Memo by Hedge Fund Manager Robert Chapman: Bill Ackman’s Attempt to Goad Regulators Into a Baseless, Unnecessary Legal Battle

The attacks on Herbalife have been staged on many fronts.  Almost two years into Ackman’s bear raid against Herbalife, the clock is ticking and Ackman undoubtedly needs a government bailout / regulatory action against Herbalife.  Ackman’s thoughts about those on the long-side of $HLF: they’re all idiots.  Kenny Moelis, Bill Stiritz, Carl Icahn, Joele Frank, Boies Schiller, PWC, “uneducated” Herbalife distributors….all operating with inferior minds to his own.  Do Ackman and his gang have an explanation for the 0.25% rate of return on Herbalife products (which offers a 100% buyback)?  Sure they do. It’s magic.  I’m not kidding.  Brent Wilkes, director of a Latin American advocacy group, attributed the low rate of return of inventory to a “magical hold” Herbalife has over its distributors.  In other words, consumers, if they were thinking clearly, would demand more refunds.  

This is not even the tip of the iceberg on the elitist logic used by MLM critics.  Lately, the “influence-by-insult” strategy has been directed towards federal regulators.  With titles like “Does Herbalife Think The FTC Is Dumber Than A Bag Of Hammers?,” the critics are directing their ammo at regulators.  In other words, if the FTC fails to intervene, they’re “asleep at the wheel” and stupid like the rest of us.

Robert Chapman calls out this strategy in a very well-researched memo.  With his permission, I’ve included the full content below.  The actual PDF can be downloaded here.

Begin memo

DATE:            August 8, 2014

TO:                  Herbalife Regulators and Related Parties

RE:                  Bill Ackman’s Attempt to Goad Regulators Into a Baseless, Unnecessary Legal Battle

Introduction.  As has been covered widely by the media, Pershing Square Capital Management’s Bill Ackman has been engaged in a nearly two-year campaign to profit by putting Herbalife out of business.  Ackman’s goal appears quite obvious:  to add $2 billion to Pershing Square’s and his own wealth while feeding his apparently insatiable appetite for ego and reputational aggrandizement.  The first goal – earning profits for himself and his investors, is the cornerstone of legal and socially acceptable capitalism.  As such, it deserves no rebuke.  However, Ackman’s unconventional method of accomplishing that profit goal – making what I and an indisputably respectable list of Herbalife institutional and individual investors view as a seemingly endless string of false, exaggerated, and/or misleading statements via an unprecedented $50 million “research” (propaganda) campaign–  is worthy of the high volume of criticism it has received.

My Motive.  Unlike Ackman and his gang, I shall not attempt to obfuscate the motive underlying this communication, nor will I make false claims about what conclusions I believe the short sellers have drawn.  Unlike the short sellers preposterously stating that the shareholders of Herbalife believe it to be an illegal operation, I shall not baselessly state that the short sellers of Herbalife believe it to be a legal operation, although there are various signs that Ackman belatedly has come to realize that is the case and thus shall pivot next to goading lawmakers into changing the law itself.  I shall state my motive honestly and clearly: to portray accurately my view of this last ditch tactic being used by Ackman and his gang – to goad and attempt to shame regulators into a baseless, unnecessary legal battle against Herbalife.

Desperate Situations Require Desperate Measures.  Having incurred an estimated $200 million – $400 million in realized and unrealized losses on this one investment, Pershing Square finds itself in a fragile reputational position.  Particularly following Ackman’s unapologetic yet highly influential role in the dismantling and near bankrupting of 100-year old retailer JCPenney, his status as an investment superstar is in further jeopardy with Pershing Square’s Herbalife debacle, which unlike massive money losers JCPenney or Target, is far from over. Having proclaimed ubiquitously that Pershing Square’s research on Herbalife had led to this “best investment idea ever,”  – this despite Ackman’s reported decision not to have even one meeting with Herbalife management before launching his bear raid in December 2012 — his reputation, and potentially his franchise should there be legal repercussions, is on the line.  Indeed, the investment and regulatory worlds appear to be converging on an agreement that Ackman’s claims vs. Herbalife are mostly wrong.  Moreover, there exists no shortage of those who believe that Ackman now appears to know that his emotionally fraught analysis was and remains “wrong.” Even so, he persists in a quixotic and  most un-valiant holy war against an enemy of his own fabrication.

