Stan,
While I respect your analysis, I totally disagree with your Dot 2, looking at the incentives and assuming that those are the basis to prove that HLF is a pyramid scheme. Unless your Dot 2 is correct, their is no basis to believe HLF is an illegal pyramid scheme.
In my recent article, "HLF: The Long Case" bit.ly/1PZybmT I addressed this point in long detail. Since I wrote that, I discovered a NEW fact, mentioned below, that supports my case. The main points of that long section of that article were these:
1. The shorts' case had almost no data, only what I called "heroic assumptions". The data that was presented was a tiny, tiny fraction of the reality of 10's of thousands of real life experiences. Personally, I'd never make investment decisions on that much data, but others think differently.
2. The company had absolutely no responsibility to present data that Ackman demands. They are responsible only to their shareholders and the FTC, and you can be 100% certain they have complied with everything the FTC has requested.
3. "Recruiting", and focusing on it, is 100% legitimate. That's how people build sales networks.
4. The evidence of inappropriate recruiting is channel stuffing (aka inventory loading). Despite spending 10s of millions of dollars, Ackman totally failed at finding any significant amount.
5. As a result of the above, the shorts only have a theory that there should be inventory loading, rather than evidence that there should be.
6. Their rationale for finding no evidence of is that is that the 100% return policy doesn't work in practice. They say distributors find it too hard, or too embarrassing, or too penal because if they return inventory they have to give up their distributorship. None of those make any common sense. They assume the bulk of distributors are poor, uneducated or illegal. How does such a universe have $3,000 to waste in the first place? That amount of money is large, and it defies logic to assume they are too embarrassed to try to get it back. If they are scared of having illegal status discovered, why is it O.K. to buy, but not return? If they can't use or sell the stuff, who cares if they have to give up their distributorship?
7. And here's something NEW I learned since I wrote the piece above. Did you know that a new Supervisor earns his discount ONLY ON PRODUCT HE BUYS AFTER HE BECOMES A SUPERVISOR? The shorts' case is the incentives to get that discount are so high the new recruits buy stuff they don't need or can't sell just to get the discount. But, if you still have unused stuff you can't sell, why would you buy more? And you can't get the discount unless you buy more. Assuming otherwise is, in my view, not common sense.
8. Arguing the Michael Johnson video proves their case is also, IMO, not relevant. The entire context of the DECADE OLD video was Johnson describing practices that did exist in the company over a decade ago, just after Johnson joined the company. The part of the video you and the shorts reference was actually just the introduction to his main message: his personal focus as new CEO was to change the company and culture. You can believe he did or didn't do it. But, the video itself is not evidence of anything that happens today. Also, the references to Mark Hughes fail my personal "So what?" test.
9. Finally, I am 100% certain that in a system with millions of participants over many years it is possible to find examples of almost any practice or situations anyone can imagine. To me, as a long, the only way to prove HLF is anything other than a legitimate company is to find illegal practices that are systematic throughout the entire HLF network. So far, despite spending 10s or millions, Ackman has failed in that endeavor.
It is obvious that the shorts disagree with my logic and conclusions. That's why HLF has both long and short investors. But, in the spirit of trying to indeed Seek Alpha, what's above is at least one contrary view. And I do not speak for anyone other than myself when I present the logic and rationale above. I have no idea why any other long holds the position.