Seeking Alpha

Reel Ken's  Instablog

Reel Ken
Send Message
I have worked in the financial service industry for 40 years. My area of expertise is risk management and complex financial products. I have been a frequent speaker, on behalf of many financial firms, to financial professionals across the country. I have extensive experience in statistics and... More
View Reel Ken's Instablogs on:
  • Is Herbalife An Endless Chain?

    Let me start out by saying this article is not intended to illustrate whether or not Herbalife is a Pyramid Scheme. There are plenty of authors and readers that have their opinions. Personally, I don't think there are sufficient facts to make a solid determination.

    In following the "Herbalife Story" I've noticed that many authors and readers seem to mis-handle concepts. They seem not to have too clear an understanding of where we are, how we got here and what was discarded along the way. So I thought I'd start at the beginning and work our way to the present.

    An endless chain/pyramid is an infinite series of connected links. It is a closed system. That means that the only way for a member-link to recover their money, or make a profit, is by getting another person to join as a member-link.

    It can be proven, with mathematically certainty that the only possibility for the predominance of "member-links" to make money occurs only if there are an infinite number of potential member-links. Hence … "endless".

    One way to defeat the endless chain/pyramid is to assert that an infinite market exists. Some actually tried to make this claim using a variety of methods. But this argument is false simply because there can be no infinite number of member-links within a finite population.

    Unfortunately, some still hold onto/against the "infinite market" as vain proof of something. There can be no infinite market ... but all that means is that Endless Chain is a viable theory.

    So, where Endless Chain occurs it is a fraud because the "last man standing" will, with mathematical certainty, lose their money. Actually, not the last man, but every "last" member-link.

    Now, HLF is an open system. That means that member-links are not the only way to generate money. There is product that can be sold. So, if a distributor pays $50-$100 dollars for a "kit", they are not restricted to signing up new member-links to earn this back and make a profit. They can sell a very modest amount of product to do so. So the endless chain theory is dismissed because one can no longer, with mathematical certainty, predict that the last man will be holding the bag.

    This gave birth to the "legitimate product" theory. Proponents of endless chain postulated that the mere existence of product does not disprove endless chain. The product must be legitimate …. That is … have consumer demand. I agree. The Courts heard this argument and also agreed. However, they also said that as long as there are some people, that are not member-links, who actually purchase product, it is evidence that consumer demand exists.

    The proponents of endless chain then switched gears and focused on a new argument … even if there is consumer demand, if product cannot be sold at a profit, then endless chain exists. I agree.

    We see this argument coming up on a consistent basis and even prompted an article by me.

    The problem with this argument is an endless chain/Pyramid fraud requires mathematical certainty of ultimate result. Therefore the "no profit" argument must show that profit is impossible. As long as there is a possibility of profit, one can no longer predict an outcome with mathematical certainty.

    What happened is that the FTC, and others, soon realized that endless chain/pyramid was nearly impossible to prove, except in the most egregious situations. So it was abandoned in favor of the current theory … focusing on "recruitment rewards" vs ultimate user product sales.

    I hope this article will help people understand that, though Endless Chain was the starting point, it has been discarded as the substantive argument for Pyramid vs. MLM and replaced with a more "modernized" version of Pyramid. I also hope that others will realize that many of there conceptions about what a Pyramid is has been displaced in favor of the current status.

    I also hope that following the history will convince others that we are likely to see even further revisions as the FTC and the Courts try to figure this all out.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: HLF
    Jul 27 3:35 PM | Link | 13 Comments
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Most Commented
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.