I can't recall the last time an executive of a company essentially admitted that they company they worked for was a fraud. Well that all changed Wednesday when a video that was released by Bill Ackman showed a top Herbalife (NYSE:HLF) distributor named Stephan Gratziani flat out admit the company deceives perspective distributors. The video is from a 2005 meeting of distributors and top management. There are some notable executives that attended the meeting including VP Mike Mckee, Senior VP Rob Levy, Senior VP Bruce Peters, and Herbalife board member Leslie Stanford. Keep in mind that these executives were in attendance when the following admissions were made:
Admission 1: "We sell people on a dream business, that they can make it. Yet deep down inside, what do we really know? Yeah. We know that the reality is that most of them aren't going to make it."
Thought: Wow. That is a flat out corroboration of Bill Ackman's thesis that Herbalife exists to sell a financial dream and not a weight loss product. This also contradicts Herbalife executives, namely CEO Michael Johnson and founder Mark Hughes, who have gone on TV time and time again to say that the company offers an unparalleled chance to become rich. I'd love for the company to reconcile how they could say they make people rich when they knowingly sell them on a dream that will fail.
Admission 2: "We tell people, hey, you know, sign on the dotted line, you know, start working from home, it's going to be unbelievable, you're going to have this incredible life… So there really is this situation or this level of inauthenticity that's there."
Thought: WOW. The second quote is an admission on the part of the distributors that the entire dream is "inauthentic." Not only do they admit that potential distributors won't succeed, they admit to actively misleading them. Note here the "dream" has nothing to do with selling products, another aspect to Ackman's thesis.
Admission 3: "Fake it until you make it. Some of us got so good at faking it, we forgot to make it!"
Thought: This is an admission that the company is built entirely on deception. In fact, Mr. Gratziani wryly notes, some top salesman are so involved in the deception that they cannot appreciate how successful they have become along the way. When a top salesperson, who is making over a million dollars, says that the company is all about deception then it is clear that is the only way to make money!
Admission 4: "The Herbalife business model, at this point in time, is not based on customers purchasing, it's based on distributors purchasing volume."
Thought: This is the definition of a pyramid scheme. This is nothing less an admission that the Herbalife products are a guise, they are not intended for an end consumer. Rather the products are sent down a distributor chain with the last sucker holding the inventory.
The fact that top Herbalife executives were in attendance and did nothing to stop Mr. Gratziani from admitting all of this should be troubling. If the allegations against the company were truly false as the company claims, why would the company let their top salesman say all of this freely? I think it is fair to take the executives silence at face value, meaning they fully know that the company is built on deception.
Herbalife's response to the video was that Bill Ackman clipped out certain parts so it was taken out of context. I don't know about you but I cannot think of a context where these quotes would be considered anything other than an admission that Herbalife is a scheme. It is also not a surprise that Herbalife released PR during market hours (at 11 A.M.) when its stock was down 2.5% after the video was released. I find that most companies release PR before or after the markets open, but when PR is released during the market (except in the case of biotech companies) it is usually meant to distract investors from another narrative going on.
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