17 ms·

One Billion Dollars Short, Bill Ackman, and the Siege Of Herbalife (2015)

138 points by lawrenceyan 9y ago

Overtonwindow 9y ago
I use to work in legislative affairs for the natural health industry. It's all one big scam. I try to explain it like this: Company A sells natural remedies, etc. Company B is a news organization which reports on natural health remedies, and also advertises for those companies, et. Nonprofit C is a consumer watchdog organization that investigates and promotes natural health. They are supported by the natural health industry, and community. Trade Association D is a group of natural health corporations that lobby the government, and fight bad press. The trick is, A, B, C, and D are all working together, in collusion, with the same investors, same backers, and each supports the other. It's so pervasive it's astounding, and extremely difficult for consumers to see through to factual information.
- gnu8 9y ago
  Seems like a sure thing to short the piss out of an enterprise like this and wage a comprehensive campaign of activism and consumer education against it. With rationality on your side, how could you lose?
  - coaxial 9y ago
    > with rationality on your side, how could you lose? Look at south Africa, multi vitamins, and hiv/aids denialism. It's pretty fascinating, human toll aside.
    - markdown 9y ago
      Or USA and climate change denialism and the anti-vaxers.
      - corporateslave2 9y ago
        Climate change is not statistically significant
      - herbst 9y ago
        Don't forget the natural medicine deniers over there! Just because they have a major bullshit industrie does not mean nature never made good medicine. (I know I just went full circle)
      - monochromatic 9y ago
        Climate change skepticism does not belong in the same bucket as anti-vaccination.
        ajuc 9y ago
        Why? Both beliefs are held against current scientific consensus and have only a few supporting studies, while vast majority of studies support the contrary. You could argue that technically "climate change scepticism" only means you don't know, but in practice climate change sceptics argue for political actions (or inaction) basing on their (lack of) beliefs. Similarly I can be anti-vacc without claiming "vaccines cause autism". just claiming "I'm not sure what they cause, so just to be sure don't do it".
        monochromatic 9y ago
        The science in favor of vaccination is very straightforward and well-understood. It's easy to run double-blind tests and determine the truth of the matter. The science in favor of anthropogenic global warming includes two parts: well-understood physics and chemistry (which is quite trustworthy and is actually science), and a bunch of conflicting computer models of a chaotic and poorly understood system with a huge number of inputs and feedback loops (which I'm not sure why anyone trusts). This blog post puts it pretty well: http://blog.dilbert.com/post/158778029326/how-to-change-my-biases-on-climate-science http://blog.dilbert.com/post/158778029326/how-to-change-my-b...
    - richardkeller 9y ago
      South Africa is hardly the only country where multivitamins are common. If rationality were the only metric for decision making, I would expect homeopathy to be far less common globally than it is today. As for Aids denialism, South Africa suffers from a case of cultural antiestablishmentism, particularly in the context of Western medicine. Thankfully our government has stepped up in recent years, and actively promotes HIV/Aids education these days.
      - Overtonwindow 9y ago
        Homeopathy is the beloved little black sheep of natural health. I would say half of natural health industry people don't believe in it, know it doesn't work, but they have to go along with it. Otherwise, to admit (as countless studies, and the federal government have done) that homeopathy is completely without merit, would threaten the entire house of cards that natural health is built upon. I remember last year when the FTC announced their enforcement action on homeopathic OTC drugs, there was an unusual silence from the natural health community. Almost a shrug. From the inside it was laughable at the lack of concern for homeopathy's future.
  - diogenescynic 9y ago
    >With rationality on your side, how could you lose? Hahahhaha. Great joke. Sadly, there are and probably always will be a lot of ignorant/gullible people. As PT Barnum said, "there's a sucker born every minute."
    - kbenson 9y ago
      Given global population growth and birth trends, I wonder if we've reached a sucker every second yet...
      - the_duke 9y ago
        Given the current birth rate of over 4 births per second, and considering that almost every newborn will consume nutrients by sucking milk, I'd say that we have reached that milestone a long time ago.
    - hyperbovine 9y ago
      Actually, there is no evidence that he ever said this.
      - asdfjklasdfjkl 9y ago
        In this instance, I'd say it's an even better quote, then.
  - CyberDildonics 9y ago
    "The market can stay irrational longer than you can stay solvent" -Keynes
    - jacobush 9y ago
      Don't believe all quotes on the internet - Benjamin Franklin
  - dragonwriter 9y ago
    > With rationality on your side, how could you lose? You could lose because the rational choice model does not accurately model human behavior in the real world; people don't act based on perfect information, in part because even when presented with correct information, they are likely to reject it if it doesn't fit their pre-existing world view.
    - deleted 9y ago
      [deleted]
    - mbgilliland 9y ago
      That has very little to do with the rational choice model. Rational choice agrees that people don't act on perfect information. It also agrees that even when given good information, individuals don't necessarily believe it. All RCT really boils down to is the fairly uncontroversial statement that people act in accordance with their actual preferences (even if their preferences should be different, the actions are not well-calculated to achieve their goals, or they say they have different preferences).
      - Finnucane 9y ago
        So 'rational choice theory' should be called 'fleeting whim choice theory.'
      - dragonwriter 9y ago
        > Rational choice agrees that people don't act on perfect information No, full rational choice theory posits that people do behave in a way which maximizes actual (not expected) net utility, or, in more detail, as if: (1) They have a coherent “utility function” mapping each potential path through time that might be taken to a unidimensional, real-number utility value. (2) They have perfect knowledge of the outcome (path through time), or at least resulting utility value, produced by every possible option with every decision they make, (3) They consistently choose the option that maximizes utility. There are more limited modifications of rational choice theory that attempt, with varying degrees of success, to close the predictive gap between full rational choice theory and actual behavior resulting from the fact that humans do not behave “rationally” in the sense of rational choice theory, but they aren't what is involved with the question “how can you lose when rationality is on your side?” asked upthread.
  - sumedh 9y ago
    > With rationality on your side, how could you lose? Do you think rationality can win when the President of the United States says that global warming is a Chinese hoax.
    - ethbro 9y ago
      France? Maybe we've come full circle, and it's time for it to lead a second Enlightenment. And to be accurate, I believe Trump's current position is "global warming is happening, caused by humans, but Paris unfairly advantages other nations over the US." Which is how all climate agreements look when you're trying to get buy in from developing economies... but at least it's better than hoaxism.
  - samdoidge 9y ago
    Aristotle realised the rational argument does not always win a long time, and then wrote Poetics.
    - ethbro 9y ago
      I always thought there should be a "Being an Adult" mandatory course in US grade school, and one section should be "defense against rhetoric."
  - wcummings 9y ago
    Isn't that exactly what Ackman did?
- divenorth 9y ago
  Sounds exactly like every other industry. I don't see how it's any different. Edit: Seriously? I'm getting down voted. Look I don't care how much you hate the natural products industry but every industry has sleazy business practices. They are not alone. Edit2: For example I work in the entertainment industry and the awards are all made up, the news is mostly just to get attention and they have politicians in their back pockets.
  - kbenson 9y ago
    > Sounds exactly like every other industry. I don't see how it's any different. You were likely downvoted because you were far too strong for how general your statement was and presented it without evidence. As stated, it doesn't really contribute much. Worded as "sounds like many different industries. For example..." and followed with some examples would be interesting. As it is, it can be parsed as "business is corrupt."
    - divenorth 9y ago
      Thanks for being the kind soul to explain this to me. I'm still pretty new to hacker news.
      - ethbro 9y ago
        The meta around voting is complex and rarely discussed. Kind of like Fight Club. Generally though, think of "contributing substantively to the discussion" (e.g. providing facts, ideally sourced [1], relevant personal experience, or interesting and neutrally worded questions) as a high good. And tossing around memes, ad hoc attacks, argumentative language without facts, and "contentless" comments as the lowest bad. And as parent mentioned, the stronger the claim, the more it behooves you to cite a source. In general, try and write the kind of comments you want to read & treat everyone with respect. :) And hopefully others will do the same!
