The Siege of Herbalife (2015) | Hacker News Reader

The Siege of Herbalife (2015)

fortune.com

135 pointstodayiamme44 comments

Good. I hope he is successful in taking them down. I know too many people who've wasted $$ falling prey to these MLM scams.

I know an emergency room physician who stopped working as an MD to sell Arbonne products (another MLM like herbalife that sells makeup and diet shakes) after getting roped into it by a nurse we worked with. Now she is in the nurse's "downline." Utter waste of an education.

When my wife and I were under severe financial pressure in the early years of our marriage, her father spent several hours subjecting us (well, her in particular) to an intense sales pitch about how much money we'd make selling Melaleuca (https://www.melaleuca.com), a MLM he was involved with.

My wife was insisting we sign his contracts, because it would be so easy to recruit only X people (I think it was 3 or 5, I can't quite remember) where X was the minimum number of recruits needed for you to earn your "passive income" from their sales.

I had to take her aside, and write a short Python program to show that after seven generations of recruitment, the entirety of our country would be selling Melaleuca to each other.

I still bear a grudge against her Dad for targeting us during a very vulnerable time.

A python program is kind of overkill for this.

that really depends on how you're showing the data. if you wanted to make it visual then a python program could be ideal.

It's a very easy Python script to write, and I wanted her to see the numbers get larger and larger.

> I had to take her aside, and write a short Python program to show that after seven generations of recruitment, the entirety of our country would be selling Melaleuca to each other.

    Layer 1 -> 1 person
    Layer 2 -> 5 people (6 total)
    Layer 3 -> 25 people (31 total)
    ...
    Layer N -> 5 ** (N-1) people ((5 ** N - 1 ) / 4 total)
    ...
    Layer 7 -> 15625 people (19531 total)

Ahoy, Cook Islander! [0]

Solving for the fanout to match the population of my Special Administrative Region [0] in 7 generations :

    (Fanout ** 6 - 1) / (Fanout - 1) = 7298600
    Fanout ~= 23.380354

[0] https://en.wikipedia.org/wiki/List_of_countries_and_dependen...

Note that I actually solved the fanout to reach the whole Hong Kong population for 6 generations, not 7. Oops.

Interesting article...lots of up-votes, but few weighing in... I'll give it a go...

Money is at stake for one side..a stock has been publicly shorted...

Money, and a "way of life" created, for many, by an organizational structure (MLM), is at stake for Herbalife, to include it's financial managers, distributors and customers...

I can only respond by sharing my own personal experiences with MLMs...

I've never been approached by anyone that I suspected was knowingly, or unknowingly, involved in an MLM-type business that was selling a product I couldn't live without...and in many cases the "peddlers" had obviously been coached to tout benefits that I firmly believed didn't exist, or weren't possible...

This to include lotions, juices, air purifiers, supplements, etc...you name it...

In this specific case I can say the same...I try to go with the best available evidence whenever I can...

I've never seen any evidence that a normal healthy person derives significant benefit from supplements of any kind...vitamins, herbs, juice extracts, whatever...

I'm wary of "snake oil" to a fault...if you aren't well seek medical advice...buying something from a salesman is possibly one of the worst things you can do if you're concerned about your health...spend that money getting yourself checked out...

The question for me is not whether Herbalife offers any kind of a health benefit to consumers, or an economic benefit to those involved in it's distribution network...

The question to be answered is whether or not a "whistle-blower" should ethically be allowed to profit, substantially, from blowing that whistle...

> The question to be answered is whether or not a "whistle-blower" should ethically be allowed to profit, substantially, from blowing that whistle

If they're an external party then I don't think it really matters.

Your comment raises the question: if a substantial profit is involved is a claimant still "impartial", "neutral", "unbiased"...?

Or, "external" to the proceedings, as your choice of terms suggests...?

I don't have the answer....still thinking about this one!

You make a good point...

The hope is that a company's fate isn't decided by the claimant. Of course the claimant is biased, that's what would have motivated them to take this position in the first place.

The ultimate decision should be reached by an unbiased third party or parties, in this case the FTC / the market.

I didn't know Bill Ackerman, or his fund, before this battle.

While I agree with Ackerman completely, I think at this point, he should take his short position off the table.

Bring down Herbalife down for moral reasons. We need morality. I didn't know Ackerman was only 49. I thought he was much older. I think Ackerman might have a political future, if he desires politics? Maybe, he just doesn't care about how that short looks. I thought it looked o.k., until today.

