BK Boreyko Tries His Hand at Magic: Does he pull it off?

01c62c29d34ede51f7c12ef645d59945I can remember where I was sitting when I saw David Copperfield’s infamous Statue of Liberty trick.  I was right in my living room, sitting three feet from our “big screen” 25 inch television.  I was speechless!  I had my imagination running wild….where in the world did it go!?  Is magic real!? As it turns out, years later, people revealed the logistics behind the magic: it was a revolving stage.  The statute was shown between two pillars, the curtain was lifted to conceal the statute, and as David Copperfield was doing his thing, the stage rotated without audience detection.  When the curtain was dropped, the audience (and those of us watching on television) were staring out into the ocean without even realizing it.

Changing the optic! Pure genius!

With BK’s latest announcement, he’s attempting a similar effort.  In summary, he’s changing the perspective (words) about MLM without changing the model itself.  He’s just rotating the stage while keeping the statute (the model) in tact.

In BK’s video below, he SPRINTS from the MLM category, claiming that Vemma is “more like Amazon and less like Amway.” I’ll start this breakdown with the obvious points first:

(1) Amazon is not a member of the Direct Selling Association;

(2) Amazon does not terminate its affiliates for promoting other MLMs;

(3) Amazon does not bind its affiliates to non-solicitation clauses (commonly done by clients of mine and every other company in the MLM industry);

(4) Amazon does not have monthly volume requirements.  BK makes it clear: “We no longer require our affiliates to buy products.”  Well that’s good to know, because you technically were never supposed to have such requirements anyways.  I know, I know….it’s debatable whether a company can impose a purchase requirement. ViSalus does it (I think).  But in my opinion, I advise all clients to stay away from required monthly purchases. Instead, Vemma is doing what 95% of all other MLMs do: they’re now requiring VOLUME.  Can this volume be achieved via the now optional Autoship? Yep.  Will the majority of reps qualify in this manner?  Probably.  Does this “change” make Vemma more like Amazon and less like Amway?  No. Ironically enough, Amway has ZERO volume requirements for reps to join.

(5) Amazon does not have a genealogy for calculating commissions i.e. there’s no opportunity for recruitment;

(6) Amazon discloses its revenue from customer sales. While BK implies of significant customer activity, we have no way of knowing the numbers.

Affiliate vs. MLM

In his video, BK distinguishes affiliate models from MLMs as follows: affiliate programs are more customer focused and there are no requirements to buy product. Please remember, the entire point of an MLM sales strategy is to SERVE CUSTOMERS. If Vemma was not on this track before, what in the world were they doing? And I’ve already opined on the issue of required product purchases. They never should’ve had those requirements in the first place. Going with a volume requirements puts them in line with most other MLMs out there (keyword being “IN-LINE”…..not ahead).

Real Changes

These are the changes that seem legitimate:

(1) Affiliates are all Customers first. When a “Customer” enrolls another customer, they become an Affiliate and qualified to earn commissions (after they generated the volume via personal purchases and/or sales). This is interesting to me. Do these Customers go on the Affiliate’s front-line i.e. like a personally enrolled affiliate would? If so, Vemma made it more difficult for affiliates to sling participants down in depth. This would legitimately slow recruitment; thus, look more like an Affiliate arrangement. If, on the other hand, these “Customers” are given a position in the genealogy and can benefit from their upline’s actions on a later date, we’re back to David Copperfield’s rotating stage. If the latter is the case, regulators will not consider those people as Customers in the event of an inquiry (my opinion).

