Vemma Settles with FTC

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It’s a new day for Vemma Nutrition Co.

The Federal Trade Commission announced Dec. 15 that it has approved a settlement agreement in its case against the Arizona-based company, bringing an end to a more than year-long, multimillion-dollar legal battle. The agreement offers a clear path forward for CEO B.K. Boreyko to continue operating Vemma as a customer-focused network marketing company, while also establishing specific rules related to distributor compensation and income claims.

The settlement covers Vemma Nutrition Co., Vemma International Holdings Inc. and Boreyko, and a separate settlement covers former Vemma distributor Tom Alkazin and Alkazin’s wife, Bethany, who had been named as a relief defendant in the original federal court action. The settlement outlines specific business practices from which the defendants are prohibited in engaging, including paying compensation to a distributor unless a majority of that individual’s revenue comes from sales to people who are not a part of the business venture, making deceptive income claims and making unsubstantiated health claims. In addition, Vemma has agreed to…

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DSN will continue to update this story as additional details become available.


Herbalife Settles with FTC

Herbalife Ltd. and the Federal Trade Commission have reached a long-awaited settlement agreement resolving an investigation of the Los Angeles-based nutrition company that began more than two years ago. The deal, which requires Herbalife to make specific changes to its U.S. operations and pay $200 million, will be studied closely by the wider direct selling channel.

Herbalife also reached a settlement with the Illinois Attorney General, resulting in the company agreeing to pay $3 million to the office, separate from the FTC agreement.

Company executives and investors responded positively to the settlements, with shares in the company trading above $66 at midday, an increase of more than 10 percent.

“The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms,” Herbalife Chairman and CEO Michael O. Johnson said in a statement announcing the settlement. The statement went on to say that the company believes many of the allegations made by the FTC are factually incorrect but that the settlement is in the company’s best interest in light of the financial cost and distraction of protracted litigation. Herbalife said management can now focus all of its energies on continuing to build the business.

The FTC commenced an investigation into Herbalife 26 months ago, following accusations by hedge fund manager Bill Ackman that the company is defrauding customers. Ackman launched a campaign against the supplement seller in December 2012, backing his claims with a $1 billion short position in Herbalife stock.

As part of the deal, the company will pay a $200 million judgment and has agreed to various business procedures and policy enhancements. The $200 million figure is what Herbalife had floated in its first-quarter financial report as the company’s best estimate of a settlement. The FTC said this is the largest such consumer redress settlement obtained by the FTC and that it will provide information at a later date about how it will make those funds available for consumers.

The business procedures and policy enhancements included in the settlement pertain largely to Herbalife’s compensation model and marketing claims, which the FTC criticized in its complaint against the company. The settlement stipulates that the company must distinguish between individuals looking to build an Herbalife business and those who sign up simply to purchase products at a discount—a practice Herbalife management, in fact, implemented several years ago. Discount buyers are not eligible to sell product or earn rewards. The company is also required to ensure that at least two-thirds of rewards paid out to distributors are based on verified retail sales, rather than distributors’ personal consumption. And, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. If that threshold is not met, rewards to distributors must be reduced.

The company also agreed to:

  • require distributors to complete their first year, as well as a …


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Fox Business: Herbalife to Launch Million Dollar Ad Campaign

Herbalife is once again going on a public relations offensive with a major advertising campaign reportedly hitting radio, TV, print and online outlets as early as Wednesday.

FOX News Senior Correspondent Charlie Gasparino reports on FOX Business Network that the supplement maker is crafting a “seven-figure” campaign aimed at changing the narrative around the company as it continues to push back against short seller Bill Ackman and his Pershing Square firm. On Monday’s Countdown to the Closing Bell, Gasparino told host Liz Claman the buy will initially focus on the Los Angeles and Miami markets, potentially including spots during the NCAA March Madness tournament.

The report comes a week after a Los Angeles judge dismissed a lawsuit by Herbalife shareholders, who claimed they lost money because the company is operating a pyramid scheme. The lawsuit echoed many of the allegations brought against Herbalife by activist investor Ackman in his two-year campaign to discredit the company as an illegitimate business that victimizes its salespeople.

U.S. District Judge Dale S. Fischer ruled that the “plaintiffs did not show that accusations by activist investor Bill Ackman proved fraud by Herbalife,” AP reports. Finding no evidence of misrepresentation on Herbalife’s part, the judge dismissed the allegation that the company caused its shareholders to suffer losses.