I'm not a fan of financial activism. Positive, or negative activism.

I am so tired of the poor/naieve being exploited. This financial activism is not going away; it's just getting started.

(Suprised George Sorrows was in this mess. He one of the rich boys I actually like. He's be of the few rich boys who tells the truth. He once said, while being interviewed on his yacht, 'I owe all of my success to my father, and his fortune. I would be a nobody--if it wasen't for his money, and guidance.')

Also be especially wary of people pushing products based on testimonials, not actual science.

I read through the slides back when this was presented. The issue that the guy (i.e. Bill Ackman) had is that the product is just a token, in his opinion: that nobody opens it, it sits unopened in apartments and houses: it's just a way to implement a pyramid scheme in the very literal sense of the word.

This is how a pyramid scheme works: "you give me $5 and you get in on it and get all the materials. Everyone you recruit gives me $5, since I'm the one operating this thing, but look! You get $1 of it. So if you get a thousand people to give me $5 for the materials, you've just made $1000 without doing anything. But it gets better: for every person THEY recruit (second level) you get $0.25. That's the real way for you to get to get them to agree to pay me. That's the real selling point. So let's say you get a thousand people to buy my materials - okay, you've made $1,000 nice - but you also remember this pitch I just gave you, you tell it to them, and they also start to see your success and follow in your footsteps. So they also get a thousand people just like you did. And this time it's passive income. That's now a million people at the second level giving me $5, and I give you $0.25 out of all of them. That's $250,000 and you didn't have to do anything except sell $5,000 of product. Do you know a thousand people? Do you think you can talk to a thousand people in the next few months? Easy. But it gets better. I'll even give you $0.20 of the third level. So let's say each of those million people on average recruit a thousand people, now we've reached 1 billion people. At this point, you now have one billion * 0.20 is $200 million dollars. And literally all you need to do is buy $5 of product from me right now, I'll hook you up with all of the materials. Try it. This shit WORKS. I'm pulling $20,000 a month already, and I just started literally 7 weeks ago. IT REALLY REALLY WORKS. Investigate for yourself."

And what do you do if you investigate for yourself? You DO find that it really does fucking work! That's the whole thing about pyramid schemes, they really and truly well and truly work all the way until the minute they don't. Because, you know, there's only 7 billion people on the planet.

So that's what the charge is, that's what the slides are about: http://www.slideshare.net/talzanco/bill-ackmans-herbalife-pr...

That's the charge. That you don't even need the boxes of supplement, they're just a cover for the fact that this is a pyramid scheme. Consider them tokens instead of boxes of unopened herbalife: I sell you a token, but what I'm really selling you is the story of how much money I'm making selling tokens. You buy some tokens from me, and start trying to also sell tokens to your friends. And so forth.

The product is incidental. (According to the charge.)

There's no reason the product can't work extremely well. In fact, personally I would say Herbalife has all the incentive and probably means to make it the best nutritional supplement on the planet. If you're selling overpriced tokens, why not make them high-quality?

But the charge is that the fundamental business model is a pyramid scheme, instead of a product-selling scheme. That people aren't buying the product, they're buying the business opportunity.

This is easy to see. Read my spiel above. It's unlikely you would consider buying any product from me based on this comment for $5. But I bet at least some readers were like, "hmmm, logicallee has a point - I wonder if I have a chance to strike it rich getting in on his program." Except there's no program, because I'm not a con artist :)

I personally don't have a view about whether Herbalife fits this description, but that's what the accusation is. Your entire comment is more or less irrelevant.

Of course if it was a pyramid scheme, they wouldn't have a 1-year, 100% + shipping costs, refund for any unopened herbalife, would they? Bronte Capital, quoted in the article, did a fair amount of on-the-ground investigation, and unless he's lying through his teeth, Ackman is BSing.

Why wouldn't they? Until the scheme collapses the generous refund policy only makes people more confident. Once it collapses people at the top of the pyramid have probably already put enough money somewhere where it can't be touched anyway and the policy hardly matters.

"Pyramid scheme" is a milder version of a "cult".

The whole point of a cult is to provide cult leaders with easy, pre-refined access to money, power, and/or sex.

The pyramid scheme scene is a subset of various groups and movements that use a standard set of psychological techniques to persuade downline members to hand over their cash and loyalty.

The more usual variations offer "therapy" or "professional development" at "large group awareness training program" workshops, which typically start free or cheap and then spiral up into ridiculous prices as the more gullible and hopeful members pre-qualify themselves for advanced levels of fleecing.