(2) There’s a “Custiliate” program. Friend and MLM consultant, Mel Atwood, coined the phrase “Custiliate,” so I’ve got to give credit where credit is due. A Custiliate is a hybrid between a customer and an affiliate. The Customer cannot earn the big bucks but there are some financial incentives available. There’s nothing earth-shattering here. There are numerous companies out there that offer incentives for customers to share the products with other customers. With Vemma, they’re giving customers “credits” that can be redeemed for product sales. This is a good thing and most companies need to implement similar incentives. The key question: will the incentives lead to an increase in customer revenues? If an MLM is selling $1,000 lemonade, the policy would be lipstick on a pig because there would never be legitimate demand for such a product. If Vemma’s product is priced outside of the market, the Custiliate program is window-dressing. If it’s in-line, it’ll help drive the numbers up. This is not proven by making comparisons with Red Bull. It’s proven by customer revenue. It’s that simple.

(3) Vemma now pays full CV on customer activity. This caught me off guard. Why in the world were they allocating 50% on customer volume? This would be a dis-incentive for distributors (affiliates) to accrue customers. Why pursue customer sales that yield 50% CV when they can recruit and get 1 to 1 on the volume for their commissions? This is so bad, I’m not convinced I’m right. If they fixed the 50%, good for Vemma. They’re now in-line with other MLMs (again, in-line…..not ahead).

Conclusion

At a time when the industry needs to be more united, BK’s announcement of “big changes” is counter-productive. Will these changes lead to meaningful changes in Vemma’s sales culture, leading to a more customer-oriented company? Or is he just rotating the stage, using the right words and gestures while only changing the perspective?

What do you think?

If you’re reading this via email, click here to view BK’s announcement video.

Herbalife Announces FTC Investigation

Herbalife announced that the FTC has initiated an investigation. While it’s not pleasant to deal with a government subpoena, this gives Herbalife an opportunity to put this issue to rest. Watch the video below to get my thoughts. In summary, I believe the FTC will use the data it collects from Herbalife to sharpen its saw in an effort to create better guidelines for network marketing companies. They’re not going to sue Herbalife (though I’m sure they’re thinking about it). If you’re reading this via email, click here to watch the video. The paper referenced in my video can be found embedded below (or here).
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FTC Responds to Senator Markey’s Letter about Herbalife

MLM LawIn January of 2013, Senator Markey from Massachusetts called upon the FTC to investigate Herbalife. I made three predictions regarding the FTC’s response to Markey’s letter. I predicted: (1) The FTC would respond AFTER Markey’s requested dealing (Feb. 28); (2) the FTC would say nothing about Herbalife’s business model; and (3) the FTC would use this as an opportunity to start a broader conversation to help add clarity to the “gray” in the industry.

Well, there are two ways to look at my predictions regarding the FTC’s response.  I was either 66% wrong or 33% right. I’ll let you decide;)

The FTC’s letter to Markey is below. If you’re reading this via email, click here to read the letter.

The letter is easy to understand and interpret. Basically, the FTC cannot comment about Herbalife (which was the one prediction I got right). This is a quick summary of the letter:

85% of the letter was spent justifying the existence of the agency. I’ve paraphrased this part of the letter: “We’re busy and we’ve had a number of successes recently with respect to pyramid schemes and weight loss claims. While some say we’re dormant, we’re doing our best.”

The remaining 15% contains their response regarding Herbalife. It’s included below. I’ve paraphrased: “Thanks for bringing these concerns to our attention. We’re not able to talk about it. Just FYI, we assess a number of factors before making a decision to take actions. The factors referenced here are nebulous so as not to commit ourselves to anything specific. If consumers are having problems, give them our information.”

I have mixed thoughts about this response. I was hoping for something with more substance…something about their vision for the industry. But alas, we’ll save the discussion for improvements for a later date. At some point, the industry needs some help. The regulators are not able to squish all of the bad guys, which has led to a dirty environment.

With respect to the allegations against Herbalife, Ltd., a number of statutory provisions and the Commission Rules of Practice prevent me from discussing what action, if any, the Commission may take in any particular situation. I can assure you, however, that the information you provided and the concerns you expressed are being carefully considered. In general, in determining whether to take enforcement or other action, the Commission may consider a number of factors, including the nature of the practices at issue; the type of violation alleged; the likelihood of preventing future unlawful conduct and securing redress or other relief; the nature and amount of consumer injury at issue; and the number of consumers affected.

