Media Attention Moving From P-Word To C-Word For Multi-Level Marketing Stocks

| About: Herbalife Ltd. (HLF)


The international radio documentary, "This American Life", recently examined a popular and publicly-traded MLM, Wake Up Now, and raised the question of cult practices. The show will reverberate upon Herbalife.

The charge of cultism has haunted MLM and Herbalife, which resembles Wake Up Now. Historically, MLM was connected to "mind-control" programs linked to the pyramid scheme structure.

Few analysts have investigated cultism as a marketing factor, yet conventional approaches of finance and law fall short of explaining Herbalife and other MLMs' growth and power.

The radio show introduced the concept, "economic cults", citing cult characteristics to explain self-destructive behavior of MLM recruits. Pyramid schemes facilitate economic cults, allowing them to promise heaven on earth.

There are ten basic traits that identify cults, including "economic cults." Multi-level marketing exhibits all ten.

On December 26, 2014 a publicly traded multi-level marketing, MLM, called Wake Up Now, (OTCPK:WORC) was dramatically spotlighted in a radio documentary on the public radio show, This American Life, produced by Ira Glass. I humbly advise all Herbalife (NYSE:HLF) investors to listen to the 36-minute podcast of the show with an ear to the show's keen observations reverberating upon Herbalife. The show framed its portrait, not around the usual controversy about Pyramid Schemes, but the far more potent charge of Cultism, the seldom uttered C-Word.

In its MLM business model, compensation plan, marketing rhetoric, product claims, and devastating rates of distributor failure, as revealed on the show, Wake Up Now is a mini-Herbalife. The show identified Wake Up Now as "network marketing" and listed three other companies with the same identity, Amway, Herbalife and Nu Skin (NYSE:NUS). For those interested in more details about Wake Up Now, Truth in Advertising has provided a revealing exposition.

The observations of the two correspondents of This American Life eerily resemble those of others who have studied Herbalife and shared their experiences in the Seeking Alpha forum. But the documentary takes the investigation of MLM to a new level, bringing a fresh and independent outlook, and a willingness to report what others dare not. Describing the MLM business, shared by Wake Up Now, Herbalife, and hundreds of similar enterprises, the show's correspondent states at the start, "Network marketing is a very bland term for something completely mind-blowing, way beyond anything we could have imagined." This was not meant as a compliment to MLM.

According to its own website, This America Life is broadcast on more than 500 stations to about 2.2 million listeners and has won all of the major broadcasting awards. It is also often the most popular podcast in the country, with around one million people downloading each week. This American Life is the co-producer, with NPR News, of the economics podcast and blog Planet Money. Many listeners, including regulators, attorneys and academics, will obviously hear the show or its podcast reproduction, and it is reasonable to assume many will make the connection to Herbalife due to its own recent media prominence.

Yet, it is not just Wake Up Now's factual similarity to Herbalife or its shared identity in "network marketing" that will spawn widespread reflections on Herbalife; it is also the show's startling explanation of what it had observed. After examining seemingly baffling behavior of Wake Up Now and its followers, the show dispensed with conventional claims of "direct selling" and instead asked an explosive question- What is Wake Up Now, really? This central question, addressed throughout the 36-minute presentation, is a distillation of the very same inquiry Pershing Square Capital raised in December, 2012 when it announced its billion-dollar short position on Herbalife. Like William Ackman who spent a year studying Herbalife, This American Life's two correspondents observed a syndrome of characteristics at Wake Up Now that were definitively un-economic, causing them to open some other possible explanations, such as club, social movement, religion or pyramid scheme?

These strange, non-businesslike features included god-like status of leaders on the recruiting stage making evangelistic promises of total life fulfillment to those who join the "business"; rank and file distributors who were unable to explain or describe the company's products; absence of sales training or any evidence of retail sales; relentless (5-hour!) promotional event with repetitive marketing messages that the attendees also mimicked word for word; clarion calls from leaders for recruits to proselytize all personal relationships; near ecstasy displayed by recruits over commonplace product announcements; unquestioning faith of followers that they would soon become wealthy from the scheme, in the face of the company's disclosed record of 96% of distributors' never gaining even one cent in profit and less than 1% gaining what might be called a livelihood.

Mirroring the Herbalife controversy about the true status of contract-distributors, the reporters wondered aloud who the people in attendance at a large Wake Up Now event were - Members (of what)? Customers (buying what)? Prospects (for what)? Salespeople (selling what exactly)?