“Herbalife welcomes the decision by the U.S. District Court for the Central District of California to dismiss the case,” the company stated in response to the ruling. “As we have consistently stated, we are confident in the strong fundamentals of our business model and remain committed to helping people and communities improve their nutrition.”

The LA-based nutrition company has seen its stock price climb more than 40 percent in March.

Direct Selling Association President Responds to NYT Op-Ed

Direct Selling Association President Joseph Mariano has a message for New York Times columnist Joe Nocera. Earlier this month, the opinion writer added to the abundant ink that has been spilled on the topic of activist investor Bill Ackman’s $1 billion Herbalife short. This week Mariano penned a Letter to the Editor addressing the questions raised by Nocera.

The salient question appears in Nocera’s headline: “Riddle of the Pyramids: What Is Herbalife?” He compares the volleys between Ackman and Herbalife, with its bullish investors behind it, to a “hotly contested political race”—very entertaining at times, but a sideshow to more serious issues. In Herbalife’s case, that issue is whether a company is duping millions of individuals through deceptive business practices.

It is a question currently under investigation by the Federal Trade Commission (FTC) and the Department of Justice. Though the FTC declined to provide comment to the Times editorial page, Mariano gives some background on the regulations governing pyramid schemes in his response.

“There is no riddle,” Mariano writes. “Federal law and statutes in a majority of the states clearly define a pyramid as an operation that pays salespeople primarily for recruiting additional members into a network instead of selling products. The Federal Trade Commission further warns that pyramids may require members to buy large amounts of inventory, meaning you couldn’t consume it yourself, or unwanted items.”

Mariano also points to the clear distinction between the multilevel marketing business model and illegal business operations—a distinction that falls through the cracks of Nocera’s argument.

“We should consider the consequences to the individuals who sell and consume their products—and the communities their parent companies serve—before placing scarlet letters upon their legitimate businesses,” Mariano concludes.

Controlling the Conversation: Balancing Product and Opportunity

by Lori Bush

Click here to order the September 2014 issue in which this article appeared or click here to download it to your mobile device.

At Rodan + Fields, when we made the decision to pivot from our department store marketing channel to direct sales, a great deal of consideration was given to protecting the brand equity that derived from our founders’ legacy in the skincare segment of the beauty industry. As we looked to transform our go-to-market strategy, we wanted an independent business ownership model with low cost of entry that afforded our Independent Consultants the opportunity to compete with other industry players. The key here is what we define as our “industry.” While there are many definitions for the word industry, the most relevant ones read something like this: noun \ˈin-(ˌ)dəs-trē\: a group of businesses that provide a particular product or service. By this definition, Rodan + Fields is in the beauty industry. The business opportunity derives from product leadership coupled with our sales and marketing strategy: The opportunity itself is not our principle product.

Sounds simple enough, right? But gaining buy-in and protecting and advancing this aspect of our brand equity is a challenge that requires rigor in monitoring and compliance, especially when it comes to engaging direct selling veterans as employees or as Independent Consultants. Our investment in product and brand development is materially eroded when a successful business-building Consultant is dismissive or even disparaging to those who want to engage as product ambassadors rather than promoting the business model. The worse-case scenario of this is the proclamation that “it doesn’t matter what you’re selling as long as the compensation plan works.” Not only does this fly in the face of who we are, but it generates ill will and validates the position of those who challenge the legitimacy of our business model.

Out of a deliberate exercise to define the soul of our company, a clear set of business values emerged, which we call our “True Colors,” and we constantly assess our people and programs for demonstration of these values.

So what is direct selling to Rodan + Fields if it’s not an industry? We see direct selling as crowdsourcing our marketing and sales initiatives. And with the advantages of social, mobile and web-based tools for customer acquisition, engagement and monetization, it is a highly effective, modern business model that provides individual micro-enterprises the opportunity to participate and capture market share in an important, lucrative and growing consumer products category.

Soul Searching

When we launched our current business program in 2008, we believed we had the opportunity to help shift public perception of direct selling and went as far as to bake this notion into our mission statement: “Our mission is to redefine independent business ownership with brand presence and transformational products and programs that change skin and change lives.” It didn’t take us long to learn that walking the talk requires constant commitment to education and compliance because, when it comes to salesforce behavior and performance, the simple fact that something works doesn’t necessarily make it right.