- martincmartin 9y ago
  extremely difficult for consumers to see through to factual information. This is why I like consumerlab.org. They summarize the medical research and test to see how much of the active ingredient it actually has.
  - thephyber 9y ago
    I think the most valuable sources of information right now are independent non-profits. Do you have any other recommendations along this line?
    - Overtonwindow 9y ago
      It's impossible to determine which nonprofits are independent. So many nonprofits are industry backed, and depend on the industries they report on for most, if not all, of their funding. Your best bet are those that have been around along time, with clear 990's that show where money comes in, where it goes out, etc. There's an organization called Charity Navigator that tries to evaluate nonprofits, and score them based on transparency, etc. Another factor that I found in my experience is when a nonprofit goes after it's own industry. For example: Find a nonprofit that attacks MLM's and dietary supplements. Just because an organization says it's an independent nonprofit does not mean it is.
- rwmj 9y ago
  I used to consult for a couple of mortgage brokers back in the go-go 2000s before the crash, and it wasn't too different. Companies A, B and C arrange mortgages. Company D is a trade organization closely associated with A, B and C which awards annual prizes for "excellence" in the mortgage broking industry. By strange coincidence companies A, B and C are awarded the prizes every year (usually with slightly different names each year, or rotated from last years winners).
anilshanbhag 9y ago
John Oliver discussing Herbalife https://www.youtube.com/watch?v=s6MwGeOm8iI https://www.youtube.com/watch?v=s6MwGeOm8iI Bill Ackmann on Herbalife https://www.youtube.com/watch?v=bQc6L4ieMwo https://www.youtube.com/watch?v=bQc6L4ieMwo Almost 60% of their distributors were latinos (http://articles.latimes.com/2013/feb/15/business/la-fi-herbalife-latino-20130216 http://articles.latimes.com/2013/feb/15/business/la-fi-herba...). The lengthy presentation countering Pershing Square's accusations which contained this fact (http://files.shareholder.com/downloads/ABEA-48ZAJ9/2297763534x0x627448/e3de3984-4dff-4ca3-90a1-a1c1cafecb4e/Herbalife_Investor_Day_Presentation_-_01.10.13.pdf http://files.shareholder.com/downloads/ABEA-48ZAJ9/229776353...). There are countless stories of how these people were exploited in the name of gains. They are expanding rapidly in international markets. In India, Herbalife has over 40 distribution centers now and over 0.5 million distributors ! They even got a famous sports personalities to advertise for them (http://www.herbalproductkart.com/herbalife-brand-ambassdors http://www.herbalproductkart.com/herbalife-brand-ambassdors). To do my bit in preventing people from falling for such scams, I asked my friends and mother to share it on their whatsapp groups so that people don't fall prey to such pyramid schemes.
- ridruejo 9y ago
  You may not like it, but it is not necessarily a scam. Some of the posts by Bronte capital mentioned in the article http://brontecapital.blogspot.com/2015/06/herbalife-very-long-post.html http://brontecapital.blogspot.com/2015/06/herbalife-very-lon... http://brontecapital.blogspot.com/2016/07/herbalife-and-end-of-world.html http://brontecapital.blogspot.com/2016/07/herbalife-and-end-...
  - eej71 9y ago
    It's unfortunate that you are being downvoted - especially since you are citing John Hempton's excellent work on the topic. It's really worth a read and an interesting counterpoint to Ackman's analysis.
    - ZoeZoeBee 9y ago
      Long story short "The market can stay irrational longer than you can stay solvent.”
ufo 9y ago
Does anyone know if there have been more developments to this story in the two years since this article was written?
- ringaroundthetx 9y ago
  Herbalife was too rich for the FTC to find it an illegal financial scheme, subsequently and simultaneously Bill Ackman got squeezed pretty hard on that and several of his other bets. He still has a group of followers because he's rich and has a nice pedigree, but he has fallen from glory pretty hard and his calls don't matter anymore. One of the best short sells these days is to short everything in his portfolio when you think he is about to get a margin call. Because that will force him to liquidate several large positions in different stocks.
  - lstyls 9y ago
    Honest question: how the heck do you time a margin call for a whale like that apart from knowing someone on the inside?
    - ringaroundthetx 9y ago
      The fund's holdings are known, and the fund manager's dispositions are easily inferred by how much they talk about something. ie. How married they are to a position. So for example, when Valeant Pharmaceauticals was tanking from its highs of $220, all the way to $16, after Bill Ackman defended it, doubled down, joined the board, and bought calls, and then admitted to not having more funds available. You just short other things in his portfolio, or at least short them on the expectation that other people are going to short. Its fun. I do "proxy trades" a lot, where I trade a temporarily correlated asset, while the market focuses on a different asset.
      - lawrenceyan 9y ago
        How was Ackman able to get away with having lost so much money on Valeant?
aresant 9y ago
Hard to beat the hedge fund compensation model of fee on the way up, fee on the way down. Agnostic to his Herbalife bet, Ackman "has widely underperformed the S&P 500 since its EOY 2012 inception: 7.1% since inception net of fees vs. 84% for the S&P 500. Their original flagship fund's (2004 inception) track record is outstanding with returns of ~20% per annum." So his first fund killed it, he made a name for himself, raised a ton of money, and has literally cost his investors 75% of their returns to date in the market. He's personally worth $1,400,000,000 now as a result. Every fund pitch everywhere comes with the disclaimer "Past performance is not an indicator of future success" because of funds like Ackman's.
- ww520 9y ago
  Ackman bet big on Valeant and rode all the way from more than $200/share down to $10/share, losing more than $4B in the process.
- jacquesm 9y ago
  > Every fund pitch everywhere comes with the disclaimer "Past performance is not an indicator of future success" because of funds like Ackman's. No, it's because of the simple fact that you can't predict the future. That sleazeballs can make it even worse by making funds that pretend that they had yields before they even existed (or were active only in a theoretical sense with a few bucks in it as a fig leaf and the other 999 that got axed you'll never hear about) is taken as a given. That's just the 1024 envelope trick at a higher level.
  - btilly 9y ago
    Indeed. I believe that the regulation that requires that disclosure comes from the 1933 law establishing the SEC. A specific concern was how advertising past returns fed into getting people excited about bubbles like the one which popped in 1929. Therefore the regulation was meant to address a systemic problem rather than individual malfeasance.
- blunte 9y ago
  I find it almost too ironic to see a hedge fund manager righteously calling out another business model.
imbusy111 9y ago
Explain to me how this is not market manipulation and securities fraud?
- ringaroundthetx 9y ago
  It just depends on how you do it. Just because you have more money than the liquidity of the market doesn't mean your buy and sells are market manipulation. I have bought things on the open market 100% above the prior market price, when I wanted them. Moving the asset's price 100% and sure enough many out of the loop people started FOMOing and buying more. Its the same principle for bearish positions too. In the securities market you can talk about your bullish or bearish rationale, and avoid sanctioning from regulators or private persons by disclosing your position. Ackman doubled down on that logic and did it very publicly. Although this is more a problem for bearish positions, the statements can't be lies or "intentionally misleading". In the past there were many naked shorts, where fake shares were sold into the public market causing impossible selling pressure. That is illegal now, for the most part, and as long as you aren't doing that it helps make sure you aren't manipulating the market, by the legal standard. Again, just because you can have an outsize affect on the price of the market and the mere presence of creating an advantageous circumstance, doesn't make it market manipulation or securities fraud.
- williamscales 9y ago
  Explain to me the case that it could be considered as such?
  - blunte 9y ago
    When you are such a big name in finance, your public statements can be judged as attempts to influence the market. And if you furthermore pay lobbyists, do advertising, and give many presentations, it is clearly going to have an impact.
    - valuearb 9y ago
      We live in a free society that values free speech. We should be cautious when limiting it. In the case of market influence, it should be fine as long as there is full disclosure. In fact insider trading is perfectly legal as long as it's done with disclosure statements.
beavisel 9y ago
There was a documentary about this on Netflix. Interesting viewing, but it did feel like a vehicle for parties involved in shorting the stock to get more momentum. Link: https://www.netflix.com/au/title/80108609 https://www.netflix.com/au/title/80108609
deleted 9y ago
[deleted]
SirLJ 9y ago