Ackman’s Final, Desperate Strategy:       Goad/Shame the FTC into a Self Serving, Baseless Legal Battle

  • Goading/Prodding Just the Latest Tactic at Manipulating Regulators:  It is no coincidence that Bill Ackman kick started his July 22nd Herbalife-bashing presentation with John Hempton’s thoughtless categorization of the global nutrition products company Herbalife as “scumbags” in a 2012 CNBC interview.  Ackman’s nutrition club presentation followed Bruce Craig’s letter from the day earlier to FTC Chairwoman Edith Ramirez, in which the anti-MLM campaigner went over the heads of both FTC Bureau of Consumer Protection (CPB) Director Jessica Rich and FTC CPB Marketing Practices Director Lois Greisman in an overtly hostile attack.  Essentially, Craig publicly accused Ramirez subordinate Jessica Rich of having the wrong priorities (based on a March 2014 speech whereof in a MLM clampdown was not highlighted) and preposterously seemed to categorize her subordinate Lois Greisman as a feckless shill for the MLM industry, based apparently on the absurd theory that since her prior boss at the FTC was Amway’s lawyer, she must be aligned with the MLM industry herself.  I can only imagine how Ms. Rich and Ms. Greisman felt when they read how they were being depicted by Ackman ally Mr. Craig to their own common boss.
  • The Order Apparently Has Been Sent Down from Pershing Square:  Very recently and non-coincidentally, one can hardly read any of the myriad Seeking Alpha “articles” or other short seller propaganda without recognizing an obvious pattern of the short sellers trying to shame the FTC into shutting down or otherwise impairing Herbalife.  In the most recent post by Bill Ackman’s close personal friend and Herbalife short seller Whitney Tilson, Tilson claimed that many of Herbalife’s investors “concede the company is deceptive, but invest because they think regulators are spineless.”  Tilson is surprisingly shameless in displaying his coopting of Ackman’s “goad the FTC” tactic.  As one of his correspondents (per Tilson’s own concession) wrote to him on July 26 and then published proudly by Tilson, “I believe you are correct that the regulators will ultimately be goaded into action.” Tilson’s correspondent then took a shot at goading the regulators himself:  “Many of our regulators are not fond of complex cases and hard work.”  One can expect more disrespectful propaganda like this coming from those who stand to strike it rich by maiming or dealing a “death blow” to Herbalife.  They indeed seem willing to try virtually any tactic to manipulate the markets, media or regulators to that dire end.
  • Short Sellers Must Know Their Claims Are False:  The short sellers are spreading these transparently manipulative and, in my view, knowingly false depictions of the true investment thesis of Herbalife’s investors.  The true long/bullish thesis I actually do hear is that the Company is a legitimate, legally operating global MLM selling products desired and purchased by ultimate consumers, both internally and externally.  Again, whether it be D.A. Davidson’s (Tim Ramey) or Barclays (Meredith Adler) with their in-depth sell-side research, or 19% Herbalife owner Carl Icahn’s repeated public statements that he believes Herbalife is a legitimate, legally run company selling products that help people worldwide, there is not a single Herbalife investor amongst the many with whom I have spoken who ever has indicated in any way that Herbalife is ‘deceptive’ or ‘fraudulent’.  Even John Hempton’s careless choice of words in 2012 was intended to convey his view that the MLM industry has participants, including some distributers of Herbalife products, who are overly aggressive and opportunistic.  Moreover, that singular statement, no matter how taken out of context by Bill Ackman, did not represent anyone but John Hempton’s apparent view at that particular time.
  • Short Sellers Insult the Regulators’ Collective Intelligence:  The irony and hypocrisy of the Herbalife Short sellers vis-à-vis the MLM’s regulators is nothing short of astounding.  Ackman and his cabal of profiteers are not dissimilar to a small but high pitched gang of school yard bullies who repeatedly egg on an honors student to start a fight by shouting, “Come on!  He called you a wimp!  You really gonna take that?”  As I shake my head in disbelief, I wonder how Ackman & Co. actually believe that these truly sedulous regulators, who have a history of taking on the likes of the Mafia, international drug dealers and money launderers, possibly could be goaded into doing the short sellers’ bidding with this patently obvious shaming tactic.