Herbalife seems to work in a similar way, but with a physical product - which is a good thing, because it's not as vague as promises of spiritual, emotional, or professional empowerment, and most people stop buying stuff when they run out of space to store it.

>If you're selling overpriced tokens, why not make them high-quality?

Because you'll make more money if you don't - because people will buy them anyway.

These schemes have a long and colourful history, and they're especially popular when a lot of people are feeling insecure financially.

Here's another example:

http://priceonomics.com/when-your-womens-empowerment-group-i...

What's interesting is that the look and feel of the packaging changes to suit the target audience, but the core get-rich-quick-now-go-recruit narrative is always the same.

These things are really a mental virus - an example of one of many human failure modes.

Human failure mode is an interesting way to put it, although that does presuppose that there's a "normal operating mode".

Yeah, its not really a failure mode as much as exploiting peoples inability to understand geometric growth.

It's not a pyramid scheme, it's a reverse funnel system ;)

>The question to be answered is whether or not a "whistle-blower" should ethically be allowed to profit, substantially, from blowing that whistle...

I guess a big part of the answer is who loses while he profits. At this point in time I'm not sure if the losers are wholly innocent.

It seems to me that "activist shorting" for lack of a better term, is ethical if the activist is shorting based on public information. If so, then they are doing what any other investor could do. They could put themselves in an even better ethical position if they give the company a fair chance to correct the problem or to disclose it themselves.

What is public information? In my view, the nature of a product being offered for sale is public information, even if you have to do some leg work to gain that information.

You have to wonder that something bigger is going on behind the scenes. George Soros was invested in Herbalife at the time this article was published. In November he exited his position.

Carl Icahn is an investor in Herbalife. Bill Ackman has been trying to destroy it.

Are these investment tycoons waging some kind of proxy war against each other?

It certainly came across to me that Icahn and Soros were investing against Ackman, rather than for Herbalife. Moreover, they almost appear to have 'won' - without further investigation, from this article it sounds like Icahn's investment gave a stable floor to the stock price (despite several subsequent sizable fluctuations), and without that Ackman's activism may well have driven Herbalife much further down.

(I doubt he would have driven it out of business entirely - at some price it would have become a very juicy acquisition target for private equity.)

I live in China you do see a lot of Herbalife and Amway stuff here. It's the oldest trick in the book ... 1.4 billion people with a relative educational deficit and a huge social pressure to get rich quick ... a social system favoring small transactions among friends and family ... widespread appreciation of 'foreign' products as status items ... a fertile recruiting grounds for MLMs. Circa 2005 I went for a blind massage and the masseur began with "The American Amway company..."

Funny, from this page: http://catalog.herbalife.com/Catalog/en-US/Core-Products/Cor...

I click on "BBB Accredited Business" link which leads to a BBB page that states: "THIS BUSINESS IS NOT BBB ACCREDITED"

I click on the "Direct Selling Association" Link, which brings up a 404.

I'm guessing the people who do your level of research probably aren't the target market for Herbalife distributors.

The DSA is very real[1] - they must have had a bad link.

"Direct Sales" is the euphemism we in the business prefer to "MLM". We don't say MLM very often, and we never ever ever never ever say the P word.

[1] http://www.dsa.org

Followup: Looks like Herbalife changed BBB link, which now goes to front page. Searching on "Herbalife" on that front page now goes to a list of 205 businesses, which are not "BBB Accredited".

John Hempton, who is mentioned in the article, has an awesome, frank blog at http://brontecapital.blogspot.com. Of course he's often 'talking his book', but he's always well researched and (I think) surprisingly open for a hedge fund manager about what he's thinking.

It sounds to me like Ackman has made the right bet, just ten years too late. I remember researching Herbalife a lot back in 2002, off the back of these excellent articles by Rob Cockerham [1], and it definitely appeared as immoral as the Amway businesses I'd researched at the time as well.

I don't fully 'believe' the figures presented by Herbalife in this report, about returns, purchasers from outside the network etc. BUT it certainly seems that the business model and culture has dramatically shifted under Michael Johnson.

Had Ackman shorted this in 2002 not 2012 [2], I suspect his accusations would have stuck and he may well have prompted the FTC to improve their MLM guidelines. He may ultimately do us all a disservice by making all anti-MLM activists appear to be arrogant and greedy.