You got to love Carl Icahn: ON WHEN ACKMAN CALLED HIM IN 2003: "I'm telling you he's like a crybaby in the schoolyard. I went to a tough school in Queens, you know, and they used to beat up the little Jewish boys. He was like one of the little Jewish boys crying ..." ON ACKMAN AS A FRIEND: "He's the quintessential example of 'if you want a friend on Wall Street, get a dog.'" ON HAVING DINNER WITH ACKMAN: "As far as I'm concerned, he wanted to have dinner with me. I couldn't figure out if he was the most sanctimonious guy I met in my life or just arrogant and that's Ackman." ON ACKMAN DONATING ANY HLF PROFITS TO CHARITY: "He talks about charity. That's complete bullshit!" ON ACKMAN SAYING ICAHN IS A GOOD INVESTOR: "I appreciate you, Bill, calling me a 'great investor', but unfortunately I cannot say the same for you." BONUS: ON WHEN SCOTT WAPNER ASKED HIM IF HE'S LONG HLF: "I want to say what I want to say and I'm not going to talk about my Herbalife position because you want to bully me ... I don't give a damn about what you want to know. I want to talk about what I want to talk about ... You can say what the hell you want. I'm going to talk about what Ackman just said about me, not about Herbalife ... I'll talk about Herbalife when I goddamn want to ... I'm never going on a show with you again, that's for damn sure, OK."
- RodericDay 9y ago
  Carl Icahn is not lovable at all.
  - valuearb 9y ago
    Aside from all the examples just given, you mean.
    - wavefunction 9y ago
      meh
nodesocket 9y ago
I am torn, on one hand Herbalife does smell of one gigantic pyramid scheme. Howerver, they have completely revamped the company and structure havent they? On the other hand, while Ackman is savvy and smart, his activist investor style rubs me the wrong way. He has unlimited capital, and thus that affords him the right to manipulate companies for his own gain? I don't like it. Also, let's not forget... If Herbalife eventually goes out of business, he stands to make a boatload of money. Ackman is not being altruistic.
- blunte 9y ago
  You do realize that traditional business is a form of pyramid scheme. Your boss probably gets more compensation than you do. He/she may have subordinate managers who themselves have subordinate managers who have non-manager employees. The CEO makes bonuses based on performance of the company. The division managers makes bonuses based on their divisions' performance. The lowest people in the company probably make zero bonuses. And in many companies, the lowest paid workers were promised good future opportunities for growth in the company. For every bad MLM (and there are many), I could probably identify 10 bad traditional companies.
  - acchow 9y ago
    Actually, you're describing a corporate pyramid structure, not a "Pyramid Scheme" which is: "a form of investment (illegal in the US and elsewhere) in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones."
  - harryh 9y ago
    MLM != Pyramid scheme. Whether herbalife is the former or the latter is at the heart of the controversy around the company.
  - wyaeld 9y ago
    Having a hierarchy that gets narrower at the top, with people earning more, is not what makes something a pyramid scheme. Having the earnings of the higher tier directly funded by financial contributions from the lower tiers is. I lot of MLMs have a particular 'hiding in plain site deception'. The retail margins on the consumer goods aren't where the bulk of the top tier earnings are coming from. The conferences, training materials, tapes, courses and a raft of support systems for the distributors... all produced at very little cost are the true source. This is where the generous subsidies come from.
blunte 9y ago
I have built software for a number of MLMs in the past 20 years. I can tear down a compensation plan and tell you where the money will go and what the likelihood of success will be for "the little guy" as well as the upper management reward for the "hitter". The #1 factor in deciding if an MLM is legit is the product. Many, many MLMs have products that have no real value to any market, existing only to attempt to legitimize a money game. However, MLM is a pretty good marketing approach for products that: 1 - are new or difficult to understand, and where having a human explain or demonstrate in person helps the potential consumer decide if it's something for them 2 - depend on customer testimonials to express their effectiveness, particularly regarding consumables that are not or cannot be judged and regulated by the FDA or similar body 3 - are consumable, such that the buyers and _consumers_ of the product naturally evangelize the product, and then get rewards for bringing new customers Let's be honest - there are a lot of BS products that are legally marketed through traditional, accepted, and even respected channels. And there are a ton of BS products marketing via MLM. The difference is that some MLMs have lured members with the unrealistic prospect of huge incomes and then guided the new members to buy a ton of product ("front-loading") so as to ascend more rapidly to the higher earning potentials. That's how you end up with people with a garage full of junk they'll never manage to sell. I don't know if Herbalife does this. I rather doubt it. But really, if a new employee in a company could choose to pay $25k up front with the promise that they would be more quickly promoted to higher management levels, I think a lot of people would do it - even if they had no skills or motivation to work to earn a promotion. In some MLMs, that option exists. Regarding compensation, every company that markets products takes some percent of product sales and directs that toward marketing efforts. What makes MLM unique is that it directs that marketing money to individuals (presumably based on the amount of sales they drive). And just as Division Managers of large companies may receive bonuses based on the success of their divisions, MLM leaders often receive some compensation based on the sales (success) of representatives they have personally recruited or who have been recruited by their recruits. I could go on, but it's boring now. Point is, MLM isn't inherently evil, just as capitalism isn't inherently evil. But everywhere, there are some people who will do anything for a dollar. Some become hedge fund managers, and some become MLM lead marketers.
zzleeper 9y ago
I've got the feeling this thread is full of people that drank the BS koolaid of herbalife. They either sell snake oil products, or protein shakes that are 10x cheaper at Costco. I've known people desperate enough to start selling that crap (as well as others-their friends-that have to buy it just due to friendship), so please stop spreading MLM scams.
- anotherbrownguy 9y ago
  >I've known people desperate enough to start selling that crap (as well as others-their friends-that have to buy it just due to friendship), so please stop spreading MLM scams. They offer 100% buyback for distributors for unopened products and they stopped lead generation completely 4 years ago. So, their distributors are no different from what cell phone carriers are to Apple. >They either sell snake oil products, or protein shakes that are 10x cheaper at Costco. Kinda like Apple then? >I've got the feeling this thread is full of people that drank the BS koolaid of herbalife. Or the other way around?
  - gehsty 9y ago
    I think the main difference is that there is a chain of people who profit from selling to their 'downlines', not when a product is sold to an actual customer. The analogy to apple is poor. Apple sell a product that the majority of people like and they are actively trying to sell directly to the customer. They use networks as it is their only option in many markets and once a phone is sold to the network it is then sold to the customer, there isn't a series of transactions with each level profiting of the previous level.
    - anotherbrownguy 9y ago
      >I think the main difference is that there is a chain of people who profit from selling to their 'downlines' How is it different from 3rd party Apple resellers? >Apple sell a product that the majority of people like As does Herbalife. >they are actively trying to sell directly to the customer Herbalife lets distributors handle sales, not very different from Apple's resellers. >They use networks as it is their only option in many markets and once a phone is sold to the network it is then sold to the customer, there isn't a series of transactions with each level profiting of the previous level. Apple -> Authorised Resellers -> Stores. While this is not Apple's only channel (because they have their own stores plus online shop), it is one of them... and there is multiple transactions with each level profiting.
addisonj 9y ago
I live and work in Utah, which, for not completely clear to me reasons, is home to a lot of MLMs. Nu Skin, Usana, Xango, doTerra, Young Living, Jamberry (and those are the ones I can just name off the top of my head) are all headquartered here. For an area that in many ways is punching above its weight class in terms of tech companies, I occasionally have nagging (possibly unfounded?) concerns in the back of my head that one day a lot of these companies will be a hindrance on the continued growth here. I know some people already view Utah mostly as the home of MLMs and I don't know if that does much for attracting forward looking tech investment. That said, these companies have brought a ton of jobs and has certainly helped fund the growth in the area and I have worked with and met a lot of people who seem pretty decent. While many of these companies aren't "evil", I think the MLM is probably one of the most insidious dark design patterns around. I think the best way of how these companies primarily operate is like the Cassette/CD clubs of a few years past. A small fee gets you a decent amount of "up front value" (Join the club for $30 and get 30% off your first order!) with the expectation that you won't order anything else or forget to cancel the yearly membership fee. This is, of course, all made worse by the fact that is often friends and family who are peddling the high margin health and dietary products with questionable efficacy. Like I said, I don't know if I can call it an outright scam (I know a few people who really like there shakes and supplements and swear by them), but it does drive strange incentives...