  • Charming, Cajoling, Overwhelming, Bullying and Now Goading and Shaming Regulators:  In mid-late 2012, nearly two years ago, it appeared that Bill Ackman began his version of a charm offensive with the FTC, SEC and other state regulators.  Exhibiting a typical lack self-awareness, Ackman essentially told the FTC, the SEC, and state regulators that Pershing Square was doing these regulators a huge favor by blessing them with his propriety analysis that supposedly proved Herbalife to be a “criminal enterprise.”  Again, allow me to emphasize, Ackman essentially accused these regulators of having been asleep at the switch for nothing short of decades, and, as such delinquents, they all require Pershing Square’s collective perspicacity to finally do their regulatory jobs.  When his unique form of enchantment predictably failed, Ackman moved on to overwhelming the regulators with a deluge of documentation estimated into the thousands of pages.  As that tactic did not attain the immediate prosecution Ackman sought, Ackman moved onto his well-practiced approach of bullying, enlisting a relatively small segment of LULAC and a U.S. Senator to replace his own public face of his war.  In March this year, some 15 months after his first public presentation, Ackman’s final bullying thrust seemed to pay dividends when the FTC launched the formal investigation for which Ackman had agitated.  However, there is a great distance between the investigation and shutting down of Herbalife, as the now 1.5 year SEC investigation exhibits.  One may want to ask the following hypothetical:  “What might Ackman do if the SEC has turned its focus on Pershing Square and/or one of its current or former employees involved in Herbalife? What theoretically might Ackman do if he begins to sense that the results of the FTC investigation were heading toward actually vindicating rather than crucifying Herbalife? Might Ackman and his gang then begin to goad, prod and attempt to shame the FTC into a fight that was baseless and solely served the interests of those who have sold short Herbalife’s stock?”  This is precisely what I believe is happening.
  • Regulators of Herbalife are Diligent, Not Spineless:  At the risk of stating the obvious, every bull on Herbalife shares I know thinks the FTC/SEC/AGs/DOJ are anything but spineless.  Instead, they are extremely diligent in prosecuting truly illegal, endless chain pyramid schemes that primarily compensate distributers for ENROLLING their downline (vs. selling product/inventory to that down line).  The FTC, and the Illinois, Kentucky and North Carolina attorneys general hardly were “spineless when they worked for years together ahead of halting truly illegal pyramid scheme Fortune High Tech Marketing.  For over half a decade, the FTC investigated and then prosecuted truly illegal pyramid scheme BurnLounge, successfully pursuing justice through 2014 all the way to the Ninth Circuit Court of Appeals. The diligently laboring Securities and Exchange Commission (SEC) hardly was “spineless” when it slapped TelexFree with a lawsuit on charges it sold fraudulent and unregistered securities to mostly Brazilian and Dominican immigrants, who served as its promoters.  New York Attorney General Eric Schneiderman, amongst a plethora of other effective and legitimate law enforcement, ferociously has pursued enforcement against the High Frequency Trading players, whose business model involves front running the investments made indirectly and directly by America’s hard working citizens.  California Attorney General Kamala Harris has risen to superhero status on a national scale for her hard charging battle against the nation’s top banks to win a $20 billion settlement for mortgage fraud.  This is but a tiny sample of many examples of strict, appropriate enforcement.  The list of “fully spined” regulators and their persistent pursuit of justice via the prosecution of legitimate, non-falsified or fabricated cases is truly endless.  Therefore, I apologize for the many I failed to include in my list above.

ConclusionThat regulators refuse to be cajoled, bullied, prodded, goaded and “shamed” into pursuing Bill Ackman’s profiteering and self- aggrandizing agenda does not come anywhere close to making them “spineless.”  This is so obvious that any reasonable observer, Herbalife investor or otherwise, would have to agree. Bill Ackman and his compliant operatives should feel ashamed for their transparent attempts to manipulate not only the markets[1], but those who assiduously and honorably have been regulating them for decades.