Another part of our mission statement, the creation of “an enduring legacy for our Consultants and our employees,” led us to take a deep dive into the soul of our company. To truly have a company soul requires a shared understanding by everyone who is involved as to purpose and values. Out of a deliberate exercise to define the soul of our company, a clear set of business values emerged, which we call our “True Colors,” and we constantly assess our people and programs for demonstration of these values. One of these key values is Assurance.

Assurance is about brand and business integrity; it’s the commitment to our Consultants and their customers that what they signed up for is what they get. If we promise a unique brand and uplifting culture one day and they show up to find a generic, hardcore moneymaking scheme the next day, our soul is eroded. “Assuring” that the Rodan + Fields brand and business models continually meet or exceed expectations requires surveillance of how our programs manifest into and through our sales organization.

We have a responsibility to our sales organization, their customers and the direct selling community at large to control the conversation so that it doesn’t become controlled for us.


I recently attended a training conducted by members of our field development team and discovered that some important aspects of our program had drifted away from our original intent in response to preferences of some of our Independent Consultants. Even though these preferences could, arguably, accelerate the rate of growth of a Consultant’s income, they could put the long-term value of the brand and business opportunity at risk. In a nutshell, there was an overemphasis on recruiting and building an organization without a balanced focus on engaging and servicing customers. Both aspects of the business model are important, but the training was heavily biased toward the former without first firmly establishing the brand, product experience and our overall approach to social commerce. We recognized the need to make an adjustment to our approach in order to reinforce key aspects of our value proposition.

Instilling an understanding of the rationale for our vigilance helps our internal team and our Consultant leaders appreciate the importance of governing the execution of our business programs in the marketplace. No matter how carefully we craft our compensation program and articulate our Policies and Procedures, if we promote or turn a blind eye to practices that undermine our brand value proposition, a handful of rogue players can wreak havoc and lead to significant net detractors for our products, our programs and even direct selling in general. We have a responsibility to our sales organization, their customers and the direct selling community at large to control the conversation so that it doesn’t become controlled for us.

A direct selling business model enables us to collaborate with passionate micro-entrepreneurs to market compelling, innovative products and services that might never see the light of day in risk-averse brick-and-mortar retailing models. Our future is dependent on continuous introspection as to how we guide our Independent Consultants to appropriately communicate our brand and business values. The meaningful marketplace value of our opportunity is part and parcel of our compelling product proposition. If we present this the right way, the word pyramid should never enter anybody’s mind, much less the conversation.

Lori Bush

Lori Bush is President and CEO of Rodan + Fields.

Amway Leaders Express Relief at India CEO’s Release

After two months in detention, Amway India CEO Bill Pinckney was released on bail Monday.

According to The Times of India, Pinckney was arrested May 26 at Amway India’s headquarters and is accused, along with the company, of financial irregularities by Amway.

Chairman Steve Van Andel and President Doug DeVos issued a joint statement expressing their relief at the news.

“We are thankful that after these many weeks he is finally able to be with his family, yet profoundly dismayed that this unnecessary detention occurred at all, and are even more troubled that it lasted so long,” they said. “Our focus is squarely on efforts to ensure that nothing like this happens again.”

Amway remains committed to the India market and is working with the various governing bodies there to craft clear legislation that distinguishes legitimate direct selling businesses from frauds. It continues to invest in the country and has a new manufacturing facility in Tamil Nadu that is scheduled to come online later this year.

The company also plans a vigorous defense of the charges that led to Pinckney’s arrest, said Samir Behl, Regional President, Europe, South Africa & India.

“We have much work to do to define specific legislation which regulates the activities of the direct selling industry in India,” Behl said in a written statement. “In the absence of such legislation, some authorities have, on a mistaken understanding of the direct selling model, taken the view that direct selling companies are covered under the Prize Chits and Money Circulation Schemes (Banning) Act. This act does not distinguish between genuine direct selling companies and illegal schemes, nor was it intended to. In fact, this act was never intended to cover the distribution of real products and services and is being misapplied against genuine direct selling companies like Amway.