The journalists could not comprehend how tens of thousands of people, mostly young, and many African-American and Latino, a similar demographic to Herbalife's targeted recruits, were buying the scheme's commodity product and dubious services at $80 to $150 per month. They pondered how the scheme convinced these young people to work at no profit and caused them to believe they would be successful when virtually none before them had been. They asked how it could be that the followers believed so fervently in a company founded in 2009 and that offered no advertising support for its mundane consumer offerings - paid access to discounts on ordinary goods and services that were generally available for free in the open market, and a commodity "energy drink", laced with caffeine.

Does this not sound familiar?

The C-Word

Finally, the show floated its main proposition to account for this inexplicable behavior of recruits and the company's mystifying practices. It is that Wake Up Now is a cult, an "economic cult." The cult identity label has been leveled at Herbalife for years. Indeed a Yahoo search of "Herbalife cult" produces over 100,000 web pages. The C-word is routinely flung at Herbalife by bloggers, web-forum commenters and hinted at in mainstream media reports. In May, 2013, the New York Post ran a story headlined, Herbalife suspends cult distributor." The article began, "Herbalife … has suspended a distributor accused of running a cult-like operation in Israel… accused of using humiliation, threats and sexual abuse to recruit an obedient group of followers who sell and use Herbalife's diet protein shakes." Now the C-Word has broken through to National Public Radio, heard by millions around the world.

The question of Herbalife's cult credentials follows a long line of cult references and inquiries about its business sector, multi-level marketing. Amway, the mother of all other MLMs, in particular, has been repeatedly cited for cult persuasion. Three tell-all books by former distributors, Amway, the Cult of Free Enterprise by Steven Butterfield, Amway Motivation Organizations, Behind the Smoke and Mirrors by Ruth Carter, and Merchants of Deception by Eric Scheibeler, all focus on the factors of deception, coercive persuasion, manipulation, and immersion into cult membership.

For those that reject or are uncomfortable with the term, cult, in reference to MLM businesses, it may be useful to understand that MLM, from its earliest days, has been closely connected with "mind control" programs. The three largest and fastest growing MLMs that the FTC targeted in the 1970s, Holiday Magic, Koscot Interplanetary and Amway, each had powerful indoctrination programs connected to them that were profit centers unto themselves and operated hand-in-glove with the "direct selling" operation.

Glenn W. Turner, founder of Koscot Interplanetary, was also the founder of the large group "motivation" program, Dare to be Great, which operated in 13 countries. William Penn Patrick, founder of Holiday Magic, was also owner of Leadership Dynamics, often referenced as the first form of what psychologists term "Large Group Awareness Training", and Mind Dynamics, considered a precursor to other "large group" training programs such as Est and LifeSpring. As reported in Wikipedia, "Holiday Magic distributors were invited, though not required, to attend the Leadership Dynamics Institute self-improvement sessions at a cost of $1000 each. The program was described "as having "overtones of strict military training techniques."

Amway became prominently identified with cultish "motivation" groups through its associated "tools" scheme, a precursor to Herbalife's "sales leads" programs. These were run by powerful and dominating "king pin" distributors with enormous downlines that looked to the leaders as near deities. The "tools" were largely "mind-training" and indoctrination materials consisting of books, audios and videos from the leaders and carefully orchestrated and large-scale "motivation" rallies, sometimes involving nationally famous speakers like Newt Gingrich, Oliver North, and O. J. Simpson. Members believed that joining one of these Amway Motivation Organizations was their ticket to success, despite a 99% loss rate of distributors overall.

On This American Life, I was the interviewee who connected the long-standing MLM cult thesis to the reporters' own observations of lemming-like financial behavior of the MLM recruits and their spooky euphoria at banal pronouncements by the exalted leaders. I supported the thesis by noting several classic cult characteristics of promoting uncritical belief over due diligence and of separating people, once they are recruited, from any of their own friends and family who would question or criticize the program. The show presented corroborating evidence of those red flags from speeches and statements made by Wake Up Now promoters.

Asked to characterize Herbalife, that is, if asked "What is Herbalife, really?", I would unhesitatingly offer the same general characterization. Without an understanding of Herbalife's cult practices, all the recent revelations, shocking or perplexing as they may be, will not account for the scheme's growth and power over many of its "members."