- swimfar 9y ago
  The reason I had heard is because Mormon's make great door-to-door salesmen. Many of the men have spent a year or two of door-to-door proselyting (attempting to convert). So they're used to selling to strangers and also being rejected. I'm not sure how true this is, but it seems plausible.
  - jansan 9y ago
    I see a lot of those Mormon young men here in Germany on their mission. There are usually two of them, dresses well and behaving very politely. Although they directly contact people on the street, I never have the feeling that anyone is annoyed by them. Therefore I could well imagine that they are great sales men.
exogeny 9y ago
I don't really get the Herbalife defense in here. Here's what I know: The products are of dubious quality, and can be bought for much cheaper elsewhere. The majority of people who end up being distributors absorb a net loss, and given that many already come from financially unstable backgrounds, that loss is particularly painful. The largest sellers in the chain either got in super early, or make more money off of ancillary products (seminars, etc.) than actual sales. That sounds shady as hell as best, downright predatory at worst, and all of the "Yeah, it might be bad, but so is X" arguments in the world don't absolve it. I guess where the real decision fork is to what extent you feel the Government is responsible for making it harder for people to make dumb decisions by shutting down the companies that prey upon them.
- lathiat 9y ago
  People also tend to lean heavily on their personal social network, which often alienates them from their personal friend base. And has limited supply before the success you do get from that runs out.
  - pavel_lishin 9y ago
    And don't forget that you're often not the first one in your network to start peddling this garbage. My parents did it for awhile, after being turned onto it by another woman in the small town we lived in. But guess what? That same woman was already selling to 90% of our potential customers. Everyone who was going to buy a case of Glister toothpaste already had one sitting in their garage; who were we supposed to sell to? The answer to the rhetorical question is, nobody. We brushed our teeth with our shitty investment for about a year, then wrote the whole thing off as a failed experiment that luckily didn't bankrupt us.
lathiat 9y ago
Theres a recent follow-up from fortune on this, worth reading.. according to the article the stock price has grown back to roughly where it was before Ackman's campaign. However they're in the middle of a lot of changes in response to the FTC settlement so material changes in the future are also possible. http://fortune.com/2017/05/05/herbalife-stock-bill-ackman/ http://fortune.com/2017/05/05/herbalife-stock-bill-ackman/
justboxing 9y ago
2017: "Herbalife’s $700 Million Stock Surge Is Another Blow to Bill Ackman" => http://fortune.com/2017/05/05/herbalife-stock-bill-ackman/ http://fortune.com/2017/05/05/herbalife-stock-bill-ackman/ Looks like Herbalife is having the last laugh.
- deleted 9y ago
  [deleted]
Illniyar 9y ago
This raises an interesting notions - can shorting be an effective option for funding legal/social action against a misbehaving company? So far there has only been two ways to fund social activism against companies - donations and feeds on class-action lawsuits.
- creaghpatr 9y ago
  Seems like it could be the other way around- legal/social action against a company as a strategy for shorting. Of course, they (the allegedly misled class) deserved to at least get a trial and a ruling, which at that scale require money and press coverage. But Ackman turned it into spectacle, which probably is what motivated Carl Icahn to btchslap his short.
- yesiamyourdad 9y ago
  Whether or not Ackman is right, his method is what's questionable. Let alone what seems like insanity to me: he's making a very public short bet against a company. He's _borrowing_ shares of stock to prove the management is wrong and publicly announcing that fact. So everybody can pile into the short squeeze, irrespective of the facts or morality of the situation. This is one reason why the quote "The market can stay irrational longer than you can stay solvent.” applies. The market is irrational because it's in the participants' short term interest for it to be irrational. > Conventional activists like Carl Icahn and Nelson Peltz buy shares and then “try to fix the company,” observes one hedge fund investor. Ackman, by contrast, is trying to annihilate a company. “I’ve never heard of short-selling activism in my life,” this investor says. “Are we comfortable that a private individual named Bill can try to put somebody out of business?” Shorting a company as a method of activism just seems like a terrible strategy on the face of it. A short is a really risky strategy for investing, for activism it just seems even worse. If you want to change a company using its stock, the effective way is to be rich enough to buy enough stock to influence the board.
mschuster91 9y ago
It's not just Herbalife. There are so many MLMs out there, it's madness. One former friend is a former friend because he fell victim to some German MLM, believe it was about a website where you could do conference calls. Back when I was younger, I was a stagehand at a venue where a huge MLM, also named in the Fortune article, had thrown a yuuuge party. They rented two entire conference halls for thousands of people and had a giant stage for a musical set up, complete with pyrotechnics and everything. Utter madness, all financed by poor people who were screwed over by their relatives or close friends...
Top19 9y ago
All MLMs are scams. I hate using the term pyramid schemes, because if you use that term all of the MLM apologists will start cranking out very long-winded philosophical definitions of pyramid schemes that obscure the true point. The MLM "model" can be summarized thusly: - 1. Give people pretty good business advice from a host of good business books - 2. Give people a very positive exciting environment - 3. Give people literally the WORST job ever created with a product that cannot exist on its own in the marketplace if it wasn't being artificially propped up by hundreds of thousands of distributors MLMs are scams. And no matter how much they try to attack other industries by saying how unethical they are, or how much they lie about their products, that can never and will never absolve them for the damage they have done to so many lives. ALSO: something else you'll notice is that people who've been involved with MLMs might recall them fondly. This is just a defense mechanism (an extremely understandable one) to prevent having to view oneself as being duped. I think it's a shame though because we'll all be duped or scammed to some degree in our life, no need to change the past. Anyway reading "The Big Con" by David Maurer right now, a book by a sociologist about con-men in the 1940s. It's the basis for the movie "The Sting", and its remarkable how many people in the book are conned but refuse to believe it, and even years later still think their guy is out there, about to return their money at any time with 20x the profit or whatever. EDIT: Also it is nearly impossible to look this stuff up on Google. MLM people have so carpet bombed the search sites the first 30 or so links will be links to Youtube videos with titles like "Is XYZ company a scam??" that find of course it's not. Occasionally a random legitimate news article will leak through. Otherwise they've literally walled the world off from anti-MLM information.
- throwaway7645 9y ago
  Yes, they've completely subverted the internet for their own use. You can send people in need to John Oliver's amazing piece though.
  - dsacco 9y ago
    I'm of the opinion that John Oliver is not really a good source for changing people's minds. I agree with a lot of his points and he cites sources, but I find him difficult to watch. A lot of his show appears to endorse an echo chamber: he frequently criticizes the subjects by making them appear ridiculous. That's a very pervasive problem in political satire. It's often pandering. You have hosts taking clips of someone doing or saying something the demographic audience is going to clearly disagree with, then acting absolutely gobsmacked at how stupid/malicious/unaware they are. That's not persuasive to anyone and doesn't complement changing someone's mind, it's just ridiculing the people they currently agree with. Ostensibly the show is supposed to be informative, because he does appeal to the other side's rationality to try and persuade them. I think the usual argument for the format is that a sobering account doesn't capture enough attention, which is why jokes are interspersed. But those jokes are heavy handed enough that opponents probably will be put off. If the goal is actually convincing someone that MLMs don't really work for most people, I think there are probably better sources of information if they're willing to be proven wrong in the first place. And if they're not willing, they may take someone who is as abrasive as John Oliver as ridicule.
Chickenosaurus 9y ago
Does anyone know of any legitimate MLM based companies that sell products that could probably be successfully sold without MLM? In other words, can MLM be a useful tool for non-scammy companies?