“We are a legitimate direct selling company, which sells more than 140 daily use products across categories like nutrition, beauty, personal care and home care through individuals who make personal recommendations regarding the use of distinctive high quality products and earn commissions only on the sale of Amway products. Amway products are widely recognized and appreciated for their quality and value. The Amway business costs nothing to join, and all Amway products are backed by a money-back guarantee for 100 percent satisfaction of use.

“The business community in India has supported us in this hour of crisis and pledged its continuing support in our pursuit of fair legislation that also protects Indian consumers. Leading industry associations like FICCI, IDSA, Amcham, CII, USIBC and the Kerala Chamber of Commerce openly support our cause. We are thankful to them.”

BurnLounge Roundup: Unpacking the Ninth Circuit Decision

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This month the United States Court of Appeals for the Ninth Circuit passed down a long-awaited decision in the case of FTC v. BurnLounge Inc. The Federal Trade Commission brought a pyramid complaint against the New York City-based company in 2007.

Digital music seller BurnLounge positioned itself as a breed of network marketing company that enabled independent retailers to sell music through online “BurnPages.” The company’s labyrinthine compensation plan included multiple income opportunities, with extra incentives based upon the sale of premium packages rather than actual merchandise.

The recent ruling upholds a 2012 judgment barring the defendants from operating a pyramid scheme and ordering the payment of $17 million in damages. The opinion provoked a flurry of related opinions on its implications, for Herbalife in particular and direct selling in general. We’ve rounded up commentary from industry legal experts and other interested parties to provide a better understanding of the precedent established in BurnLounge.




  • Pershing Square Responds to Recent Ruling in ‘FTC v. BurnLounge Inc.’ “The notion that the Ninth Circuit’s decision is a vindication of Herbalife is absurd. The case certainly does not support Herbalife’s position that sales of products to distributors who tried—but failed—to succeed in their pursuit of the Herbalife business should be regarded as true retail sales.”


  • BurnLounge Appeal Decision by MLM attorney Jeffrey Babener “[TheBurnLounge decision] will dramatically impact the landscape of direct selling to provide guidance on two fundamental legal issues: (1) What activity constitutes a pyramid scheme? (2) What is the role of ‘personal use’ (by distributors) in pyramid case analysis?”

Federal Authorities Set Sights on Alleged Pyramid Schemes

This week federal authorities have revealed major developments in two cases involving pyramid scheme allegations. With the backing of anti-pyramid laws like the one recently established in Tennessee, regulators have announced a settlement in the case of Kentucky-based Fortune Hi-Tech Marketing (FHTM) and filed fraud charges against TelexFree of Massachusetts.

Officials at FHTM will surrender assets totaling $7.75 million in restitution to participants, according to a release from Kentucky Attorney General Jack Conway’s office. He joined the Federal Trade Commission (FTC) and attorneys general from Illinois and North Carolina in a January lawsuit filed against FHTM. An investigation begun in 2010 found FHTM to be a deceptive operation built upon collecting substantial start-up costs and monthly fees rather than selling product. More than 98 percent of the company’s participants lost more money than they ever made in what Conway calls a “classic pyramid scheme.”

“Unlike legitimate multi-level marketing programs, FHTM distributors had no incentive to sell products. For example, the distributors only received pennies for selling multi-year service contracts and received substantial payments for every new FHTM member they signed up,” said Conway. “FHTM’s promotional presentations and materials focused almost entirely on recruiting new members rather than selling products.”

The full amount of the settlement, $169 million, will be suspended when FHTM officials have surrendered their assets. The order also bans the defendants from any future participation in multi-level marketing programs.

After a raid on TelexFree’s Massachusetts headquarters in April, federal agents have found one of the business’s co-owners “may be elusive,” as a Boston Globe headline puts it. Carlos Wanzeler reportedly fled to Brazil after state and U.S. securities regulators filed civil charges against the company and its principals in April.

On Wednesday night the U.S. attorney’s office confirmed that Wanzeler’s wife, Katia, was arrested at JFK International Airport allegedly attempting to join her fugitive husband in Brazil. According to the Globe, an affidavit filed Thursday reveals that large sums of money have been transferred from TelexFree accounts into a Wells Fargo account under Katia Wanzeler’s name.

During the TelexFree raid one executive attempted to flee with a bag of cashier’s checks totaling $38 million. The Securities and Exchange Commission (SEC) subsequently froze the company’s assets, and last week authorities charged Wanzeler and co-owner James Merrill with conspiracy to commit wire fraud.