What are economic cults and how could a sales business with ordinary consumer products be a cult? Because cults and cultism have no legal standing, that is they are not illegal per se, and are generally associated only with fringe religious or political movements, most analyses of Herbalife treated the cult factor as irrelevant or taboo. Consequently they have avoided or glaring realities. Instead, mounds of evidence and endless analyses have been offered about gross deceptions regarding Herbalife "health" products or "distributor" incomes and on whether Herbalife is a pyramid scheme as defined by the FTC or SEC.

This American Life spent little time on the technical pyramid question (the P-Word, which is also taboo for some journalists) or on the scheme's absurd products. It dispensed with the income question by citing the hard number disclosed by the company itself: 96% of distributors gained no money at all. Instead, in keeping with the show's intrepid style and mission, This American Life delved into the heart of darkness, the unmistakable cult-behavior of recruits and the tactics of the company.

The show also offered one profile of a tragic and all too typical young man overcome by the MLM company's persuasive messages and captivating "community" who believed the scheme was his last best hope. He stopped working his minimum wage job and turned over some of his family's meager resources to Wake Up Now each month, the price to stay on the sales chain. Sadly, but inevitably, he quit and was soon back at a minimum wage job from which he had fervently aspired to escape.

Failure of Conventional Analysis

It is fair to say that the conventional analyses of Herbalife, framed in legal and financial terms, have been less than persuasive to many attentive investors partly because they fail to explain Herbalife's capacity to enroll millions of people and to evoke such enthusiasm from so many followers, despite the documented negative consequences befalling nearly all who have ever joined. Evading laws against pyramid fraud, making exaggerated or fabricated medical claims or ginning up income promises do not adequately account for fanatical response of thousands of adherents and the silence of millions of others who lost money or otherwise suffered harm from Herbalife. Cultism, however, goes a long way to explain these phenomena that appear inexplicable in conventional business or legal terms.

Exposition of cultism in connection with multi-level marketing may not directly threaten Herbalife in the eyes of some people, due its legal non-status. To some others, cultism may even be admired as the ultimate form of "brand loyalty". Buyer Beware is their retort and "No one forced anyone to sign up." However, association with cultism can indeed harm Herbalife's, or any other MLM's, brand and cause regulators to see Herbalife in a whole new light.

A large part of Herbalife's defense against recently-revealed facts has been its overarching claim to be a free market company meeting valid and voluntary consumer demand. A cult thesis directly confronts that free market thesis. Cultism in business may be seen as the ultimate "false advertising" and the epitome of "unfair and deceptive trade practice." A cult's power to shut down critical judgment and induce self-destructive and irrational actions from large numbers of people is generally known. The deceptive and manipulative measures used by cults are widely seen as inimical to personal freedom and critical thinking, the foundation of a free market.

Cults are generally understood to be pernicious, even dangerous. It is, therefore, not a good thing for any religion, political movement, company or sector of companies to be associated with this term in the media as multi-level marketing has been for years, culminating in the devastating portrait on This American Life. Investors, while perhaps having no interest in the study of cultism otherwise, would be wise to become alert to cultism as a market factor, just as they have recently had to become knowledgeable about the arcane features of the pyramid scheme in connection with "direct selling."

The Relationship of Cultism to Pyramid Schemes

Before itemizing the main characteristics of commercial cults, it will be useful to explain the connection of cult tactics to the other charge leveled at Herbalife and other MLMs - Pyramid Scheme.

Most cults promise a grand and sublime reward to followers. It may be total enlightenment, complete happiness, eternal bliss in the next world, or exclusive membership in a movement to save all mankind. These kinds of profound and transcendent reward-promises generally preclude businesses from functioning as cults. Businesses are fact-based, finite, and normally relegated to the mundane work portion of day-to-day life. Real businesses are, by definition, not "totalistic."

Multi-level marketing is the lone exception to this rule in the commercial world. An "endless chain" recruiting plan is its alleged method of producing income. It promises "unlimited wealth to any who follow the plan" regardless of demographics, saturation, competition or years of expansion. It rises above mere earthly work to the heavenly realms of utopia, infinity and "beyond your wildest imagination." Utilizing "social networking" to spread its transcendent promises, it claims to be a "way of life" and can therefore violate all traditional boundaries separating private and commercial life. MLM is totalistic.