[1] Herbalife’s illiquid convertible bonds (2’s of 2019) in the past few weeks have been sold down aggressively and disproportionately to the common stock, with some speculating that Pershing Square directly or indirectly (via CDS bidding) having influenced their lower pricing to create the appearance and related media “reporting” of a symptom of financial distress, despite the company’s healthy debt service coverage.

End

FTC Settles with TriVita. Is the word “Inflammation” off limits when you’re selling a health product?

InflammationThe FTC has spoken and we better pay attention. Recently, the FTC announced a $3.5M settlement with TriVita, a network marketing company. TriVita is an Arizona corporation that advertises, markets, distributes, and sells Nopalea. Nopelea is a nutrient rich drink derived from the superfruit of the Nopal cactus. TriVita peppered the marketplace with an aggressive marketing campaign that touted the curative properties of Nopelea. The theme of the advertisements: Nopalea is a drink that will reduce bodily inflammation, which will lead to a reduction in pain associated with inflammation-related diseases.

In May, the FTC obtained an Injunction against TriVita because of the aggressive claims. In the lawsuit, the FTC found the following claims about Nopalea offensive:

• Significantly reduces or eliminates the effects of inflammation on the body
• Provides significant relief from pain, including but not limited to, chronic pain, joint pain, back pain, nerve pain, phantom pain, and pain from inflammation, arthritis, fibromyalgia, surgical procedures, or other conditions;
• Significantly reduces or relieves swelling of joints and muscles;
• Significantly improves breathing or provides significant relief from respiratory conditions, including but not limited to, sinus infections; or
• Provides significant relief from skin conditions, including but not limited to psoriasis.

The FTC found these claims to be disease claims. The FDA defines disease as “damage to an organ, part, structure, or system of the body such that it does not function properly (e.g., cardiovascular disease), or a state of health leading to such dysfunctioning (e.g., hypertension).” Under this definition, a common cold is considered a “disease.” Basically, if an ingredient is marketed expressly or implicitly as having any kind of positive effect on a disease (as defined above), it’ll be treated as a disease claim and subject to further regulations/penalties.

As a result of the settlement, TriVita has agreed to pay a $3.5M fine a refrain implying that its product can be used in the treatment of any diseases.

Regarding the product claims above, they’re obviously over the line. References to diseases like arthritis, fibromyalgia, sinus infections and psoriasis are obvious examples of what not to do.

But what about inflammation?

If a company states that a product can limit the effects of inflammation, is that considered a “disease claim.” In this article by MonaVie, the word “inflammation” is referenced 16 times. Vemma went so far as to commissioning a report on Vemma’s affect on inflammation. I’m not picking on MonaVie and Vemma, I’m just referencing the links to show that it’s quite common for juice companies to talk about their products’ affect on inflammation in the body.

The big question is whether “inflammation” is now in the government’s little black book of unusable words. Based on their position in this case, it would certainly seem to be the case. While one could argue that TriVita was not sued SOLELY because of their use of the word inflammation, it was certainly a strong factor.

If a company promotes a product as an anti-inflammatory, the logical conclusion is that the field will take it one step further. While “inflammation” by itself is not a disease, the easy association of the word to several ailments will result in the inevitable (and predictable) disease claims. The field will naturally explain that inflammation is a leading cause of various diseases, with arthritis and fibromyalgia being on top of the list.

TriVita was too aggressive. Nopalea was advertised as a product that could do more than alleviate ailments, it was advertised as a product that could treat and cure. TriVita, and its field leaders, marketed the product explicitly as one that can mitigate horrible disease symptoms. They portrayed their product as the Ferrari of all anti-inflammatories.

Takeaway

The FTC is taking its job seriously. If a company is going to play in the gray with the word “inflammation,” it’s playing with fire. Again, “inflammation” might not be a disease by itself; however, it’s going to be nearly impossible to prevent field leaders from taking it to the next level. If a company insists on keeping the word “inflammation” in its marketing literature, it needs to take EXTRA precautions to ensure that the field is not extrapolating the message and stating that the product can cure or mitigate diseases associated with inflammation. This is where compliance enforcement is critical i.e. disciplining people when infractions are observed.