The civil charges claim TelexFree is a global pyramid scheme defrauding consumers with the promise of a quick profit. The company, which sold Internet phone-service plans, generated most of its money by incentivizing members to invest in online ads. The criminal wire fraud charges Wanzeler and Merrill face carry a sentence of up to 20 years in prison.

Ackman’s Folly: 7 False Assumptions on Herbalife

by Kevin Thompson

Click here to order the February 2014 issue in which this article appeared or click here to download it to your mobile device.

Editor’s Note: Direct Selling News contacted Kevin Thompson directly and requested a condensed version of a longer article he recently wrote. We reprint his point of view because we feel it is a perspective that should be shared with our DSN audience.

The full article is also available on Thompson’s website at

It’s been almost a year since Bill Ackman announced his short position on Herbalife (HLF—NYSE). With much media fanfare, he gave a 300+ slide presentation explaining the validity of his thesis. On Bloomberg, he confidently declared, “This is the highest conviction I’ve ever had about any investment I’ve ever made.” To the casual onlooker, it appeared that all hope was lost for Herbalife. But those of us who benefited from a little more context knew better. We’ve seen this movie before with convicted criminal, Barry Minkow. Admittedly, Bill Ackman is different than his felon predecessor. While Minkow concealed the fact he was paid for his attack (fraud), Ackman made his position clear from the start. And really, that was the only difference. They both relied on the same worn-out anti-MLM arguments. They both stitched together various quotes and articles, most of them out of context, in an effort to stretch the truth and create an appearance of filth.

They both ultimately failed. As I’ve watched the debate unfold over the past year, I’ve been greatly puzzled by the amount of effort Ackman has expended to kick down this “unsustainable pyramid.” While I don’t think he’s a bad person, I think he’s obviously crossed a line and gone from an objective fund manager to a mean-spirited fund manager. It can happen to anybody. I tell all of my children, “Thompsons control their emotions.” I started reciting this maxim when I noticed my 4-year-old daughter making poor decisions during one of her fits. Under the influence of strong emotions, we all make mistakes. Ackman is clearly under intense emotions when he says things like,

While I don’t think Bill Ackman’s a bad person, I think he’s obviously crossed a line and gone from an objective fund manager to a mean- spirited fund manager.

“This is not a trade for me, we are going to take this… to the end of the earth.” He’s ignoring basic fundamentals and investing purely on ego. At some point, he got off track. I’m calling the game. It’s over for Ackman’s bet, no matter how hard he postures. Herbalife is not going to be shut down as a pyramid scheme. I can count seven assumptions made by Ackman that have all turned out to be faulty. It was his reliance on these assumptions that led to his reckless confidence.

False Assumptions

1. He Assumed Bigger Means Better

Central to Ackman’s thesis is a legal report prepared by someone at Sullivan & Cromwell. To this date, Ackman has not provided this report, though he still falls back on it when pressed about his thesis. Sullivan & Cromwell is an enormous law firm based out of New York. With over 800 lawyers and $1 billion in revenue, it’s safe to place them in the “big firm” category. But bigger is not always better. While Sullivan touts a number of reputable brands as clients, they’ve likely advised zero clients regarding their sales in a network marketing format. I represent network marketing companies, and I know the competitive landscape of lawyers in my space. Candidly, Sullivan & Cromwell is completely off the map. With MLM law, being a generalist is a plan for failure. If someone at Sullivan & Cromwell told Ackman that Herbalife was a pyramid scheme, he or she lacked meaningful experience to know better.

Bill Ackman assumed the market would follow his “well-researched” logic. He thought wrong.

2. He Assumed He Could Hypnotize the Market

Ackman assumed that with the awesomeness of his initial PowerPoint presentation, the market would panic resulting in a massive selloff. And truthfully, the market did panic for a couple of weeks before growing immune. Bob Chapman and I published the first article that challenged Ackman’s position. (Chapman is the Founder of Chapman Capital LLC, a Los Angeles-based investment company, and was an activist versus Herbalife following the death of Herbalife Founder Mark Hughes in 2000.) Two weeks after Ackman’s initial presentation, when the wound was still fresh and the stock was trading in the low $30s (it’s now at $75 per share), we pointed out that the emperor had no clothes. Ackman did not anticipate large fund managers betting against him. As other funds began doing some due diligence, they all started piling on the long side based on the realization that Ackman’s only shot was government intervention. As the market sobered up, Ackman’s presentation was placed under a microscope and found to be grossly inadequate for purposes of finding illegality.