When multi-level marketing employs cult tactics, it elevates its peerless and impossible income promise to a spiritual status of complete happiness, the doorway to pure fulfillment and personal expression. Its leaders are presented as living examples of this state of perfection, and the company's "secret" or "unique" system for delivering this happiness - endless chain recruiting, powered by "exponential expansion" - is said to be the only way for an individual to achieve this sublime status. MLM can be and is routinely portrayed as the way, the truth and the light.

Due to the FTC's decades-long permissive policy on endless chain scams, MLM has been allowed to sell its false but intoxicating financial promise. With that license it also gained free rein to raise its income promise to the level of a "heaven on earth" reward. For those who are deceptively persuaded to follow its utopian pathway, MLMs can convince them that success in reaching the promised wealth is the true measure of their life's value and purpose.

Like other marketers, MLM taps into deep longings and needs of people but only MLM claims to be able to fulfill them totally and then charge money to receive the heavenly rewards. Hence MLM can operate as commercial cults in which wealth and the MLM plan for achieving wealth become a total and closed philosophy of life with followers trapped in the scheme's fictional portrayal of reality while paying through the nose.

In cult "businesses", the pyramid scheme may be seen as the proprietary compensation plan or marketing tool, and cultism as the pervasive corporate culture and marketing message. The goal is total control over the "customer", IBO "member" or whatever term the particular scheme uses to refer to those it exploits.

In this light, MLM can be seen as a network of cults or as one enormous interlocking cult operating worldwide. The MLM cult message is not only the "prosperity gospel," which is now also popularly heard in some churches and synagogues; MLMs claim to offer (sell) the precise formula to deliver on the destiny of prosperity for all who perfectly follow (invest in) the "proprietary plan." Try to find any other business that can do this.

Traits and Sources

With this background, investment advisory and media alert, we can now move to the defining characteristics of cults. This includes "financial cults", and their special significance for multi-level marketing companies such as Herbalife. This would also be relevant to others such as Nu Skin and Usana (NYSE:USNA) and hundreds of other privately owned MLMs.

For reference purposes, I recommend and have relied upon the well known authorities Robert Jay Lifton, who focused research on coercive persuasion and the author of Thought Reform and the Psychology of Totalism, and Margaret Singer, co-author of the book, Cults in Our Midst: The Hidden Menace in Our Everyday Lives. As resources for professionally aiding people to escape or avoid cults, including multi-level marketing, investors may refer to the work of cult professionals, Rick Ross and Steven Hassan. And for the most clearly stated, in-depth analysis of how multi-level marketing fits the classic definition of cults and their significance for individuals, society and democracy, the thought-provoking blog by David Brear stands above all other sources.

Cult Characteristics as Marketing Tactics

When cults are identified as quasi-religions or extremist political movements, their recruiting and control measures are referred to ominously as lures and entrapments. However, when cults are disguised as sales companies, these same devices are redefined as legal marketing tactics, making them seemingly valid and benign.

The habit of uncritically accepting anything defined as "marketing" may explain why many from the business world have accepted MLM's devious and destructive measures unquestioningly. Marketing is the presumed prerequisite for profit, and extreme and aggressive marketing is often a sign of high profit. For those on the receiving end of dividends or capital gains obtained through the use of such cult tactics, the ability to look at them critically is further dulled.

The following list of characteristics comes from David Brear's copyrighted work which incorporates a similar list by Robert Jay Lifton. The notes are my own in applying them to multi-level marketing.

1). Deception - The greatest of the deceptions, even above the unconscionable income lies, or the amazing cure-alls, is the MLM claim of a "direct selling" identity, when the reality is endless chain recruiting. Hence, the recruit enters the gateway of the scheme without full consent of participating in its actual program. All cults maintain a false identity disguising their true operations and motives.

2). Self-appointed sovereign leadership - Unlike traditional organizations with accountable or transparent boards, elections, or professional management standards, MLM cult leaders - not always the same as corporate officers - are self-proclaimed, self-portrayed as god-like in power and status, products of their own enlightened guidance being offered to followers. To question them is considered self-defeating and an indication of resistance to learn the "system" from the "master."

3). Manipulation - Recruits are cunningly sent on a fool's mission to extend the "endless chain", without knowledge of massive attrition rates or the built-in and unchangeable ratio of losers to "winners." Family and friendship are re-purposed for commercial ends. Regardless of levels of losses, the participants are told to keep buying and recruiting, to "never quit." The inevitable failure is then callously blamed on the recruit's character inadequacy, negative personal relationships, or perverse attachment to poverty.