138 points by lawrenceyan 9y ago

I use to work in legislative affairs for the natural health industry. It's all one big scam. I try to explain it like this: Company A sells natural remedies, etc. Company B is a news organization which reports on natural health remedies, and also advertises for those companies, et. Nonprofit C is a consumer watchdog organization that investigates and promotes natural health. They are supported by the natural health industry, and community. Trade Association D is a group of natural health corporations that lobby the government, and fight bad press. The trick is, A, B, C, and D are all working together, in collusion, with the same investors, same backers, and each supports the other. It's so pervasive it's astounding, and extremely difficult for consumers to see through to factual information.

gnu8 9y ago
Seems like a sure thing to short the piss out of an enterprise like this and wage a comprehensive campaign of activism and consumer education against it. With rationality on your side, how could you lose?
- coaxial 9y ago
  > with rationality on your side, how could you lose? Look at south Africa, multi vitamins, and hiv/aids denialism. It's pretty fascinating, human toll aside.
  - markdown 9y ago
    Or USA and climate change denialism and the anti-vaxers.
    - corporateslave2 9y ago
      Climate change is not statistically significant
    - herbst 9y ago
      Don't forget the natural medicine deniers over there! Just because they have a major bullshit industrie does not mean nature never made good medicine. (I know I just went full circle)
    - monochromatic 9y ago
      Climate change skepticism does not belong in the same bucket as anti-vaccination.
      - ajuc 9y ago
        Why? Both beliefs are held against current scientific consensus and have only a few supporting studies, while vast majority of studies support the contrary. You could argue that technically "climate change scepticism" only means you don't know, but in practice climate change sceptics argue for political actions (or inaction) basing on their (lack of) beliefs. Similarly I can be anti-vacc without claiming "vaccines cause autism". just claiming "I'm not sure what they cause, so just to be sure don't do it".
        monochromatic 9y ago
        The science in favor of vaccination is very straightforward and well-understood. It's easy to run double-blind tests and determine the truth of the matter. The science in favor of anthropogenic global warming includes two parts: well-understood physics and chemistry (which is quite trustworthy and is actually science), and a bunch of conflicting computer models of a chaotic and poorly understood system with a huge number of inputs and feedback loops (which I'm not sure why anyone trusts). This blog post puts it pretty well: http://blog.dilbert.com/post/158778029326/how-to-change-my-biases-on-climate-science http://blog.dilbert.com/post/158778029326/how-to-change-my-b...
  - richardkeller 9y ago
    South Africa is hardly the only country where multivitamins are common. If rationality were the only metric for decision making, I would expect homeopathy to be far less common globally than it is today. As for Aids denialism, South Africa suffers from a case of cultural antiestablishmentism, particularly in the context of Western medicine. Thankfully our government has stepped up in recent years, and actively promotes HIV/Aids education these days.
    - Overtonwindow 9y ago
      Homeopathy is the beloved little black sheep of natural health. I would say half of natural health industry people don't believe in it, know it doesn't work, but they have to go along with it. Otherwise, to admit (as countless studies, and the federal government have done) that homeopathy is completely without merit, would threaten the entire house of cards that natural health is built upon. I remember last year when the FTC announced their enforcement action on homeopathic OTC drugs, there was an unusual silence from the natural health community. Almost a shrug. From the inside it was laughable at the lack of concern for homeopathy's future.
- diogenescynic 9y ago
  >With rationality on your side, how could you lose? Hahahhaha. Great joke. Sadly, there are and probably always will be a lot of ignorant/gullible people. As PT Barnum said, "there's a sucker born every minute."
  - kbenson 9y ago
    Given global population growth and birth trends, I wonder if we've reached a sucker every second yet...
    - the_duke 9y ago
      Given the current birth rate of over 4 births per second, and considering that almost every newborn will consume nutrients by sucking milk, I'd say that we have reached that milestone a long time ago.
  - hyperbovine 9y ago
    Actually, there is no evidence that he ever said this.
    - asdfjklasdfjkl 9y ago
      In this instance, I'd say it's an even better quote, then.
- CyberDildonics 9y ago
  "The market can stay irrational longer than you can stay solvent" -Keynes
  - jacobush 9y ago
    Don't believe all quotes on the internet - Benjamin Franklin
- dragonwriter 9y ago
  > With rationality on your side, how could you lose? You could lose because the rational choice model does not accurately model human behavior in the real world; people don't act based on perfect information, in part because even when presented with correct information, they are likely to reject it if it doesn't fit their pre-existing world view.
  - deleted 9y ago
    [deleted]
  - mbgilliland 9y ago
    That has very little to do with the rational choice model. Rational choice agrees that people don't act on perfect information. It also agrees that even when given good information, individuals don't necessarily believe it. All RCT really boils down to is the fairly uncontroversial statement that people act in accordance with their actual preferences (even if their preferences should be different, the actions are not well-calculated to achieve their goals, or they say they have different preferences).
    - Finnucane 9y ago
      So 'rational choice theory' should be called 'fleeting whim choice theory.'
    - dragonwriter 9y ago
      > Rational choice agrees that people don't act on perfect information No, full rational choice theory posits that people do behave in a way which maximizes actual (not expected) net utility, or, in more detail, as if: (1) They have a coherent “utility function” mapping each potential path through time that might be taken to a unidimensional, real-number utility value. (2) They have perfect knowledge of the outcome (path through time), or at least resulting utility value, produced by every possible option with every decision they make, (3) They consistently choose the option that maximizes utility. There are more limited modifications of rational choice theory that attempt, with varying degrees of success, to close the predictive gap between full rational choice theory and actual behavior resulting from the fact that humans do not behave “rationally” in the sense of rational choice theory, but they aren't what is involved with the question “how can you lose when rationality is on your side?” asked upthread.
- sumedh 9y ago
  > With rationality on your side, how could you lose? Do you think rationality can win when the President of the United States says that global warming is a Chinese hoax.
  - ethbro 9y ago
    France? Maybe we've come full circle, and it's time for it to lead a second Enlightenment. And to be accurate, I believe Trump's current position is "global warming is happening, caused by humans, but Paris unfairly advantages other nations over the US." Which is how all climate agreements look when you're trying to get buy in from developing economies... but at least it's better than hoaxism.
- samdoidge 9y ago
  Aristotle realised the rational argument does not always win a long time, and then wrote Poetics.
  - ethbro 9y ago
    I always thought there should be a "Being an Adult" mandatory course in US grade school, and one section should be "defense against rhetoric."
- wcummings 9y ago
  Isn't that exactly what Ackman did?
divenorth 9y ago
Sounds exactly like every other industry. I don't see how it's any different. Edit: Seriously? I'm getting down voted. Look I don't care how much you hate the natural products industry but every industry has sleazy business practices. They are not alone. Edit2: For example I work in the entertainment industry and the awards are all made up, the news is mostly just to get attention and they have politicians in their back pockets.
- kbenson 9y ago
  > Sounds exactly like every other industry. I don't see how it's any different. You were likely downvoted because you were far too strong for how general your statement was and presented it without evidence. As stated, it doesn't really contribute much. Worded as "sounds like many different industries. For example..." and followed with some examples would be interesting. As it is, it can be parsed as "business is corrupt."
  - divenorth 9y ago
    Thanks for being the kind soul to explain this to me. I'm still pretty new to hacker news.
    - ethbro 9y ago
      The meta around voting is complex and rarely discussed. Kind of like Fight Club. Generally though, think of "contributing substantively to the discussion" (e.g. providing facts, ideally sourced [1], relevant personal experience, or interesting and neutrally worded questions) as a high good. And tossing around memes, ad hoc attacks, argumentative language without facts, and "contentless" comments as the lowest bad. And as parent mentioned, the stronger the claim, the more it behooves you to cite a source. In general, try and write the kind of comments you want to read & treat everyone with respect. :) And hopefully others will do the same!
martincmartin 9y ago
extremely difficult for consumers to see through to factual information. This is why I like consumerlab.org. They summarize the medical research and test to see how much of the active ingredient it actually has.
- thephyber 9y ago
  I think the most valuable sources of information right now are independent non-profits. Do you have any other recommendations along this line?
  - Overtonwindow 9y ago
    It's impossible to determine which nonprofits are independent. So many nonprofits are industry backed, and depend on the industries they report on for most, if not all, of their funding. Your best bet are those that have been around along time, with clear 990's that show where money comes in, where it goes out, etc. There's an organization called Charity Navigator that tries to evaluate nonprofits, and score them based on transparency, etc. Another factor that I found in my experience is when a nonprofit goes after it's own industry. For example: Find a nonprofit that attacks MLM's and dietary supplements. Just because an organization says it's an independent nonprofit does not mean it is.
rwmj 9y ago
I used to consult for a couple of mortgage brokers back in the go-go 2000s before the crash, and it wasn't too different. Companies A, B and C arrange mortgages. Company D is a trade organization closely associated with A, B and C which awards annual prizes for "excellence" in the mortgage broking industry. By strange coincidence companies A, B and C are awarded the prizes every year (usually with slightly different names each year, or rotated from last years winners).