Complaints from consumers can provide valuable information that we frequently use to identify deceptive and unfair practices in the marketplace. Therefore, please encourage your constituents to file their complaints with the FTC, in English or in Spanish, by visiting the FTC’s online Complaint Assistant at https://www.ftc.gov/complaint or by calling 1-877- FTC-HELP (1-877-382-4357).

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.

So You’ve Heard I’ve Been Retained?

In this video, I explain what it means when our firm is retained by a network marketing client. The fact that I’m retained should never be viewed as an endorsement of the program. There’s a lot that goes one when I’m working with a client and I make it very clear that my name is never to be used in a promotional sense i.e. “We hired Kevin Thompson and he says we’re a great company.” I want you to have a better understanding of what it means when I’m retained by a client. Watch this video to understand more.

The Cease and Desist

lawyer_joke_accounting_cartoon

If you’ve been in business for very long, there’s a good chance you’ve received what I call an “eat s%@#” letter from a lawyer. These are commonly referred to as “cease and desist” letters and are designed to serve two functions:

  • Intimidate the other side in an effort to get them to stop doing something; and,
  • Put the other side on notice that if the bad behavior persists, they could get sued.

Cease and desist letters are commonly used by network marketing companies when distributors are raiding the downline.  I’ve sent dozens of these letters to disgruntled distributors on behalf of companies, usually with a bit of discomfort while hoping the information I’m fed is accurate.  This is my litmus test I explain to clients before sending a C&D: if they’re willing to spend the money to sue the other party if the letter is ignored, I’ll send it. Otherwise, I’m not interested in allowing a client to take a gamble with my credentials.  I’m not a fan of sending hollow threats.  When someone sees a C&D on Thompson Burton letterhead, it needs to be known that we follow up, otherwise C&Ds are meaningless.

Negative Online Commentary

Negative online commentary is the cost of doing business. If you’re doing anything meaningful, there’s going to be some skeptical people. And if you’re doing something shady, there’s going to be a lot of skeptical people, some of whom will choose to write an article about you or your business. It’s the nature of the internet. We all have the power to publish content at the push of a few keys. While I have several thoughts on how companies should deal with negative online articles, I’m going to focus instead on what they should NOT do: have their lawyers send Cease and Desist letters.

In all of my years seeing online publishers post negative commentary about companies here and there, I have never once seen an author actually heed the C&D (hey, that rhymes). Troy Dooly gets them. BusinessForHome gets them. And now we can add Oz over at BehindMLM to the list. Oz was recently sent a C&D regarding his review about “BidsForMyMeds.” And what was the result? The article was not pulled down. On the contrary, Oz dedicated another article to the business and made the poor lawyer famous. Unless a company is willing to defend itself publicly on a platform it does not control, it should always lead with a hand shake instead of a handgun. Be proactive instead of reactive. I have yet to see an instance where an online author posts blatant lies about a company or person. In that scenario, it might make sense to throw a punch. In nearly all cases, the authors are providing their opinions. As biased as those opinions might be, they’re still opinions and given broad protections under the First Amendment.

Scope of the First Amendment

When you’re thinking about calling your lawyer to send one of these nasty-grams to an online meanie, it’s important to understand the limits of First Amendment protections. Below, I’ve inserted some notes from one my talks a few years ago with respect to the First Amendment and blogging. Bottom line: save the Cease and Desist for those occasions when the damages are real, you’re justified and you’re fully prepared to go the distance. Otherwise, throw water on the fire instead of gasoline by reaching out human-to-human and engaging in a conversation. Keep your emotions under control.

If you’ve received a C&D, how did you handle it?

Beginning of my notes

DEFAMATION

A statement is defamatory if it “tends to injure the plaintiff’s reputation and expose the plaintiff to public hatred, contempt, ridicule, or degradation.” Phipps v. Clark Oil & Ref. Corp., 408 N.W.2d 569, 573 (Minn. 1987).
The defendant must have known or should have known that the communication was false. The statement must also have been a statement of fact.

