A year after Bill Ackman’s detailed public presentation about Herbalife being a pyramid scheme, the FTC which oversees consumer interests, has finally acted
US Federal Trade Commission (FTC) has launched an investigation into the operations of Herbalife, the multi-level marketing (MLM) company that sells weight-management, nutrition and personal-care products. As per regulatory policy in the US, the FTC cannot publicly comment on the investigation. However, Herbalife itself has confirmed the investigations. In a release, the MLM company said that it had received a Civil Investigative Demand from FTC.
The FTC’s action comes after a year-long push for government scrutiny by Pershing Square hedge-fund manager Bill Ackman who has labelled the company a pyramid scheme and bet $1 billion against it. According to New York Times, the Commission’s move, after more than a year of lobbying by Ackman, politicians and civil rights groups, could be a boon for Ackman’s $1 billion bet against the company after a series of setbacks, in particular a strong run-up in Herbalife’s share price.
“The success of Ackman’s wager depends on a collapse of Herbalife’s stock price, and he gains ground when other investors sell their shares because they fear the consequences of a regulatory crackdown on the company,” the report says.
Shares of Herbalife were briefly halted and then dropped Wednesday on the news of the investigation. Herbalife closed Wednesday 7.4% down at $60.57.
Interestingly, this whole Herbalife episode in America had become a battle of wits between hedge funds. Ackman has shorted the stock while, on the other end, Dan Loeb, whose hedge fund Third Point owns 8.9 million shares of Herbalife and feels it is worth more than $55, and has gone long. Ackman thinks it is worth zero.
After a whole year of research, Ackman and his team at Pershing Square Capital Management had come to the conclusion that Herbalife is worthless as a company and one big “pyramid scheme” and “caused and continues to cause enormous harm to the most vulnerable communities in the US and around the world”. He gave a lengthy presentation (a whopping 342 slides were shown) listing out reasons why Herbalife is worthless a company and warned investors and consumers alike to stay away from the company. He has even put up a website warning consumers about Herbalife. He was hoping that FTC would act which hadn’t happened – until now.
Herbalife is an MLM scheme, which ‘sells’ nutritional and weight-management products, in as many as 84 countries since 1980. It makes money not by selling product directly to you and me but by recruiting sales people, which recruits more sales people, which in turn recruits more sales people. The moment you buy its product, you become the sales person. In order to qualify for rewards or bonus, consumers (who become distributors automatically) must recruit (or ‘sell’ Herbalife’s products) so that they meet a stipulated target every month. Not many consumers or distributors get back their money’s worth. It is estimated that failed sales people, those at the bottom of the pyramid scheme, lost as much as $3.8 billion since 1980!
Ever since Ackman blew the lid on Herbalife’s business model, Wall Street has been furiously discussing whether or not the company is running a pyramid scheme. The comprehensive evidence gathered by Ackman, is damning. In February, Herbalife, which has repeatedly denied that it is a pyramid scheme, met with Congressional officials to explain its business.
One of the biggest and most promising markets for Herbalife is India. Moneylife has been lobbying hard for stringent regulations and banning of MLM schemes in India. We had also covered the Herbalife episode in three parts. You can access Part I, Part II and Part III .
Last year February Herbalife, which has come under the radar of the US Securities Exchange Commission, roped in Girisha Hosanagara Nagarajegowda (HN Girisha), the London paralympics silver-medallist and Padma Shri awardee, as its brand ambassador in India. Girisha was roped in to endorse and promote the controversial “Formula1 Nutritional Shake” and “Afresh Energy Drink Mix” of the MLM company.
According to Ackman, Herbalife’s Formula1 (for which Girisha has been signed as brand ambassador) is the costliest nutritional powder among six other brands. Formula1 power comes at $2.87 per 200 calorie serving, while all other powders from Abbott Labs, Unilever and GNC are available between 88 cents to $1.74 per 200 calorie serving. This is just an example. All other products from Herbalife are overpriced compared with similar products.