Bottom line: He assumed the market would follow his “well-researched” logic. He thought wrong. The most notable of long investors are Carl Icahn, George Soros and Bill Stiritz. Notable investors in Ackman’s camp: zero.

3. He Assumed the Salesforce Would Collapse

When I first saw Ackman’s presentation last year, I thought to myself, “There’s no way Herbalife distributors can build with this kind of negative publicity.” They surprised me, and they surprised Bill Ackman. Ackman’s presentation was almost a self-fulfilling prophecy. If the salesforce were rendered inert, the stock would tank, thus proving his theory that Herbalife is a volatile pyramid destined to collapse. While the collapse would have been directly tied to Ackman, he would have attributed it to the volatile nature of pyramid schemes. As stated earlier, the stock bounced back. As for the salesforce, they trudged forward, producing significant results under tremendous pressure quarter after quarter. It’s hard enough to build a network without impediments. If there’s negative press, it only compounds the difficulty. Somehow, the Herbalife distributor found a way.

4. He Assumed He Could Confuse the Public about Market Saturation

This is somewhat related to Assumption No. 2 where Bill Ackman expected to mesmerize the market with his logic. Ackman assumed that his argument regarding market saturation would actually fly. In theory, it seems to make sense. At some point, assuming everyone is successful at recruiting Herbalife distributors, the market would be exhausted. In Ger-Ro-Mar, the FTC tried to make this “geometric progression” argument and failed. In that case, the company was in the business of selling women’s lingerie. The court cleverly wrote, “We find no flaw in the mathematics or the extrapolation [presented by the FTC] and agree that the prospect of a quarter of a billion brassiere and girdle hawkers is not only impossible but frightening to contemplate, particularly since it is in excess of the present population of the Nation, only about half of whom hopefully are prospective lingerie consumers. However, we live in a real world and not fantasyland.”

In an article online, MLM consultant Len Clements said it best when he wrote, “I wonder, how many more years does a 32-year-old company like Herbalife have to exist, and continue to grow, before this notion of the MLM company succumbing to ‘inevitable market saturation’ becomes folly.” In his first presentation, Ackman asserted that Herbalife was running out of markets; thus, doomed to experience “market saturation.” Keep in mind, Amway is 22 years older than Herbalife, operates in 20+ more countries and has over three times the sales revenue of Herbalife—and they have yet to “saturate the market.” But I digress.

5. He Assumed He Could Confuse the Issue of Internal Consumption

Bill Ackman assumed he could stitch together an argument that criminalized heavy internal consumption. As a recap, “internal consumption” is a term used to describe the act of paying commissions on downline consumption/sales. If distributors buy the product for personal use (distributor = “internal”), commissions are triggered. The criticism of internal consumption: It can lead people to buy things they never would buy while they’re under the influence of a pay plan, i.e. “opportunity driven demand.” This issue is the main source of criticism of network marketing, and Ackman seized on it. First, the conclusion: It’s legal to pay commissions on internal consumption. The debate has always revolved around the appropriate amount.

Given the low cost of entry into network marketing companies (oftentimes less than $100), this sort of black-and-white standard is intellectually disingenuous. Since it’s so easy for distributors to join a program to “give it a shot” or save money on product, it blurs the line between retail sales and distributor volume. In an oft-quoted FTC advisory memo in 2004, the FTC said, “In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.” The key is motivation: What’s driving the consumption? If it’s opportunity driven demand, the motivation is misplaced. In its rebuttal presentation on Investor Day (Jan. 10, 2013), Herbalife released some data that put this issue to rest. Based on its objective data, 31 percent of all orders are drop-shipped to non-participants (found on page 50 of the presentation). This at least indicates that the products have legitimate value and are not merely token items. As for the issue of distributor motivation, 73 percent of all distributor orders are made by participants that are not qualified to receive commissions (page 59). As if that’s not enough, Herbalife commissioned Nielsen to conduct a study on the penetration of Herbalife distributors and end users in the United States. The results: Herbalife has over 7 million customers in the U.S. alone, which dwarfs its distributor numbers by 6.5 million. The verdict: The products have value.