Bottom line: While it’s treacherous water to promote a product as one that can reduce inflammation, it’s not illegal to swim there. If the FTC or FDA releases a clear statement regarding their thoughts on whether “inflammation” is an actual disease, I’ll update this article. In the meantime, companies need to tread cautiously. Candidly, I would advise my clients to stop using the word “inflammation” because the message in the field is nearly impossible to control and the downside is too great.

What do you think? Do you think this is a fair outcome for TriVita? Should the word “inflammation” be a privilege only allowed by FDA approved drugs?

MLM Startup Conference, Direct Selling Edge #9, On September 4th

DS Edge - Nashville | MLM Startup

On September 4th, it’s a great time to be in Nashville, Tennessee!  We’re once again hosting our MLM Startup Conference, the Direct Selling Edge.  Click here to purchase your tickets: DS Edge.  Use the promo code: LEGAL-EAGLE.

This two-day educational conference is the best for new and young direct selling companies because the quality of the content presented is excellent. It is pure education….with the exception of one night on the town if you’re interested.

We cover a lot at this conference

You’ll learn….

  • what recent Federal Trade Commission decisions means for you
  • best practices and step-by-step instructions for creating an ethical and effective presence in the social media landscape
  • the legal limits for raising capital and the legal rights inherent with stock ownership
  • the differences between different types of compensation plans and how to assess which plan type is best for you
  • the ABC’s of successful recruiting
  • how to select the right MLM software
  • why you need to have a distributor compliance system for your network marketing or party plan company
  • all about sales tax, 1099′s, unclaimed property reporting, and state income taxes

and more!

Personal Appointments

At the end of each day, from 5 until 7 pm, you’ll have the opportunity to meet with conference speakers for 20 minute appointments at no additional cost!

Where?

The Direct Selling Edge Conference will be held in Franklin, Tennessee (just 20 miles from Nashville) at the Drury Plaza Hotel Franklin on Thursday and Friday, September 4 and 5, 2014.

Built in 2012, the new 338-room hotel offers a daily free hot breakfast, free soda and popcorn, free food at 5:30pm, free local and long distance calls, free parking, and a microwave and refrigerator in every room.

We’ve negotiated excellent rates for you. Click this link to reserve your room:  https://wwwc.druryhotels.com/Reservations.aspx?groupno=2212903

Questions? Shoot me an email at: [email protected]  I hope to meet you there!

(ARTICLE FEATURED IN SEEKING ALPHA) Battle Over BurnLounge: Both sides claim victory

Below is an excerpt from my article about the Ninth Circuit opinion on BurnLounge.  The article can be read in full over at Seeking Alpha.  It’s an important subject.  Click here to read it.

Summary

  • The Court successfully threaded the needle on the issue of “ultimate users,” essentially creating two classes of participants.
  • The Court provided several factors throughout the opinion to help outsiders deduce the motivation driving consumption. This is especially helpful in assessing $HLF.
  • The Opinion will require the FTC’s pyramid scheme expert to create another analytical framework to distinguish pyramid schemes from legitimate direct selling companies (assuming they need one).
  • The Court adopted the logic provided by the FTC in its 2004 Staff Advisory Opinion.
  • The Court eliminated all confusion regarding Omnitrition as it completely ignored the widely referenced dicta that consumption from participants cannot count as sales to “ultimate users.”

On June 2nd, 2014, the Ninth Circuit published its long awaited BurnLounge Opinion. Within hours, both sides of the Herbalife battlefield issued statements claiming victory about the decision. I’ve taken the week to process the opinion. During this time, I’ve tried to keep up to speed with the online chatter regarding various interpretations. One thing is clear: the gray space in MLM law separating legitimate direct selling companies from pyramid schemes has been minimized considerably.

