-participants. In Webster v. Omnitrition the 9th Circuit Court of Appeals followed both Koscot and Amway, emphasizing that an MLM which purported to follow the Amway rules has to prove that its rules "actually work." Omnitrition also rejected the proposition, which continues to be advanced by MLM proponents, that a distributor's "personal use" satisfies the retail sales requirement. The 9th Circuit stated "If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to "ultimate users" of a product." 79 F.3d 776, 784 (9th Cir. 1996), cert. den., 519 U.S. 865.
    May 1, 2014. 04:59 PM | 3 Likes Like |Link to Comment
  • MLMs, Herbalife, Information Asymmetry, Reporting Regulations, And Not Tom Wolfe [View article]
    Another pithy article from Bill Keep - well done!

    The MLM industry has been very effective at preserving the asymmetry of information that makes a mockery of its pretensions to be the refuge of American entrepreneurial spirit. To take just one example, when, in 2006, the FTC proposed that MLM offerings should be subject to a very modest disclosure rule, MLM firms and the Direct Selling Association mounted a multi-million dollar lobbying campaign, ultimately enlisting 85 Congressmen and women, to procure an exemption for MLM from what ultimately became the FTC's Business Opportunity Rule. The substance of the opposition was that disclosure of basic facts about MLM "business opportunities" along with a cooling off period, would destroy the industry. Asymmetry triumphed.

    To follow up on the comments by David Brear, there is a report by Professor G. Robert Blakey, an expert on federal and state RICO statutes, concerning the parallels between the Amway hierarchy and organized crime which is well worth reading. It is available at The report suggests at least one answer to Mr. Herbert's question concerning the responsibility of an MLM firm for the conduct of its high level distributors, which is that the pretense of "independent" distributor agreements should not obscure the fact that in most MLM programs there is an intimate relationship between the MLM firm and its high level distributors, with a distinct sharing of roles and responsibilities for the continuous recruiting and churning of the masses of hapless distributors lower in the chain who do not have the slightest chance of success.
    Apr 4, 2014. 03:16 PM | 4 Likes Like |Link to Comment
  • Will The FTC Summon 'The Kraken' To Investigate Herbalife? [View article]
    I don't know how the oral arguments went. From reading the briefs my impression is that the FTC would like the Court to resolve the internal consumption issue, but the Court could affirm the judgment without dealing with it.
    Mar 17, 2014. 01:55 PM | Likes Like |Link to Comment
  • Will The FTC Summon 'The Kraken' To Investigate Herbalife? [View article]
    One interesting aspect of Commissioner Ramirez' response to Senator Markey was her reference to the pending Burnlounge case. The FTC sued the MLM firm Burnlounge in 2007 and won a final injunction in 2012, which Burnlounge appealed. Ramirez noted that the Burnlounge injunction prohibits the defendants from "engaging in any schemes in which compensation for recruitment is unrelated to the sale of products to customer who are not participants." This is a strong signal that the FTC is taking a position diametrically opposed to that of Herbalife and the Direct Selling Association, who maintain that "internal consumption" by distributors should count as "retailing." A ruling by the Ninth Circuit Court of Appeals could resolve this issue. A panel of the Ninth Circuit heard oral arguments in Burnlounge in December. The Ninth Circuit typically decides cases within 3 to 12 months after oral arguments.
    Mar 17, 2014. 12:34 PM | 4 Likes Like |Link to Comment
  • Herbalife Could Damn Well Be The Next MBIA [View article]
    Evaluating arguments by counting footnotes is rather silly. My sources are identified in the text of my article rather than in footnotes. As I discuss in my article, most of Coughlan's assertions are not supported by citations to supporting authorities, whether in her text or footnotes. Your comments concerning retail sales in the context of multi-level marketing are inconsistent with 40 years of pyramid scheme case law. If MLM participants are not making money by retailing products then the only other way they can be making money is by recruiting, which is the sine qua non of a pyramid scheme.
    Nov 29, 2013. 08:16 AM | Likes Like |Link to Comment
  • Herbalife Could Damn Well Be The Next MBIA [View article]
    I analyzed Coughlan's articles here:
    Nov 27, 2013. 07:44 AM | Likes Like |Link to Comment
  • Money Back Guarantee Makes Herbalife Even More Sinister [View article]
    When there is a termination of a franchise in a traditional system, like McDonald's or Burger King, there is typically either a repurchase of the franchise by the franchisor or a purchase of the franchise by another franchisee. In some systems there is a specific formula for how the repurchase amount is calculated, including an amount reflecting the value of any inventory, plus furnishings, fixtures and equipment as well as other factors. In other systems the repurchase amount is based on the "going concern" value of the business, which would also reflect the value of any inventory. For instance, in the McDonald's and Burger King systems the going concern value of a franchise was often expressed as a percentage of the trailing twelve months' gross sales (TTMS), so a franchise might be sold or repurchased at 50% or 70% of TTMS plus inventory, depending on a variety of factors. There are many variations, but in most cases the value of the inventory is only one element of the repurchase price.
    Nov 17, 2013. 10:15 AM | 1 Like Like |Link to Comment
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