Bottom line: Ackman is clamoring for the wrong piece of data. He’s asking that Herbalife reveal their retail sales data. The key factor is “motivation,” and motivation is not easily quantified. And given the low cost of entry for all network marketing companies ($60 for Herbalife), this piece of data is not the determining factor with respect to pyramid allegations. Does Herbalife have this data? Yes. Are they obligated to provide it? No. They’ve already shown some compelling statistics, and they’re tightening the screws with respect to distributor compliance. Going forward, I suspect Herbalife will do a better job of distinguishing its customers from business-builders.

Ackman’s failure has led to a more unified direct sales industry and bolstered support for outreach efforts. And quite candidly, it’s made the space better.

6. He Assumed He Could Launch a Surgical Strike on Herbalife

Ackman likely assumed that he could keep the pressure solely on Herbalife without agitating the rest of the direct sales industry. Keep in mind, the direct sales channel represents approximately $167 billion in global revenue, according to the World Federation of Direct Selling Associations. When he relied on common arguments used against all network marketing companies, he brought the entire industry into the melee. Initially, he was careful. On Bloomberg after his initial presentation, he said, “I’m not saying that companies like Amway are pyramid schemes.” Now, his arguments are growing broader with each presentation. With this in mind, every company in the industry benefits from his failure. It’s led to a more unified direct sales industry and bolstered support for outreach efforts. And quite candidly, it’s made the space better.

7. He Assumed He Could Refute the Value of the Buyback Policy

The value of Herbalife’s 12-month buyback policy cannot be understated. When I see former distributors crying foul about the money they’ve lost, I care, but I wonder if they knew about the return policy. Herbalife offers a 12-month refund on all unused/unsellable inventory (without a restocking fee). When people are upset about money lost, it’s clear that the issue is regret. They regret using the product. But they still used it and derived value from it. The 12-month buyback policy, which is adopted by Herbalife and strongly encouraged across the entire industry, is the ultimate consumer safeguard. It’s designed to help distributors get their money back on unsellable and unwanted inventory when they decide to exit.

When you factor this element with the 31 percent drop-shipping statistic + the 73 percent statistic of orders from non-qualified distributors + the 12-month buyback policy + the 0.2 percent return rate + the minimal amount of consumer complaints, it paints a clear picture: The products have legitimate value, and the consumer safeguards are sufficient.


Ackman’s gamble is over. This is not false bravado. I’m calling it now like I called it with Bob Chapman weeks after Ackman’s first presentation. Ackman can waste his investors’ money as long as they’ll allow. It does not change the fact that Ackman’s argument was premised on several assumptions, all of them faulty. It took little skill to craft an argument and seem convincing to those unfamiliar with the issues. The MLM space is murky, to say the least. But Herbalife has never taken ranks with the companies on the bottom rung. Ackman knew this, relied on an undisclosed legal report from a firm with zero experience in the category, relied on several other assumptions, took a gamble, and failed. Recent statements from Ackman seem to be coming from a man with a bruised ego, leading with his emotions and not his head. Herbalife is not a pyramid scheme, and with each passing day they evolve into a better company.

Kevin Thompson+Kevin Thompson is an MLM attorney with extensive experience in helping entrepreneurs to launch their businesses on secure legal footing. He is a founding member of Thompson Burton PLLC and a Supplier Member of the Direct Selling Association.

Herbalife Exceeds Q1 Earnings Forecast


Herbalife has spent much of 2013 defending its business model against hedge fund manager Bill Ackman’s pyramid accusations. In a Dec. 20 presentation, Ackman denounced the nutritional supplements seller and stated a $0 target price for Herbalife stock, simultaneously shorting the company 20 million shares. In spite of Ackman’s continued opposition, Herbalife’s first quarter earnings report surpassed analysts’ predictions and its own forecasts with $1.1 billion in revenue, a 17 percent year-over-year increase.

The report also follows closely upon the resignation of Herbalife auditing firm KPMG following accusations of insider trading by the firm’s senior partners. Herbalife’s earnings equal $1.10 per share, beating the $1.03 to $1.07 per share forecasted by the company and marking the seventeenth consecutive quarter Herbalife has posted earnings reports surpassing analysts’ estimates.

Read the full Los Angeles Times story here.