Defamation Per se

Some statements are so defamatory that they are considered defamation per se; and the plaintiff need not prove that the statements harmed his reputation. The classic examples of defamation per se are allegations of serious sexual misconduct; allegations of serious criminal misbehavior; or allegations that a person is afflicted with a loathsome disease.

What Constitutes Injury to Reputation?

The plaintiff must establish proof of damage to reputation in order to recover any damages for mental anguish; see Gobin v. Globe Publishing Co., 232 Kan. 1, 649 P.2d 1239, 1244 (1982).

Libel-proof plaintiffs

Some plaintiffs have such poor reputations to begin with, they are considered “libel- proof.” A plaintiff is “libel-proof” when his reputation has been irreparably stained by prior publications. At the point the challenged statements are published, then, plaintiff’s reputation is already so damaged that a plaintiff cannot recover more than nominal damages for subsequent defamatory statements. Marcone v. Penthouse Int’l Magazine for Men, 754 F.2d 1072, 1079 (3rd Cir. 1985).

Defenses to Defamation

Truth is an absolute defense.

If the communication is designed as a parody where a reasonable audience would not confuse it as factual, it is not actionable. Falwell v. Hustler Magazine. In Falwell, the Supreme Court held, “At the heart of the First Amendment is the recognition of the fundamental importance of the free flow of ideas and opinions on matters of public interest and concern. The freedom to speak one’s mind is not only an aspect of individual liberty – and thus a good unto itself – but also is essential to the common quest for truth and the vitality of society as a whole. We have therefore been particularly vigilant to ensure that individual expressions of ideas remain free from governmentally imposed sanctions.”

In the mid-80s, Hustler magazine printed a satirical advertisement talking about Jerry Falwell’s “first time” with liquor. The advertisement was a play on words that made it seem like Jerry was talking about his “first time” with his mother. Since the advertisement was clearly a parody and one where a reasonable audience would know that the statements were not factual, Jerry Falwell lost his lawsuit.

“Actual Malice”

If the Plaintiff is considered a Public Official or Public Figure, they have to prove that the Defendant acted with malicious intent to harm the Plaintiff. It’s an extra element that makes it more difficult for public figures to file suit against their detractors.

What’s a Public Figure/Official

In general, Public Officials are individuals that hold public office while public figures are individuals that are in the forefront of particular issues.

Large, publicly traded companies are typically treated as “public figures” for purposes of First Amendment cases. If a citizen lashes out at Comcast and communicates false statements. Comcast would have the additional burden of proving that the individual acted with malicious intent to harm the company.

Opinion defenses

The First Amendment protects statements of opinion, as distinct from statements of fact, against claims of defamation. A statement is an opinion when:

(1) the statement is genuinely believed; and
(2) that there is a reasonable basis for that belief; and
(3) that the speaker is not aware of any undisclosed facts tending to undermine the accuracy of the statement.

Prefacing a sentence with “in my opinion” is not always the cure. Statements of opinions can be actionable when one of the above factors is absent.

– end notes –

Article on Seeking Alpha: Ackman’s Folly With Herbalife: 7 Assumptions That Led Him Astray

I published an article on Seeking Alpha yesterday. SA is a site dedicated to stock analysis. As a wannabe-tech nerd, I think their site is brilliant. People interested in a stock can subscribe to receive updates when articles are published about the specific stock. If you have the mobile app, you’re notified when new articles are live. Herbalife has been a widely discussed stock over the past year. It’s been almost a year since Bill Ackman gave his first presentation about Herbalife. In this article, I outline the seven assumptions that caused Ackman to miss big. The article got 90+ comments on day 1. Some favorable, some not-so-favorable.

Check it. Chime in. Share.

Bill Ackman’s Folly With Herbalife: 7 Assumptions That Led Him Astray

Is it better to raid in secret or raid in plain sight?

