I wrote and article over at BeachsideCEO.com asking this question and sharing some additional information on how brandjacking aka subterfuge marketing may land a personal in civil and criminal court by using these blackhat marketing tactics.
I received this new as it was released to the public through the PR Wires and thought… “These boys are putting their money where mouths are! In a world where network marketing founders are selling out, merging with foreign companies, or going out of business, Blair, Sarnicola and Mallen seem to be taking a stand to follow through on the promises they have made to the ViSalus employees, promoters, and customers over the years.
Over the last week or so I have read a boatload of commentary as well as the formal allegations raised by the Australian Competition & Consumer Commission. The ACCC is similar to the FTC in the USA. My stance is that when an investigation is launched, that it is a good thing for the consumers, the independent professionals as well as the company for the following reasons.
Over the last couple of years GenY aka Millennial Generation has become a focus point for the continued growth of the direct selling aka network marketing aka MLM industry. Now I see Wallstreet and main stream media asking if specific companies are manipulating this generation.
Founded By, MLM Attorney, Kevin Thompson of the Thompson Burton Law Firm and Jay Leisner of Sylvina Consulting, the DS Edge Business School has quickly risen to be known as the #1 direct selling/ network marketing educational event available today (at least that’s how I see it!)
What Will I Learn?
This article first appeared on The MLM Attorney Blog!
I had the privilege of being on Bloomberg for a small segment talking about Bill Ackman’s latest presentation. The 7-minute segment can be viewed above. Ackman’s presentation today, if you can spare 3+ hours, can be found here . Before summarizing his argument, it needs to be said that he heavily promoted this presentation yesterday across the news. He was like Muhammad Ali talking about the Thrilla in Manila, saying that this was “the most important presentation of his life.” He further said that this would be the “death blow ” to Herbalife. He successfully spooked the market, causing it to drop 11%. Instead of “conclusively proving fraud,” which was his intent, he ignited confidence in the market due to the lack of substance, causing the stock to go up 25% in one day. I’m not making this up. Up 25% the day of the death blow. Only on Wall Street. I’ll summarize his thesis:
- Herbalife’s usage of “Nutrition Clubs” operates like a bait and switch for consumers.
- The prospects are lured into the clubs on the auspices of hanging out with friends and sampling products.
- These prospects are then pressured to “get on the treadmill” and join as distributors and recruit more people to visit the clubs.
- The Club concept is designed to recruit, not to sell.
- Herbalife’s stance that the clubs foster community efforts for weight loss is smoke and mirrors.
- He goes further and argues that the positioning of some of the clubs as “success universities” is misleading because they’re not accredited as real universities.
- He further argues that the Clubs violate various labor laws since the members are expected to help out in keeping the club operational i.e. free labor.
- He argues that Michael Johnson learned of these strategies of penetrating the hispanic market while at Disney. In my opinion, he gave Michael Johnson way more credit than he deserved in this regard. The Nutrition Club concept was likely an invention in the field.
We discuss the presentation during the interview. Herbalife has issued its own response , including the findings from an economist about its model. Based on his data, he concluded that the vast majority of revenue is attributable to legitimate product consumption i.e. people buying for legitimate value. The data is significant, as it essentially puts the pyramid scheme argument to bed. If true, the majority of commissions are driven via legitimate economic activity by “ultimate users.” This is why, in my opinion, Ackman paid very little attention to the law today. I think he knows the law is not in his favor on a macro level with Herbalife. Instead, he was arguing the facts on a micro level, painting a picture that there’s a massive bait-and-switch occurring with the Nutrition Clubs. In his mind, if he can kill the Nutrition Clubs, he can kill Herbalife.
Commentary from me
Herbalife needs to avoid gloating. They sort of spiked the football today with their remarks. Yes, Ackman’s presentation went off like a snap bomp instead of the full scale firework show we were promised. But, with that being said, he’s certainly not someone to poke. He’s obviously emotionally charged on the issue. He cried on a few occasions during the presentation. In his mind, he sees himself as a “Superman” that needs to rescue these poor, hispanic citizens. While 93% of Herbalife Nutrition Club operators are happy with their experience (based on a recent survey), Ackman would argue that they’re under a trance that only he can break. Referencing the history of his great-grandfather that came to America from Russia, Ackman sees Herbalife as preying on people like his great-granddad, causing significant damage for future generations. Bottom line: he’s amped up. And his puts expire in January of 2015, which means he needs to land a punch soon to get the stock to soften before he eats the loss. I think he’s done his worst to Herbalife. It’s now in the hands of regulators. Speaking of regulators, he did not provide them with any new ammunition today that they did not already possess yesterday. I stand firm with my initial opinion, made in January of 2013. Admittedly, I could be wrong. But I do not think the FTC will file an action against Herbalife. Instead, I think there’s going to be some sort of negotiated settlement that will involve some sort of penalty for past transgressions. They’re the Federal government…they’re going to find something. Give me Ackman’s investigatory budget of $50,000,000 and I’ll find dirt whatever you want. The return on his $50M investment here was not very anti-climatic and the market made him pay today. What do you think? What’s next for Herbalife? What’s next in Bill Ackman’s playbook?
Last week Jeff Babener, like Kevin Thompson before him, wrote a great analysis on the Burn Lounge decision handed out by the 9th Circuit. I believe there is much to be learned fro this decision no matter how one views network marketing if they are willing to study the courts decision.
BurnLounge Appeal Decision:
Guidance on Pyramid v. Legitimate MLM and the Role of Personal Use in Pyramid Analysis
By Jeffrey A. Babener
You can read the full article at MLM Legal! Here at MLM Help Desk, I am going to print what I feel are the most important points Babener makes.