Published January 09, 2013
Long ago, when my parents were young and impressionable, they stumbled upon a "business opportunity" in the form of a multilevel marketing company called "Holiday Magic."
My mom worked days as a nurse. My dad worked nights as a printer. They had three kids and a mortgage, so they were looking for a holiday and some magic.
They had zero experience selling cosmetics. They never asked the obvious question: Isn't it easier to buy this stuff at a store when you need it?
This is the question Herbalife Ltd. (HLF) should answer when its executives take the stage at an investor conference this week in New York.
Herbalife has three million "independent distributors" in 84 countries. All of them are selling the kind of products you can buy at just about every pharmacy, grocery and superstore in the world: weight-loss supplements, vitamins and wrinkle creams. And these are the same elixirs advertisers always have sold using emotional ploys and exaggerated claims.
If you find yourself buying products like these from a friend instead of a store, you are either doing that friend a favor or you are just being sold.
Maybe you've gotten fat. Maybe you've gotten old. Or maybe you're just so horribly underemployed you've come to believe you can get rich selling this stuff yourself, despite millions of others attempting to make the same sale.
On Dec. 20, a well-known hedge-fund manager named William Ackman of Pershing Square Capital Management presented a 340-page slide show, trashing Herbalife at a New York investor conference. He claims it's a pyramid scheme that takes advantage of desperate and unsophisticated people. He says it simply must be shut down by the Federal Trade Commission. He has shorted the stock and said he expects its value to go to zero once this happens.
The market reacted violently, wiping out nearly one-third of Herbalife's value. But the shares have since recovered some of that loss as investors sorted through Mr. Ackman's claims.
Herbalife countered by accusing Mr. Ackman of manipulating its stock, and it has said it will address Mr. Ackman's claims further Thursday.
Another hedge fund investor, Robert Chapman of Chapman Capital LLC, writes that he bought Herbalife shares after Mr. Ackman's "bear raid." He speculates Mr. Ackman knows there's no chance the FTC will shut down Herbalife, which is why he's flashing his slide show to the media instead.
At points in his missive, though, Mr. Chapman seems to support Mr. Ackman's point that Herbalife takes advantage of desperate people.
The company "has two secular tailwinds in its favor," Mr. Chapman writes. "Lots of fat people...and no shortage of structurally un/underemployed people."
So why not turn them all into Herbalife salesmen? We can all sell each other "Formula 1" shakes for a living. America will be saved!
Mr. Ackman's presentation is available at factsaboutherbalife.com. Herbalife's response likely will be a bore if the company chooses to answer Mr. Ackman point by laborious point. It might be better off saying nothing at all.
It's too easy to call just about any multilevel marketing company a pyramid scheme, because, well, that's pretty much what an MLM is. It's guys at the top sucking up gravy from guys at the bottom.
Mr. Ackman's attack reminds me of the time GOP presidential hopeful Rick Perry called Social Security a Ponzi scheme. This comment helped cost him the race because somehow a Ponzi scheme isn't technically a Ponzi scheme until it either collapses or is prosecuted as such.
For now, Herbalife is booming. Its revenue has expanded to a reported $3.9 billion since its 1980 founding. Complaints against it are few. Only one country, Belgium, has ruled that it is indeed is a pyramid scheme, and that court ruling is under appeal.
But as Mr. Ackman points out in his slide show, even Herbalife concedes there's always a risk someone will officially deem it a pyramid scheme.
"We are subject to the risk that...our network marketing program could be found not to be in compliance with applicable law," the company reports in the "risk factors" section of its most recent form 10K filed with regulators. "Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as "pyramid" or "chain sales" schemes."
What comes around, goes around--again and again. In the 1970s, my parents were so excited about selling Holiday Magic, they went to the bank to withdraw money. A wise trust fund officer warned them Holiday Magic was a pyramid scheme regulators eventually would shutter.
They didn't want to hear this. They thought the trust fund officer was just trying to keep their dough in his bank. But this is exactly what happened, in case you are wondering why you've never heard of Holiday Magic.
Holiday Magic's late founder, William Penn Patrick, wrote a book called "Happiness and Success through Principle." He also ran a self-improvement racket called the "Leadership Dynamics Institute."
If you go to Herbalife's website, you'll see that it peddles this sort of self-improvement banter, too: "Help people live healthier, active lives!...Work from home, the beach...wherever!"
Michael Johnson, Herbalife's chief executive, is a former Walt Disney Co. (DIS) executive. You can tell by the way he talks. Mr. Ackman quotes Mr. Johnson from a 2007 investor conference sponsored by Goldman Sachs:
"Part of our business is entertainment. We entertain our distributors with opportunity, with dreams, stories. It's all a part of what this company is."
(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. Contact Al at email@example.com or tellittoal.com)