On the one side, Bill Ackman’s Pershing Square spun it as validation of its argument that commissions in the Herbalife plan were derived primarily by opportunity driven demand (recruitment rewards) instead of legitimate product consumption. On the other side, the MLM industry (myself included), breathed a sigh of relief, submitting that the decision validates a lot of our main points in responding to common criticisms of the model. This article is intended to cull out the key nuggets in the BurnLounge decision and interpret what it means going forward.

End of Excerpt

Click here to read the rest of the article on Seeking Alpha.  Seeking Alpha is a news site dedicated to publishing content about publicly traded companies.  The article took me quite a bit of time to prepare.  I hope you find it informative.

MLM Income Claims: Basic guidelines for companies and distributors | FTC (Part 2)

INTRODUCTION

In the last article, MLM Income Claims: Basic guidelines for companies and distributors | FTC, we walked through the Federal Trade Commission’s (“FTC”) recent allegations against Fortune Hi-Tech Marketing (“FHTM”) regarding income claims made by its distributors. In this installment, we’re going to see what it takes to give an adequate disclosure for the claims made.

The format is simple: First, I’m going to lay out what a company needs to provide for its distributors in order for them to give proper disclosures. Next, I’m going to walk through the examples cited by the FTC against FHTM and demonstrate how to make a proper disclosure under the circumstances using the framework provided by the court in Nat’l Dynamics and the FTC’s .com Disclosure Guidelines. The goal of this post is to provide you with practical, blanket instructions to make adequate disclosures. Ready to get started? All right, let’s get down to business.

THE INCOME DISCLOSURE DOCUMENT

The best way for a company to ensure that claims regarding its payment plan are given properly is to put the information on a silver platter for the distributors to use. It’s not the distributors’ job to gather the data; it’s the distributors job to zealously represent your company and all the while properly disclosing the information provided to them. This is why every company should provide its distributors with an income disclosure document: the ultimate, end-all-end-all, “Swiss Army knife” for distributors to give income claims.

At a minimum, an income disclosure document should include:

  1. A statement of the average amount of time per day, week or month spent by the distributors at each rank to achieve the various levels;
  2. The year or years during which the disclosed results were achieved;
  3. A statement of the average earnings achieved by all distributors at each rank;
  4. The Highest and Lowest earnings achieved weekly by distributors at each rank; and
  5. The percentage of distributors at each rank who achieve the average income.

Here is a (very) simple example of what an income disclosure document should kind of look like. This can be done on Excel in 10 minutes:

disclosure chart

These are some specific examples referenced by the FTC in its lawsuit against FHTM.

RECORDED VIDEO PRESENTATIONS

Claim #1:

One distributor claimed in a recorded video presentation that “four months into the business [with FHTM]… I had actually quadrupled what I have ever made as a Registered Nurse.”

Claim #2:

A distributor claimed on her Vimeo site that distributors who reach the National or Executive Sales Manager levels “are making thirty-, forty-, sixty-, seventy-thousand a month.”

Claim #3:

The FTC alleged distributors frequently made lifestyle claims, such as highlighting extended family vacations to exotic locations, driving nice cars, and purchasing large homes with luxurious amenities.

The Answer

If you will remember back to the FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 2), we explained that a text income disclosure displayed in the video DURING the claim in addition to a more detailed audio and video formatted disclosure at the end of the testimonial was the best strategy. During the video disclaimer at the end of the testimonial video, an image of the company’s income disclosure document should be displayed with audio narration regarding the average earnings.

Regarding Claim #2, the court in Nat’l Dynamics provides some guidance:

Statements of ranges may be deceptive if the earnings ranges are too large. A consumer presented with a statement that thousands of distributors have earned from “$ to $” is likely to assume that the average lies somewhere near the middle of the range, and that substantial numbers of people have achieved results in the top of the range.

In order to provide an earnings range like the one given above, it must be provided with a “clear and conspicuous” disclosure of the percentage of all distributors that achieved results within the range. If the ranges are from $0 and up, the disclosure only needs to indicate the number of distributors within each range or the percentage of distributors in each range. Luckily, all of this information is provided in our income disclosure document shared above.

RECORDED AUDIO PRESENTATIONS

Claim #4:

The FTC alleged that a distributor on a recorded conference call stated that someone earned over $50,000 in his sixth months with the company alone and that he “earned millions and millions beyond that” in subsequent years.