anilshanbhag 9y ago

John Oliver discussing Herbalife https://www.youtube.com/watch?v=s6MwGeOm8iI https://www.youtube.com/watch?v=s6MwGeOm8iI Bill Ackmann on Herbalife https://www.youtube.com/watch?v=bQc6L4ieMwo https://www.youtube.com/watch?v=bQc6L4ieMwo Almost 60% of their distributors were latinos (http://articles.latimes.com/2013/feb/15/business/la-fi-herbalife-latino-20130216 http://articles.latimes.com/2013/feb/15/business/la-fi-herba...). The lengthy presentation countering Pershing Square's accusations which contained this fact (http://files.shareholder.com/downloads/ABEA-48ZAJ9/2297763534x0x627448/e3de3984-4dff-4ca3-90a1-a1c1cafecb4e/Herbalife_Investor_Day_Presentation_-_01.10.13.pdf http://files.shareholder.com/downloads/ABEA-48ZAJ9/229776353...). There are countless stories of how these people were exploited in the name of gains. They are expanding rapidly in international markets. In India, Herbalife has over 40 distribution centers now and over 0.5 million distributors ! They even got a famous sports personalities to advertise for them (http://www.herbalproductkart.com/herbalife-brand-ambassdors http://www.herbalproductkart.com/herbalife-brand-ambassdors). To do my bit in preventing people from falling for such scams, I asked my friends and mother to share it on their whatsapp groups so that people don't fall prey to such pyramid schemes.

ridruejo 9y ago
You may not like it, but it is not necessarily a scam. Some of the posts by Bronte capital mentioned in the article http://brontecapital.blogspot.com/2015/06/herbalife-very-long-post.html http://brontecapital.blogspot.com/2015/06/herbalife-very-lon... http://brontecapital.blogspot.com/2016/07/herbalife-and-end-of-world.html http://brontecapital.blogspot.com/2016/07/herbalife-and-end-...
- eej71 9y ago
  It's unfortunate that you are being downvoted - especially since you are citing John Hempton's excellent work on the topic. It's really worth a read and an interesting counterpoint to Ackman's analysis.
  - ZoeZoeBee 9y ago
    Long story short "The market can stay irrational longer than you can stay solvent.”

ufo 9y ago

Does anyone know if there have been more developments to this story in the two years since this article was written?

ringaroundthetx 9y ago
Herbalife was too rich for the FTC to find it an illegal financial scheme, subsequently and simultaneously Bill Ackman got squeezed pretty hard on that and several of his other bets. He still has a group of followers because he's rich and has a nice pedigree, but he has fallen from glory pretty hard and his calls don't matter anymore. One of the best short sells these days is to short everything in his portfolio when you think he is about to get a margin call. Because that will force him to liquidate several large positions in different stocks.
- lstyls 9y ago
  Honest question: how the heck do you time a margin call for a whale like that apart from knowing someone on the inside?
  - ringaroundthetx 9y ago
    The fund's holdings are known, and the fund manager's dispositions are easily inferred by how much they talk about something. ie. How married they are to a position. So for example, when Valeant Pharmaceauticals was tanking from its highs of $220, all the way to $16, after Bill Ackman defended it, doubled down, joined the board, and bought calls, and then admitted to not having more funds available. You just short other things in his portfolio, or at least short them on the expectation that other people are going to short. Its fun. I do "proxy trades" a lot, where I trade a temporarily correlated asset, while the market focuses on a different asset.
    - lawrenceyan 9y ago
      How was Ackman able to get away with having lost so much money on Valeant?

aresant 9y ago

Hard to beat the hedge fund compensation model of fee on the way up, fee on the way down. Agnostic to his Herbalife bet, Ackman "has widely underperformed the S&P 500 since its EOY 2012 inception: 7.1% since inception net of fees vs. 84% for the S&P 500. Their original flagship fund's (2004 inception) track record is outstanding with returns of ~20% per annum." So his first fund killed it, he made a name for himself, raised a ton of money, and has literally cost his investors 75% of their returns to date in the market. He's personally worth $1,400,000,000 now as a result. Every fund pitch everywhere comes with the disclaimer "Past performance is not an indicator of future success" because of funds like Ackman's.

ww520 9y ago
Ackman bet big on Valeant and rode all the way from more than $200/share down to $10/share, losing more than $4B in the process.
jacquesm 9y ago
> Every fund pitch everywhere comes with the disclaimer "Past performance is not an indicator of future success" because of funds like Ackman's. No, it's because of the simple fact that you can't predict the future. That sleazeballs can make it even worse by making funds that pretend that they had yields before they even existed (or were active only in a theoretical sense with a few bucks in it as a fig leaf and the other 999 that got axed you'll never hear about) is taken as a given. That's just the 1024 envelope trick at a higher level.
- btilly 9y ago
  Indeed. I believe that the regulation that requires that disclosure comes from the 1933 law establishing the SEC. A specific concern was how advertising past returns fed into getting people excited about bubbles like the one which popped in 1929. Therefore the regulation was meant to address a systemic problem rather than individual malfeasance.
blunte 9y ago
I find it almost too ironic to see a hedge fund manager righteously calling out another business model.

imbusy111 9y ago

Explain to me how this is not market manipulation and securities fraud?

ringaroundthetx 9y ago
It just depends on how you do it. Just because you have more money than the liquidity of the market doesn't mean your buy and sells are market manipulation. I have bought things on the open market 100% above the prior market price, when I wanted them. Moving the asset's price 100% and sure enough many out of the loop people started FOMOing and buying more. Its the same principle for bearish positions too. In the securities market you can talk about your bullish or bearish rationale, and avoid sanctioning from regulators or private persons by disclosing your position. Ackman doubled down on that logic and did it very publicly. Although this is more a problem for bearish positions, the statements can't be lies or "intentionally misleading". In the past there were many naked shorts, where fake shares were sold into the public market causing impossible selling pressure. That is illegal now, for the most part, and as long as you aren't doing that it helps make sure you aren't manipulating the market, by the legal standard. Again, just because you can have an outsize affect on the price of the market and the mere presence of creating an advantageous circumstance, doesn't make it market manipulation or securities fraud.
williamscales 9y ago
Explain to me the case that it could be considered as such?
- blunte 9y ago
  When you are such a big name in finance, your public statements can be judged as attempts to influence the market. And if you furthermore pay lobbyists, do advertising, and give many presentations, it is clearly going to have an impact.
  - valuearb 9y ago
    We live in a free society that values free speech. We should be cautious when limiting it. In the case of market influence, it should be fine as long as there is full disclosure. In fact insider trading is perfectly legal as long as it's done with disclosure statements.

beavisel 9y ago

There was a documentary about this on Netflix. Interesting viewing, but it did feel like a vehicle for parties involved in shorting the stock to get more momentum. Link: https://www.netflix.com/au/title/80108609 https://www.netflix.com/au/title/80108609

deleted 9y ago

[deleted]