[1] http://www.cockeyed.com/workfromhome/workfromhome.html

[2] Which wasn't an option, because 1) it was privately held at that time (or thereabouts), and 2) Ackman was recovering from his previous fund's collapse.

Go read John Hempton's articles on Bronte Capital's website. For example:

http://brontecapital.blogspot.com/2015/06/herbalife-very-lon...

He might have been 5 too late, instead. Herbalife's business model depends on getting new suckers into the mix. Herbalife is now branching out into essentially 3rd world countries, because the market is drying up for them in the developed world. Eventually (I hope) the whole thing will come crashing down, even without FTC intervention. Timing it is difficult, though, and even if Ackman is right, he can still lose money if he calls it too early.

The question posed by this article is unfair, because it labels Ackman as a regulator. He has absolutely no regulatory authority, and if you want to claim that his money allows him to act as one, then what of all of the money put behind Herbalife by billionaire investors? Are they regulators propping up a company?

There was an investigation into Herbalife because there are legitimate questions about its business practices that Ackman drew attention to through his research. If he were a regulator, then his massive bet would have fared far better than it has.

Weird situation. Being from southern California, I've been asked to join Herbalife a few times but each time turned it down since it wasn't a good fit for me (I'm not interested in sales).

However the people and company were always straight-forward about how it worked, so I never felt they were "shady" as the guy in the article accuses. On the other hand, I didn't know what to make of it completely.

I think Ackman would argue it's only the top management and insiders who are shady, and only they who make significant money.

It's an interesting saga. I haven't researched it much so here's my gut take from reading the story and remembering earlier discussions...

(Sadly) I think supplements and questionable weight loss products are a real market and will be bought in the future even without any scientific backing. Which makes me weary of Ackman's bet. It seems like Herbalife has actually changed stuff quite a bit and could very well just be selling to people if they changed distribution to direct sales. They are selling snakeoil (imo) but they still seem to sell to real consumers at the end of the line and don't stock stuff in warehouses.

Since this is the crux of the argument from my point of view I wonder why he didn't conduct any large sample survey before mounting the attack. It seems like a good step 0 to gather data on one of your major arguments but in fact...

""" “Surveys are notoriously unreliable,” he responds. There’s no substitute for seeing the distributors’ actual retail records, he insists. """

That doesn't sound convincing at all.

If I had the money of Ackman, I'm not sure I'd spend it for the purpose of destroying a company, even if I was sure it was fraudulent. There are so many ways it can go sideways, and a hundred more could rise in its place too, so what's the point besides the quick profit? Yeah, it's all about money, but the bigger picture would frighten me.

As a private party, I'm not a regulator. I'm not the authorities. I'm not going to go play financial Batman just because I think the normal authorities aren't getting it done. I'll raise noise about the issue if I really care about it, sure. I'll testify findings in court. But bet money on it? The optics look horrible. All my ideas and findings suddenly become suspect and the question is whether I care about what's right or about making money at the expense of what I perceive to be weak targets.

Let me make money in ways where my approach is above reproach and I'm not questioned about my motives. Why put my efforts and money towards something where I could get my name tarnished?

Or Ackman doesn't think this way because he's one of the so-called masters of the universe and his resulting ego has put him on another level?

Ackman is trying to make more money. If he does good in destroying a bad company all the better, but that's not his primary mission.

Companies engaging in MLM strategies often offers superior quality, beneficial products. I personally use one on occasions just because I know it works really well for what I need.

However MLM as a marketing strategy especially sprinkled with "business opportunity" hype is as close to scam as it can be without crossing the barrier.

Tons of people are misleaded into false expectations of making living just by finding candidates and signing them up.

While I see mr. Ackman's efforts nothing more than ego- [and possibly boredom] driven personal quest, the MLM industry needs to be forced into full and very clear disclosure of "business opportunity" fragment. These promises are clearly misleading and grossly overhyped.

I built a large social networking mlm for a client. The coding was fun but it left me feeling bad. It is catching people when they are desperate. I do not really believe in limiting a lot by law but people cannot protect themselves when they are down.

I want to ask another question. I have tried Herbalife and I feel that the product is but I do not like their MLM system.

Is there any product like herbalife but without the MLM part.

Is he right about Herbalife being a pyramid scheme?

Is this really a question requiring an answer?

Yup, various court cases depend on it.

It was ruled that it was one http://mynewsla.com/business/2015/05/15/15m-settlement-appro...

then that it wasn't http://www.reuters.com/article/us-herbalife-lawsuit-idUSKCN0...

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