Claim #5:

Regarding another conference call, the FTC alleged a distributor stated that someone else was earning “over $100,000 a month” after three years with the company.

The Answer

It’s impossible to give an audio disclosure simultaneously as an audio claim (Go ahead and try it out loud to yourself). Since the claim is in audio format, we must provide a disclosure in audio format as well. Using the information provided in the income disclosure document, all earnings discussed should be addressed.

This isn’t a science, so you must get creative in order to find the easiest and most efficient way for you to equip your distributors with the tools they needs to give adequate disclosures. One suggestion is to provide distributors with a script to read before these calls that explains the average earnings. Another option is to provide an audio file to download on your homepage that distributors may attach to the beginning of their audio presentation before they post it.

Since the audio claims were posted on team websites, a hyperlink could also be provided under the audio clip like this: “The average distributor earns $___ per month. Click here for more information and disclosures about the income ranges discussed in the audio presentation.”

TWITTER

Claim #6:

The FTC alleged a distributor posted on her Twitter account about a recruiting meeting, encouraging people to “Bring ur friends & learn how 2 make $100k aYR.”

The Answer

I’m going to preach this until the cows come home: Do not make income claims via Twitter. “But Kevin!” you say, “I can simply insert a hyperlink to a proper disclosure, right?” Wrong! There is simply not enough real estate to provide an adequate income disclosure on Twitter.

FACEBOOK PHOTO

Claim #7:

The FTC alleged that at a national convention, 30 top earners were called to the stage to be presented with a mock check for $64 million to represent the amount of money they earned with the company. Several distributors later shared a photo of the presentation on Facebook.

The Answer

In the caption of the photograph: “Results not typical. The average distributor earns $____ per <week, month, year>. Click the link for a full disclosure.” The link should lead the consumer to a page where they will be provided with an image of the income disclosure document.

CONCLUSION

It’s time for the industry to wake up and smell the coffee.  The FTC is taking these earnings claims very seriously.  And as technology is making it simpler for distributors to make these sorts of claims, the responsibility is increasing for companies to properly educate the field. Looking forward, it’s vitally important to have adequate compliance training and to supply distributors with the up-to-date information that they need to make proper income claims. Most importantly, the information needs to be provided in such a way that they any consumer can look at the information and be able to understand the underlying facts so they may make a fully informed decision.

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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Zeek Receiver Sues Insiders: Paul Burks and Others Served With Lawsuit

Hat tip to Don Ryan over at ASD Updates for breaking the story on the lawsuit.

 

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.

Dawn Olivares, Operations Officer for Zeek Rewards, Pleads Guilty To Two Counts of Fraud

Dawn Olivares, operations officer at Zeek Rewards, pled guilty today to two counts of criminal charges for her involvement with the ponzi scheme. The SEC broke the story this morning in an article titled “SEC Charges Woman and Stepson for Involvement in ZeekRewards Ponzi and Pyramid Scheme.” The copy of Dawn’s guilty plea is signed below (hat tip to Don Ryan over at ASD Updates for finding the document). She pled guilty to both counts levied against her: Count 1 = Securities and Wire Fraud. Count II = Conspiracy to Defraud the IRS. Both counts carry a maximum penalty of 5 years imprisonment. The charges were filed and a plea was entered the same day, which tells me this was all negotiated between Olivares and the federal authorities. We’ll see what kind of penalty shakes out of this. See below for an excerpt from the SEC’s press release:

The SEC alleges that Dawn Wright-Olivares and Daniel Olivares, who each now live in Arkansas, provided operational support, marketing, and computer expertise to sustain ZeekRewards.com, which offered and sold securities in the form of “premium subscriptions” and “VIP bids” for penny auctions. While the website conveyed the impression that the significant payouts to investors meant the company was extremely profitable, the payouts actually bore no relation to the company’s net profits. Approximately 98 percent of total revenues for ZeekRewards – and correspondingly the share of purported net profits paid to investors – were comprised of funds received from new investors rather than legitimate retail sales.

If you’re reading this via email, click here to download a copy of the guilty plea.