SirLJ 9y ago

You got to love Carl Icahn: ON WHEN ACKMAN CALLED HIM IN 2003: "I'm telling you he's like a crybaby in the schoolyard. I went to a tough school in Queens, you know, and they used to beat up the little Jewish boys. He was like one of the little Jewish boys crying ..." ON ACKMAN AS A FRIEND: "He's the quintessential example of 'if you want a friend on Wall Street, get a dog.'" ON HAVING DINNER WITH ACKMAN: "As far as I'm concerned, he wanted to have dinner with me. I couldn't figure out if he was the most sanctimonious guy I met in my life or just arrogant and that's Ackman." ON ACKMAN DONATING ANY HLF PROFITS TO CHARITY: "He talks about charity. That's complete bullshit!" ON ACKMAN SAYING ICAHN IS A GOOD INVESTOR: "I appreciate you, Bill, calling me a 'great investor', but unfortunately I cannot say the same for you." BONUS: ON WHEN SCOTT WAPNER ASKED HIM IF HE'S LONG HLF: "I want to say what I want to say and I'm not going to talk about my Herbalife position because you want to bully me ... I don't give a damn about what you want to know. I want to talk about what I want to talk about ... You can say what the hell you want. I'm going to talk about what Ackman just said about me, not about Herbalife ... I'll talk about Herbalife when I goddamn want to ... I'm never going on a show with you again, that's for damn sure, OK."

RodericDay 9y ago
Carl Icahn is not lovable at all.
- valuearb 9y ago
  Aside from all the examples just given, you mean.
  - wavefunction 9y ago
    meh

nodesocket 9y ago

I am torn, on one hand Herbalife does smell of one gigantic pyramid scheme. Howerver, they have completely revamped the company and structure havent they? On the other hand, while Ackman is savvy and smart, his activist investor style rubs me the wrong way. He has unlimited capital, and thus that affords him the right to manipulate companies for his own gain? I don't like it. Also, let's not forget... If Herbalife eventually goes out of business, he stands to make a boatload of money. Ackman is not being altruistic.

blunte 9y ago
You do realize that traditional business is a form of pyramid scheme. Your boss probably gets more compensation than you do. He/she may have subordinate managers who themselves have subordinate managers who have non-manager employees. The CEO makes bonuses based on performance of the company. The division managers makes bonuses based on their divisions' performance. The lowest people in the company probably make zero bonuses. And in many companies, the lowest paid workers were promised good future opportunities for growth in the company. For every bad MLM (and there are many), I could probably identify 10 bad traditional companies.
- acchow 9y ago
  Actually, you're describing a corporate pyramid structure, not a "Pyramid Scheme" which is: "a form of investment (illegal in the US and elsewhere) in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones."
- harryh 9y ago
  MLM != Pyramid scheme. Whether herbalife is the former or the latter is at the heart of the controversy around the company.
- wyaeld 9y ago
  Having a hierarchy that gets narrower at the top, with people earning more, is not what makes something a pyramid scheme. Having the earnings of the higher tier directly funded by financial contributions from the lower tiers is. I lot of MLMs have a particular 'hiding in plain site deception'. The retail margins on the consumer goods aren't where the bulk of the top tier earnings are coming from. The conferences, training materials, tapes, courses and a raft of support systems for the distributors... all produced at very little cost are the true source. This is where the generous subsidies come from.

blunte 9y ago

I have built software for a number of MLMs in the past 20 years. I can tear down a compensation plan and tell you where the money will go and what the likelihood of success will be for "the little guy" as well as the upper management reward for the "hitter". The #1 factor in deciding if an MLM is legit is the product. Many, many MLMs have products that have no real value to any market, existing only to attempt to legitimize a money game. However, MLM is a pretty good marketing approach for products that: 1 - are new or difficult to understand, and where having a human explain or demonstrate in person helps the potential consumer decide if it's something for them 2 - depend on customer testimonials to express their effectiveness, particularly regarding consumables that are not or cannot be judged and regulated by the FDA or similar body 3 - are consumable, such that the buyers and _consumers_ of the product naturally evangelize the product, and then get rewards for bringing new customers Let's be honest - there are a lot of BS products that are legally marketed through traditional, accepted, and even respected channels. And there are a ton of BS products marketing via MLM. The difference is that some MLMs have lured members with the unrealistic prospect of huge incomes and then guided the new members to buy a ton of product ("front-loading") so as to ascend more rapidly to the higher earning potentials. That's how you end up with people with a garage full of junk they'll never manage to sell. I don't know if Herbalife does this. I rather doubt it. But really, if a new employee in a company could choose to pay $25k up front with the promise that they would be more quickly promoted to higher management levels, I think a lot of people would do it - even if they had no skills or motivation to work to earn a promotion. In some MLMs, that option exists. Regarding compensation, every company that markets products takes some percent of product sales and directs that toward marketing efforts. What makes MLM unique is that it directs that marketing money to individuals (presumably based on the amount of sales they drive). And just as Division Managers of large companies may receive bonuses based on the success of their divisions, MLM leaders often receive some compensation based on the sales (success) of representatives they have personally recruited or who have been recruited by their recruits. I could go on, but it's boring now. Point is, MLM isn't inherently evil, just as capitalism isn't inherently evil. But everywhere, there are some people who will do anything for a dollar. Some become hedge fund managers, and some become MLM lead marketers.

zzleeper 9y ago

I've got the feeling this thread is full of people that drank the BS koolaid of herbalife. They either sell snake oil products, or protein shakes that are 10x cheaper at Costco. I've known people desperate enough to start selling that crap (as well as others-their friends-that have to buy it just due to friendship), so please stop spreading MLM scams.

anotherbrownguy 9y ago
>I've known people desperate enough to start selling that crap (as well as others-their friends-that have to buy it just due to friendship), so please stop spreading MLM scams. They offer 100% buyback for distributors for unopened products and they stopped lead generation completely 4 years ago. So, their distributors are no different from what cell phone carriers are to Apple. >They either sell snake oil products, or protein shakes that are 10x cheaper at Costco. Kinda like Apple then? >I've got the feeling this thread is full of people that drank the BS koolaid of herbalife. Or the other way around?
- gehsty 9y ago
  I think the main difference is that there is a chain of people who profit from selling to their 'downlines', not when a product is sold to an actual customer. The analogy to apple is poor. Apple sell a product that the majority of people like and they are actively trying to sell directly to the customer. They use networks as it is their only option in many markets and once a phone is sold to the network it is then sold to the customer, there isn't a series of transactions with each level profiting of the previous level.
  - anotherbrownguy 9y ago
    >I think the main difference is that there is a chain of people who profit from selling to their 'downlines' How is it different from 3rd party Apple resellers? >Apple sell a product that the majority of people like As does Herbalife. >they are actively trying to sell directly to the customer Herbalife lets distributors handle sales, not very different from Apple's resellers. >They use networks as it is their only option in many markets and once a phone is sold to the network it is then sold to the customer, there isn't a series of transactions with each level profiting of the previous level. Apple -> Authorised Resellers -> Stores. While this is not Apple's only channel (because they have their own stores plus online shop), it is one of them... and there is multiple transactions with each level profiting.

addisonj 9y ago

I live and work in Utah, which, for not completely clear to me reasons, is home to a lot of MLMs. Nu Skin, Usana, Xango, doTerra, Young Living, Jamberry (and those are the ones I can just name off the top of my head) are all headquartered here. For an area that in many ways is punching above its weight class in terms of tech companies, I occasionally have nagging (possibly unfounded?) concerns in the back of my head that one day a lot of these companies will be a hindrance on the continued growth here. I know some people already view Utah mostly as the home of MLMs and I don't know if that does much for attracting forward looking tech investment. That said, these companies have brought a ton of jobs and has certainly helped fund the growth in the area and I have worked with and met a lot of people who seem pretty decent. While many of these companies aren't "evil", I think the MLM is probably one of the most insidious dark design patterns around. I think the best way of how these companies primarily operate is like the Cassette/CD clubs of a few years past. A small fee gets you a decent amount of "up front value" (Join the club for $30 and get 30% off your first order!) with the expectation that you won't order anything else or forget to cancel the yearly membership fee. This is, of course, all made worse by the fact that is often friends and family who are peddling the high margin health and dietary products with questionable efficacy. Like I said, I don't know if I can call it an outright scam (I know a few people who really like there shakes and supplements and swear by them), but it does drive strange incentives...

