Monday, July 18, 2016

1670 I Did Nothing Wrong and I'll Never Do it Again

If it looks like a pyramid scheme, is structured like a pyramid scheme and rewards people like a pyramid scheme, it’s a pyramid scheme, right?

Not always.

After long hours of investigation, the Federal Trade Commission has ruled that the “nutrition supplement” company, Herbalife, is not a pyramid scheme.  But it has fined the company $200 million because it doesn’t like … what?  The shipping charges?  The hairdos of the honchos?  Oh, yeah: misleading people into thinking they could sign up and make a decent buck.

Okay, what, exactly is a pyramid scheme?  It’s when you sign up to sell stuff but you really don’t make any money except by recruiting new salespeople.  You sell; those above you in the pyramid get a cut.  Your recruits sell and you get a cut (along with everyone else higher up.)

Rarely does anyone make a go of things.  And there are good reasons. More often than not, the products are something you buy anyway.  Are you really going to trade your one-a-days for some expensive pill from a company you don’t know anything about? No, why would you?  Nutritional potions are the mainstay of pyramid schemes.  But you can get to sell prepaid legal services that way too. Just ask Jodi Arias.  And there probably are other goods and services that use this template.

The granddaddy is Amway.  And their products tend to be good, although pricey.  But like the Corleone Family, Amway has gone legit.  Which means they actually have some guy in Woonsocket, Rhode Island or East Acne, Idaho whom they can prove makes a real living selling its magical laundry powder without needing food stamps, welfare or Medicaid.

But about Herbalife.

The whole dustup was started by a stockholder with a big stake in the company, Bill Ackman of Pershing Square Holdings.  Ackman has shorted the stock and complained publicly and to the FTC about what he calls a phony get-rich-quick scheme.  And while the commission’s action doesn’t make Ackman right, it doesn’t make him wrong, either.

The Commission orders bar Herbalife from making inflated claims about income potential, forces creation of accurate reports on actual sales and the profits of its chains of independent sellers.

The company now has the legal right to say it’s not a pyramid scheme.  And implicitly, the FTC has “approved” its business practices. $200 million is a steep price.

You might think the pyramid will collapse and/or become Herbalife’s tomb.  But you’d be wrong. The new restrictions apply only to the company’s US business. So easy money fantasies won’t die in Europe and Asia.

Today’s quote: “The settlements are an acknowledgement that our business model is sound and underscore our confidence in our ability to move forward successfully…” -- Herbalife CEO Michael Johnson (quoted by Bloomberg News.)

Today’s other quote: “Herbalife’s false and misleading claims continue.” -- Bill Ackman's website.

I’m Wes Richards. My opinions are my own but you’re welcome to them. ®
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© WJR 2016

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