Who Loses If Herbalife Is Not Investigated or Prosecuted

After William Ackman of the hedge fund, Pershing Square Capital, made his now famous slide presentation in which he charged that Herbalife is an illegal pyramid scheme that should be prosecuted by the FTC and the SEC, the debate soon shifted away from Herbalife itself and over to those who might profit or lose if regulators act or not.

Like in a political campaign in which vital issues are not reported, only campaign “activities” and poll results on which candidate is ahead or behind, the true significance of Herbalife is being displaced by a fixation on the fate of billionaires, William Ackman and Carl Icahn, the competing investment houses.

The true consequences of the issues about Herbalife raised by Ackman are on Main Street, not Wall Street. The Herbalife controversy is, first and foremost, a
consumer financial matter. Wall Street is not a stake holder, only a participant, as in the old saying about a bacon-and-eggs breakfast. The chicken is a participant but the pig is the stakeholder.

In fact, ever since Herbalife’s stock became publicly traded, Wall Street has feasted on the flesh and bones of Main Street’s lost funds, dashed hopes, and ruined dreams at the hands of Herbalife recruiters. The more consumers buy Herbalife’s “business opportunity” — with 99% never making a dime from it — the more Wall Street gains.

Silent Financial Disaster

The Herbalife tragedy on Main Street is of little interest to most of the financial press whose main readers are financial speculators. Most of the press, both financial and general, has little understanding of MLMs. And so the
financial fate of the consumer is seldom reported, even though the question of Herbalife’s legality and its future stock performance are on the front pages. The consumer disaster therefore spreads across the country, largely unreported and in silence.

One exception to the news blackout has been the work of financial correspondent and stock analyst, Herb Greenberg at CNBC. In his
documentary. “Selling the American Dream”, Greenberg focused on the consumer investors and told the real-life stories of several of the victims. Their losses were life-changing. Their hopes and dreams are damaged permanently. As Greenberg showed, Herbalife did not just fleece them of money, but of dignity and faith in the American Dream.

The full Main Street impact of Herbalife’s bogus income opportunity and its manipulation of the American Dream cannot be fully accounted for. Until very recently, almost no useful data were offered on the fates of the millions of consumer investors. But, under scrutiny of several hedge fund investors, more details about these “distributors” are now emerging.

Word Games

As the terrible truth of massive losses comes out, Herbalife is urgently engaged in word games to spin the disastrous results with a new interpretation. To evade charges that it is running an illegal pyramid scheme, a closed market swindle, in which “distributors” merely buy and sell the worthless “income opportunity” to each other in an “endless chain,” Herbalife now claims that the bottom 80% or so of the recruiting pyramid is made up of “end-users.” According to the new narrative, these consumers are so interested in Herbalife’ high priced, unadvertised commodity diet product, they pay to become “distributors,” in name only, just to get a little discount.

This interpretation serves another purpose for Herbalife.
It erases the financial losses of those distributors. Since Herbalife cannot verify any retail sales by these millions of distributors and few of them earn any “commissions," the data show that millions of distributors get nothing for their investment in the “income opportunity”. But, not to worry, according to Herbalife’s story, those in the lower rungs never lose money because they never wanted to gain money. They are not failures and losers. They “succeeded” in buying Herbalife products!

How does Herbalife know the millions in the bottom ranks never want to gain financial rewards as “distributors”? Because they do not gain rewards! Failure is called the proof of success! Covered up by this fiction is the reality that in an endless chain, the bottom ranks
must lose. In Herbalife, the millions at the bottom will lose whether they try or not. The “last ones in” always “fail” because pyramid expansion is not “unlimited.”

The Biggest Losers – Herbalife “Supervisors”
Data on Supervisor Losses

Yet, there is one sector of the pyramid which Herbalife’s spin doctors cannot disappear. It is the upper sector, the 20% who pay thousands of dollars to become “Supervisors.” This sector is unquestionably seeking income. They cannot be called “end-users”. They are clearly buyers of the “business opportunity.” How are they faring in the Herbalife model?

I did an analysis of this sector, using the information provided by Herbalife on its website as its “
income disclosure” for distributors in the USA in 2012. The data show a financial slaughter. Those who buy the “opportunity” lose at almost the same proportions as the so called “end-users” at the bottom. But because they invested much more, they lose much more.

The full analysis of the Herbalife “disclosure” is on the Pyramid Scheme Alert website.

Looking Ahead

So who loses if Herbalife is allowed to continue it deceptive recruiting? Not William Ackman. His lifestyle will not be affected. The true losers are all on Main Street. Most of the victims don’t know who William Ackman is and they don’t own any Herbalife stock. In the USA, the majority are Hispanic. All are in need of income. All believe that in America, success is possible for those who work and invest. Most believe that if a company is listed on the New York Stock Exchange and advertises its “business opportunity” all over the world, it must be legal, legitimate and viable.

Tragically, if Herbalife continues, we know exactly what will happen over the next 10 years, based on what happened — according to Herbalife’s own data — in 2012. Here’s what it looks like in the USA. On a global scale, the losses wiil be multiplied five-fold.

If Herbalife is allowed to continue in current form and maintains current recruitment, dropout and payment rates over the next 10 years, (dropouts are replaced with equal number of new recruits), this is what will happen in the USA:

  • 553,700 more Americans will join the ranks of 2012’s total of 113,000, as “Supervisor/Leaders” investing through direct inventory purchases and/or sales of between $3,000 — $4,000 each. Including sales lead charges, fees, marketing materials and all other business costs, the total investment per recruit can be far more.
  • In total, 666,700 Americans will be enrolled as Herbalife Supervisor/Leaders during the ensuing 10-year period, including the currently reported base of 113,000
  • 326,683 (49%) will earn nothing in payments from Herbalife.
  • A total of 553,700 – 83% of the total that participate — will dropout during this 10-year period and 67% of them – 326,683 – will dropout within the first year they are recruited.
  • Projected losses during this period for consumers who invest as Herbalife “Supervisors," based on investments of approximately $3,000 or more, range from $2 - 4 billion and potentially far more when all costs are factored.
  • Of the total 666,700 enrolled, just 2,321 (the non-churning top 2% each year) will have received, on average, an annual income approaching a “livelihood," (gross payments, before expenses, of $35,000 or more, on average). This group will constitute approximately one-third of one percent of all consumer-investors in the Herbalife “Supervisor” business opportunity. The top O.177% of the 10-year total (1 out of every 575 Supervisors) will each receive approximately $250,000 per year, on average.

See the report on what happens to Herbalife “Supervisors.”