swimfar 9y ago
The reason I had heard is because Mormon's make great door-to-door salesmen. Many of the men have spent a year or two of door-to-door proselyting (attempting to convert). So they're used to selling to strangers and also being rejected. I'm not sure how true this is, but it seems plausible.
- jansan 9y ago
  I see a lot of those Mormon young men here in Germany on their mission. There are usually two of them, dresses well and behaving very politely. Although they directly contact people on the street, I never have the feeling that anyone is annoyed by them. Therefore I could well imagine that they are great sales men.

exogeny 9y ago

I don't really get the Herbalife defense in here. Here's what I know: The products are of dubious quality, and can be bought for much cheaper elsewhere. The majority of people who end up being distributors absorb a net loss, and given that many already come from financially unstable backgrounds, that loss is particularly painful. The largest sellers in the chain either got in super early, or make more money off of ancillary products (seminars, etc.) than actual sales. That sounds shady as hell as best, downright predatory at worst, and all of the "Yeah, it might be bad, but so is X" arguments in the world don't absolve it. I guess where the real decision fork is to what extent you feel the Government is responsible for making it harder for people to make dumb decisions by shutting down the companies that prey upon them.

lathiat 9y ago
People also tend to lean heavily on their personal social network, which often alienates them from their personal friend base. And has limited supply before the success you do get from that runs out.
- pavel_lishin 9y ago
  And don't forget that you're often not the first one in your network to start peddling this garbage. My parents did it for awhile, after being turned onto it by another woman in the small town we lived in. But guess what? That same woman was already selling to 90% of our potential customers. Everyone who was going to buy a case of Glister toothpaste already had one sitting in their garage; who were we supposed to sell to? The answer to the rhetorical question is, nobody. We brushed our teeth with our shitty investment for about a year, then wrote the whole thing off as a failed experiment that luckily didn't bankrupt us.

lathiat 9y ago

Theres a recent follow-up from fortune on this, worth reading.. according to the article the stock price has grown back to roughly where it was before Ackman's campaign. However they're in the middle of a lot of changes in response to the FTC settlement so material changes in the future are also possible. http://fortune.com/2017/05/05/herbalife-stock-bill-ackman/ http://fortune.com/2017/05/05/herbalife-stock-bill-ackman/

justboxing 9y ago

2017: "Herbalife’s $700 Million Stock Surge Is Another Blow to Bill Ackman" => http://fortune.com/2017/05/05/herbalife-stock-bill-ackman/ http://fortune.com/2017/05/05/herbalife-stock-bill-ackman/ Looks like Herbalife is having the last laugh.

deleted 9y ago
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Illniyar 9y ago

This raises an interesting notions - can shorting be an effective option for funding legal/social action against a misbehaving company? So far there has only been two ways to fund social activism against companies - donations and feeds on class-action lawsuits.

creaghpatr 9y ago
Seems like it could be the other way around- legal/social action against a company as a strategy for shorting. Of course, they (the allegedly misled class) deserved to at least get a trial and a ruling, which at that scale require money and press coverage. But Ackman turned it into spectacle, which probably is what motivated Carl Icahn to btchslap his short.
yesiamyourdad 9y ago
Whether or not Ackman is right, his method is what's questionable. Let alone what seems like insanity to me: he's making a very public short bet against a company. He's _borrowing_ shares of stock to prove the management is wrong and publicly announcing that fact. So everybody can pile into the short squeeze, irrespective of the facts or morality of the situation. This is one reason why the quote "The market can stay irrational longer than you can stay solvent.” applies. The market is irrational because it's in the participants' short term interest for it to be irrational. > Conventional activists like Carl Icahn and Nelson Peltz buy shares and then “try to fix the company,” observes one hedge fund investor. Ackman, by contrast, is trying to annihilate a company. “I’ve never heard of short-selling activism in my life,” this investor says. “Are we comfortable that a private individual named Bill can try to put somebody out of business?” Shorting a company as a method of activism just seems like a terrible strategy on the face of it. A short is a really risky strategy for investing, for activism it just seems even worse. If you want to change a company using its stock, the effective way is to be rich enough to buy enough stock to influence the board.

mschuster91 9y ago

It's not just Herbalife. There are so many MLMs out there, it's madness. One former friend is a former friend because he fell victim to some German MLM, believe it was about a website where you could do conference calls. Back when I was younger, I was a stagehand at a venue where a huge MLM, also named in the Fortune article, had thrown a yuuuge party. They rented two entire conference halls for thousands of people and had a giant stage for a musical set up, complete with pyrotechnics and everything. Utter madness, all financed by poor people who were screwed over by their relatives or close friends...

Top19 9y ago

All MLMs are scams. I hate using the term pyramid schemes, because if you use that term all of the MLM apologists will start cranking out very long-winded philosophical definitions of pyramid schemes that obscure the true point. The MLM "model" can be summarized thusly: - 1. Give people pretty good business advice from a host of good business books - 2. Give people a very positive exciting environment - 3. Give people literally the WORST job ever created with a product that cannot exist on its own in the marketplace if it wasn't being artificially propped up by hundreds of thousands of distributors MLMs are scams. And no matter how much they try to attack other industries by saying how unethical they are, or how much they lie about their products, that can never and will never absolve them for the damage they have done to so many lives. ALSO: something else you'll notice is that people who've been involved with MLMs might recall them fondly. This is just a defense mechanism (an extremely understandable one) to prevent having to view oneself as being duped. I think it's a shame though because we'll all be duped or scammed to some degree in our life, no need to change the past. Anyway reading "The Big Con" by David Maurer right now, a book by a sociologist about con-men in the 1940s. It's the basis for the movie "The Sting", and its remarkable how many people in the book are conned but refuse to believe it, and even years later still think their guy is out there, about to return their money at any time with 20x the profit or whatever. EDIT: Also it is nearly impossible to look this stuff up on Google. MLM people have so carpet bombed the search sites the first 30 or so links will be links to Youtube videos with titles like "Is XYZ company a scam??" that find of course it's not. Occasionally a random legitimate news article will leak through. Otherwise they've literally walled the world off from anti-MLM information.

throwaway7645 9y ago
Yes, they've completely subverted the internet for their own use. You can send people in need to John Oliver's amazing piece though.
- dsacco 9y ago
  I'm of the opinion that John Oliver is not really a good source for changing people's minds. I agree with a lot of his points and he cites sources, but I find him difficult to watch. A lot of his show appears to endorse an echo chamber: he frequently criticizes the subjects by making them appear ridiculous. That's a very pervasive problem in political satire. It's often pandering. You have hosts taking clips of someone doing or saying something the demographic audience is going to clearly disagree with, then acting absolutely gobsmacked at how stupid/malicious/unaware they are. That's not persuasive to anyone and doesn't complement changing someone's mind, it's just ridiculing the people they currently agree with. Ostensibly the show is supposed to be informative, because he does appeal to the other side's rationality to try and persuade them. I think the usual argument for the format is that a sobering account doesn't capture enough attention, which is why jokes are interspersed. But those jokes are heavy handed enough that opponents probably will be put off. If the goal is actually convincing someone that MLMs don't really work for most people, I think there are probably better sources of information if they're willing to be proven wrong in the first place. And if they're not willing, they may take someone who is as abrasive as John Oliver as ridicule.

Chickenosaurus 9y ago

Does anyone know of any legitimate MLM based companies that sell products that could probably be successfully sold without MLM? In other words, can MLM be a useful tool for non-scammy companies?