Epic Era_MLM_Pre-Launch Founding Leaders

If you’re reading this via email, click here to view the video.

The purpose of this article is to explore the current “deal making” culture in the MLM industry. Quite frankly, it’s getting pretty stupid.

Raiding in Secret

Another word for “raiding” is “stealing.” But I’m not taking it that far. “Raiding” typically occurs when a leader strikes a special deal with a new company, violates his contract with his or her existing company, solicits the downline for the next new thing, conveniently fails to disclose the existence of the special deal, generates a decent commission for a year or two, possibly gets sued, seeks out another deal, wash, rinse, repeat. This is what I call “raiding in secret.” It’s a dirty / uncomfortable secret we deal with in the industry. It’s one that rarely gets discussed outside of the inner-circle because both parties instinctively know that it’s wrong. In the scenario of the private deal, there exists an understanding between the company and the recipient that there’s going to be a contract violation somewhere between the networker and their existing (or previous) MLM. This contract violation can even be factored into the contract negotiations i.e. “if you get sued, we’ll cover the legal fees.” I have always known about this side of the industry. There are companies out there like to cut deals and then turn around and sue their own distributors when they leave for other deals. It’s naive for me to think that these sorts of deals will end. After all, there is the occasional special deal that’s legitimate i.e. the networker waits for his or her old contract provisions to expire, starts from scratch and leverages his or her skill to build a large downline FAST. But…that’s rare.

I’ve written about this process in the past in two separate articles. The first is titled Master Distributors: good or bad? In the article, I talk in general about these deals and discuss the importance of disclosing the existence of these deals. In the second article, titled Revised FTC Endorsement Guidelines: Part 1 (Master Distributors),” I talk about the new disclosure requirements published by the FTC when it comes to these sorts of deals. Bottom line: disclosure is key.

Raiding in Plain Sight

Epic has recently announced, very publicly, that they’ve got $100,000,000 available for “experienced networkers.” The payment terms are published in a separate PDF, found below. Basically, if leaders can keep up with various performance metrics, they can earn additional income. While it caps out at $20,000 per month, Epic leaves room for some negotiation:

Are these still not big enough for your dreams and what you know you are capable of? Contact us for details on Epic Performance Programs beyond our $20,000 program.

How is this raiding in plain sight?

Watch the video above, titled Epic Puts $100,000,000 on the table for deals. In my opinion, there’s more to this than “paying for performance.” When you offer networkers $20,000+ per month in addition to commissions in exchange for 120,000 group volume points in six months….you know it’s quite likely (I’m putting it mildly) that the networker is transitioning distributors from another downline. And when that happens, it’s likely the distributor has some contractual restrictions for that kind of activity i.e. non-solicitation, non-compete, etc. There’s a better way to go about building a business. Plus, this sort of activity will invite mass litigation from the industry in general as leaders start migrating towards Epic (if that ever occurs). The claim will likely be “tortious interference,” which occurs when one company encourages people under contract with another company to violate the agreement.

Is this good for the industry?

In my opinion, it’s not. Companies invest years (sometimes decades), thousands of hours and millions of dollars building up their brands and goodwill with its leaders. If all of that effort can be taken by way of a confidential agreement with one of its top leaders, it’s bad for our profession. And what about the distributors in the downline? They’re the people that trust the leader to make good decisions. If they’re not in the know on the special deal, they’re really not in a good position to make an informed decision. They get lost in the shuffle. They get used. Is it in their best interest to uproot their organizations and follow the leader? In most cases, the answer is no.

Disclosure: I’m a conservative, free-market man. I believe in the power of the markets. However, in order for markets to work, information needs to be freely exchanged. In the case of these special deals, the public is never made aware of the deals; hence, the public / distributors are at a significant disadvantage. The market is manipulated.

