Senator Markey’s Letter to the FTC: Prediction

Recently, Senator Markey from Massachusetts called upon the FTC to investigate Herbalife.  His full letter is included below. Click here to read if you’re reading via email. It’s worth mentioning that that the letter was likely originated by someone at Pershing Square, as observed by John Hempton. Markey has useful letterhead, being a U.S. Senator and all. I digress…

These are my predictions:

  • The FTC will respond. While Markey’s letter called for a response by February 28, I’m guessing they’ll respond after the deadline but by late April.
  • The FTC is not going to respond specifically about Herbalife. Three points worth mentioning here: (1) The FTC lacks the data to provide any meaningful commentary about Herbalife; (2) If the FTC had a problem with Herbalife, they’re not going to announce same at the behest of a Senator; and most importantly (3) Herbalife is not a pyramid scheme.  Ackman is playing another confidence game, and the market has grown immune to his tricks.
  • The FTC is going to take this as an opportunity to start a broader discussion about the network marketing space.  There’s an ocean of gray that separates legitimate network marketing companies from illegal pyramid schemes.  As a result of this ambiguity, fraudulent programs are flying under the guise of network marketing, claiming legitimacy because they’re “just like Amway.”  In my opinion, this is the underbelly of the space that the FTC needs to address, not companies like Herbalife.  What will these guidelines look like in the future?  That’s a different set of predictions for another time.

The video is a short one. I hope you find it informative. If you’re reading this via email, please click here to view the video.

Update: Herbalife’s CEO, Michael Johnson, personally wrote a response to Senator Markey. It’s also included below.

  • Paul Merriwether

    Is Herbalife a “pyramid scheme” , YOU BETCHA! After being involved in MLM for more than 20 + years, I’ll say it, if most won’t, many product MLM’s are “pyramid schemes!” 1) In America a country with lots of disposable income, we say MLM products are over priced, and we leave the MLM. 2) Yet these companies are flourishing in other countries. How? 3) Because laws are lax, leaders are marketing the “money” that can be made. They certainly aren’t making retail sales in countries where people have no disposable incomes! Kevin, if Herbalife operates anywhere in the world as a money scheme they are guilty, globally if they allow it to continue! Common sense says, if top reps are in foreign countries not in America, that is a huge red flag! Just my opinion!

    • troydooly

      Paul, I can fully understand the point you are making and will even agree with some of it.

      However, in many of the countries where the largest network marketing companies are flourishing, the laws are strong and the regulators are active.

      And in the case of China where a bulk of Herbalife’s sales are generated, the business model is completely different than in America. When you look at Great Britain, Australia, Japan, and most of the developed countries you see strong laws protecting the consumers from pyramid schemes. And in the under-developed countries people can’t afford to be in a pyramid scheme, so I am not sure I follow your train of thought when you mention lax laws.

      And in some of the countries where we could agree the laws were lax, like India and Brazil, they are rappidly moving to tighten regulations to protect their people.

      In the case of Herbalife, I am not sure I saw where you presented any evidence to support your opinion, in them being a pyramid.

      I do agree that some products sold via the direct selling industry could be seen as over priced, and in a few cases were just fronts for a pyramid scheme.

      But all in all, the products sold via direct sales are competitive in price, or are seen as category creators, as is the case with Aloe Vera, Noni, Acai Berry, and Mangosteen over the last 25 to 30 years.

      Sadly, what I see happen on a regular basis, is most direct selling companies are not been willing to reduce their pricing when the market penetration grows and their margins get better, so these companies see a huge decrease in their revenues in the USA.

      I have a new client who has decided to come into the market with their products already priced at mass market acceptance and built their income model around that model. In doing so their margins are tigers than most direct selling companies, but they are building a company to last.

      It should be interesting in the next few years to see the shift, to this new model. I fully believe more and more companies have already started moving away from the current model, to this new mass market penitration model.

      Only time will tell.

  • troydooly

    Kevin, I want to address two thoughts as I read through your article and the two letters above.

    1. I find it interesting that there is no mention that the the Honorable Senator had his staff confirm the allegations as true or false before contacting the FTC. It seems to me, that the impact of his concerns would be far greater if he would have done some due diligence before writing about what he had heard.

    2. I can see that Herbalife is not sitting about waiting for the media, critics or regulators to come knocking. I think the best move all companies can make as well as our own associations and leaders is to work together to clean up all the gray and take a proactive approach to crating Best Practices moving forward.

    I think a strong educational process would be a great start.

    • Kevin Thompson

      Compliance training, Troy! It’s important. Sadly, most young companies can’t afford it, so they’re seeding the space with a very ill-informed sales force.