4). Radical changes of personality and behavior - MLM recruits are constantly subjected to what Robert Lifton termed thought-terminating clichés. Their personality, vocabulary, dress, habits, and beliefs are said to be associated only with past failure or being "ordinary". Recruits are taught to assume a superficial and constant upbeat attitude (fake it till you make it), making them unable to look at their own circumstances factually. Sales leaders are given license to dispense marital advice and religious-like power to admonish changes in sexual activity, political views, and social life. Constant exposure in audios and videos and at rallies and training sessions to specialized, manipulative language leads to recruits mimicking the terms and phrases (e.g., only quitters lose and only losers quit) and becoming disinterested in their existing jobs, or family relationships. Family and friends ask, "What happened to our son/friend/spouse, and how do we get him/her back?"

5). Pseudo-scientific mystification - MLM schemes claim to have the "secret to wealth and happiness" or "perfect health." Leaders claim to have learned the secrets through travel in India of China or from "masters" or due to a spontaneous and transformative awakening. Products are said to "alter genes", boost immunity, cure autism. Success is said to be formulaic, known by the ancients and now disclosed, for a price, at MLM "extravaganzas." Even Jesus Christ and Moses are recast as early "network marketers."

6). Monopoly of information - Recruits are told to shun anyone who questions the plan, to associate only with "positive" people (other MLMers), to constantly study the words and thoughts only of the "leaders" in their writings and speeches, even to avoid using a calculator or researching on the web for independent analysis purposes. Some recruits attend meetings and rallies three or four times a week. The goal of this relentless indoctrination is said to be to "re-program the mind", which has been subverting success and to weed out negative thinking or "toxic" people from personal life.

7). False justification - Attend any MLM and you will hear the oddly similar message of looming economic disaster facing recruits, career opportunity in corporations dismissed, professions such as teaching and nursing defiled, jobs demeaned, (J.O.B., Journal Of the Broke), and all public service work as socialistic, corrupt, or destined to collapse. Only MLM can save you, recruits are told. Leaders and the MLM company are said to have a purely benevolent mission - unrelated to mere profit-making - of rescuing recruits from the cruel fate to which non-participants and "quitters and losers" are doomed.

8). Structural mystification - MLMs famously are corporate and organizational labyrinths, with headquarters in the Caymans, and corporate subsidiaries in a hundred countries. Compensation is said to move upward through "infinite" numbers of levels. Actual company ownership is vague. All distributors and subsidiaries are "independent." Corporate intelligence is doled out only on a "need to know" basis. Massive churn rates are unreported, and the compensation formulas are beyond the understanding of Wall Street quants. Recruits are told not to bother fathoming the formula since "the computer knows." Leaders are portrayed as saint-like, with vague backgrounds in which they are said to have achieved mythic success and wealth. Their priestly intent now is only to share their wisdom.

9). Chronic psychological deterioration symptoms - a common response of people immersed over time in the MLM type of commercial cult, as in other types as well, is a gradual "falling apart." At Pyramid Scheme Alert, we receive reports of high debt, divorces, and family discord. The participant, having invested all hope, last remaining funds, and sometimes years of lost opportunity, is now bereft and isolated. Mind-numbing indoctrination has left them unable to evaluate reality and few relationships remain where they gain support or clarification.

10). Repression of all dissent - Inside the MLM, one does not find spirited debate about the product's efficacy or the market plan's fairness. The compensation plan is never critiqued. Leaders are above judgment. 99% failure rates of distributors are not up for discussion. The MLM model is "first cause", and the last best hope. Dissent is viewed as dangerous, the smallest criticism an existential threat to the entire organization and its mission. Some MLM contracts legally forbid disparagement of product, the company or leaders under pain of dismissal. All distributor contracts can be cancelled without cause, at the discretion of the MLM. Critics are regularly depicted as deranged, misguided, or mal-intentioned. Quitters are vilified as lacking character, ambition or as fear-based and doomed to be "ordinary." MLM cults, like all other destructive cults, are authoritarian.

The NPR-aired show, This American Life dramatically revealed some of these characteristics in the MLM scheme, Wake Up Now. The show may serve a larger purpose of enabling some MLM investors, and government regulators too, to wake up.

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

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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