Conclusion

There are no shortcuts to success. When I competed in the decathlon in college, I was met each year with one or two athletes that talked big. They were motivated for a month, bragging about their inevitable success. Within months, they quit. Success is a grind over time. It’s a long, arduous process. Through week after week, year after year of work, the power of compounding takes over. When I see a company trying to skirt around the work, I just shake my head… If you’re not willing to grind it out, you’re not developing the muscles necessary to win. Cutting these sorts of deals to take advantage of the investments made by other companies…it’s dishonorable.

What do you think? We’ve never had a company publish these sorts of deals before. Is it good or the industry? Bad?

+Kevin Thompson

If you’re reading this via email, please click this link.

Mere Puffery or Misleading Promises: How Much of a Scandal Is Trump University for the New York Public?

This article was written by +Kevin Thompson in collaboration with our stellar intern, Amber Lovelady.

Trump - Schneiderman | MLM law

In August, New York Attorney General Erick Schneiderman filed a $40 million lawsuit against Donald Trump for falsely promising as many as 5,000 students a successful real estate career if they enrolled in the unchartered, unlicensed Trump University. Schneiderman alleges that Trump engaged in “deceptive and unlawful practices,” including falsely representing the legitimacy of the school and false advertising in the newspaper and mail. People attended his one free class off those advertisements which led many of them into attending a $1495 three-day seminar, which enticed them into spending from $10,000 to $35,000 into higher-level Trump University programs. At the end, Schneiderman claims these experiences fell way short of teaching participants everything they needed to know about becoming billionaires. Several students are now mile high in debt, without jobs, and quite mad. According to the AG, dozens of attendees have complained to authorities all over the country about what they believed to be a scam.

 

Personal Responsibility?

But was it really illegal? According to Trump, not everyone who participated in these opportunities is as disgruntled as Schneiderman asserts. Trump declares that more than 10,000 students praise the program and 98% of those students in a survey checked excellent to describe their experience. Further, Trump believes Schneiderman is using this suit as a publicity stunt for public office. “They meet on Thursday evening – I get sued by this AG Schneiderman… Saturday at one o’clock,” Trump said. “Think of it. What government in the history of this country has ever brought a suit on Saturday? I never heard of such a thing.”

He’s got a point on the lawsuit being filed on Saturday. It adds a strange element to an already strange matter.

Marketing Claims

Although there are many things Schneiderman alleges in the lawsuit, I find that this case really hinges on the motivation leading people to attend the classes. What were they hoping to gain? Were their expectations consistent with the marketing message?

How were they convinced? Schneiderman suggests it started with false advertisements. In New York, the test for false advertising is whether representations or omissions are “likely to mislead the reasonable consumer from acting reasonably under the circumstances.” Just for the record, this is pretty consistent with the Federal Trade Commissions definition of “false and misleading.” What was misleading? Some of the false advertisements Schneiderman alleges are:

  • Trump claimed he could “turn anyone into a successful real estate investor” and that students would learn “a systematic method for investing in real estate that anyone could use effective” even though dozens of students were unable to finish one real estate transaction.
  • Trump claimed he would “share [his] techniques, which took [his] entire career to develop” when the President of the University, Michael Sexton, could not describe any Donald Trump techniques taught at the university.

Really?

But really, was this misleading to the average American? When you’re watching a commercial where a bikini model vows that you’ll look just like her after a six week, $10 video series, do you buy it? Most of us don’t because we know it’s part of a sales pitch, mere puffery. And for those who do buy it, they know that it’s their hard work with the content that will bring them success. Of course a $10 investment is significantly less than a $35,000 one, but the principle remains. It’s ill-advised, in my opinion, to judge a program based on how customers leverage the content in their spare time. It’s a problem faced in the network marketing industry. Companies get routinely clobbered based on the low success rate of participants. But is that indicative of a bad program, bad product, bad culture…or could it simply be attributed to laziness? It’s hard to pin-point the root cause of failure.

Reasonable Expectations

A reasonable person understands that success takes effort…and lot’s of it. In this case, it was not unreasonable for a person to believe that Donald Trump and his trusted instructors could provide a foundation for real estate investing. It is completely unreasonable, however, for a person to believe that Trump could transform them into a real estate tycoon.

Conclusion

If you sell any kind of informational product, the odds of litigation go up. Consumers can always say “it’s crap, it never worked for me” and you’re unable to fall back on objective metrics like patents, science, etc. It’s one of the reasons why Amway tightened the screws on its tool systems several years ago. Since many consumers were complaining that the information was poorly crafted for their Amway businesses, Amway got more involved with quality-control.

Network marketing companies that sell informational products have it more difficult because the exposure is two-fold: consumers can say the information was ineffective AND they can say they bought the information JUST TO PARTICIPATE IN THE COMPENSATION PLAN. And the latter reason opens the door up for pyramid scheme allegations.

This lawsuit filed by New York is along the same vein as the lawsuits filed by disgruntled college graduates filed against their universities. They were sold a bill of goods, they graduated, they’re jobless. Who’s to blame? And actually, this lawsuit is of the lesser sort because it’s not the disgruntled consumers filing the lawsuit, it’s the government claiming to protect the little guy incapable of protecting him or herself.

Predictions

This case will settle on the eve of trial. Contrary to what the AG is saying, it’s not about the consumers. I do think it’s really about PR for him and a little grand-standing. With that in mind, the AG will settle for a reduced amount, take the favorable PR, Trump will claim a moral victory and the parties will go their separate ways.

If you learned something new in this article, please share.

If you’re reading this via email, please click this link to download the lawsuit filed against Trump University.

Bill Ackman Throws a Hail Mary: warns auditing firm about liability if they validate Herbalife


If you’re reading this via email, please click this link to watch a full video update.

Ackman Warns PwC

In an attempt to thwart the inevitable short squeeze on Herbalife’s stock, Bill Ackman has recently turned to “warning” PricewaterhouseCoopers of potential exposure if they validate Herbalife’s accounting. The letter is included in full below. Irrespective of the fact that PwC has been in business for over 150 years and have maintained a stellar reputation among auditing firms, Ackman felt the need to educate them on accounting. In the letter, he sites a number of issues with Herbalife’s numbers, none of which will be addressed here because, candidly, I have no idea what it all means. However, I do trust analyst Tim Ramey. He wrote a solid rebuttal to Ackman’s letter, which was included on ValueWalk. The key bullets:

The opening point in the PWC letter is that Herbalife is a pyramid scheme, and PWC will have risk if it audits the Herbalife books and does not disclose that fact. The remainder of the 52 pages does absolutely nothing to prove or allege the pyramid scheme hypothesis. Remarkable.

The letter is an eleven-point discussion of various accounting treatments that Herbalife and its previous auditors have taken. We did not see a single “smoking gun” or anything that would cause us meaningful concern. There are audit-type questions, something that two accountants might have a spirited discussion about at a cocktail party, but nothing that seems material. If this is all Ackman has after millions spent on forensic accounting, Ackman has been cheated. On some of the points Pershing Square is just wrong, in our opinion; a risk you take when your securities analysis does not ever engage in a dialog with the company.

What Does This All Mean?

It’s the fourth quarter with 2 minutes left on the clock. The ball is on Ackman’s 5 yard line. He’s down by 16. He needs to traverse the field, score a touchdown, get a two-point conversion, recover the onside kick, score another touchdown and get another two point conversion. Ackman claims to be armed with the “truth;” however, it’s his version of the truth. In order to pull out of his self-induced tailspin, he needs two things to happen: He needs Herbalife to report a decrease in earnings next quarter (not likely to happen). And he needs, more than anything, the FTC to take action. The FTC is NOT going to take action. Care to know why? (1) HERBALIFE IS NOT A PYRAMID SCHEME; and (2), the existing regulations leave plenty of room for debate on both sides. If there were a lawsuit, the FTC would lose. Plain and simple. The FTC, in my opinion, is not equipped to target companies in the gray. They’ve got to go after the easy targets. And Herbalife, without question, does not fit that definition.

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