In this week’s network marketing news, I am covering the purported evidence that Pershing Square founder, Bill Ackman states proves regulators from the SEC to the FTC have turned a blind eye. Could such a successful and educated man be so hell-bent on profits and greed that he refused to fully investigate the facts of his team? Or is there something even more personal going on that is yet to be uncovered?
Bill Ackman is a well-respected and very successful Wall Street Advocate Investor. He is the founder of Pershing Square Capital Management. In December of 2012, Ackman publicly stated “I am 100% confident that Herbalife is a pyramid scheme.” He backed up his claim with a 334 page presentation and several T.V. appearances.
However… although Mr. Bill Ackman is a very well-educated investor, it seems he and his team relied heavily on supposition, supported by half-true, misrepresented facts, and in at least one case, the reports of a well-known convicted short seller and stock manipulator Barry Minkow.
I find it somewhat humorous, that Bill Ackman, who is so educated, does not seem to have studied much on what could happen to him and his firm if the SEC or other regulators, decide his report is correct, and Herbalife is a pyramid or worse yet a Ponzi. In that case, Mr. Ackman could find himself facing the same clawback situations as the promoters of Zeek Rewards are now facing.
I am not sure, the regulators will look kindly on Mr. Ackman and Pershing Square earning billions in “Blood Money” (Mr. Ackman’s term) off the backs of Herbalife distributors.
Here is the interview Mr. Bill Ackman did with Bloomberg TV, where he made it clear “I am 100% confident Herbalife is a pyramid scheme.” Click Here
I want to look at some specific points raised by Mr. Ackman.
1. He is clear that Pershing Square Capital Management stands to earn close to $1 billion dollars if he can drive the price of the stock down at Herbalife, and he will personally earn $25 million in driving down the stock.
Although, it is mentioned that he is donating $25 million to Pediatric Cancer Research, based on the presentation and the reporter at Bloomberg Mr. Ackman was giving the $25 million anyway.
2. Mr. Ackman profiles the Herbalife distributors as follows…
“Low income or unemployed people who are losing their homes. Later he adds, these people could not even qualify for a sub-prime loan.”
I was somewhat surprised that an “Advocate Investor” such as Bill Ackman, would profile people he had never met in such a vile manner. First of all he either ignorant to the facts, or has decided to let the lure of easy money blind him to the facts.
According to the DSA Fact Sheet for 2011, the following are the demographics of their member companies which includes Herbalife.
PERCENT OF DIRECT SELLERS BY RACE 2010
White non-Hispanic 73.5
Black or African American 7.1
Asian or Pacific Islander 3.1
American Indian/Alaska Native 0.5
PERCENT OF DIRECT SELLERS BY GENDER 2011
PERCENT OF DIRECT SELLERS BY TIME WORKED 2011
Now although, Herbalife doesn’t profile its distributors, based on the facts above, and the facts surrounding the weight loss industry, we can come to a logical conclusion that Herbalife distributors are going to fall very close to the above figures (not including specific Race.)
Mr. Ackman’s argument about low or unemployed people joining Herbalife, doesn’t seem to be based on conclusive evidence based on what he states throughout the presentation below and the interview above.
If the prospects had low or unemployed, then a new question is raised… How can they afford to become a distributor, and pay for the autoship order? Especially when we see Mr. Ackman claims that his team estimates that each Herbalife distributor loses $2,000 each. Although, he states these people are too embarrassed to make a stink about the purported Herbalife pyramid scheme, in other areas he states thousands of former “losing sales leaders” have sued Herbalife. These sure seem to be contradictory statements, to an already invalid argument.
Without a doubt, there are those who promote Herbalife, that may be doing it outside of the compliance policy of the company. However, this does not mean that Herbalife promotes unethical marketing to those who should not be in business or can;t afford their products. If this was a policy taught by the company, then sales would not be up in the USA around 20% for 2012 or 17% worldwide.
3. Mr. Ackman claims people “invest” in the herbalife business opportunity. Need I say more?
As educated as Bill Ackman is, he does not seem to understand the basic laws surrounding Direct Sales. When an independent distributor decides to join a network marketing company at any level, they do NOT invest anything.
They will purchase a distributor kit, and may even decide to purchase a specific pack of products and marketing collateral from the company. But all of this is seen by the IRS and regulators as an expense, not an investment.
Again, if Bill Ackman, doesn’t understand even the basic laws govern direct sales, then how ca he with “100% confidence” know that Herbalife is a pyramid?
4. Mr. Ackman claims that a distributor must be in the top fraction of 1% at Herbalife to earn over $90,000 annually.
Again, Bill Ackman and his team seem to have this desire to blow off the published facts. Although there is no law in place that demands a company to produce an Income Disclosure Statement, Herbalife does for all to see. By publishing an IDS, the company does away with the income claims and hype that does come with some companies. And it provides anyone in the public the chance to see the real numbers.
So does Mr. Ackman’s claim have any merit? I do not believe so, but we need to review the stats to get the real picture. First let’s look at the most current breakdown of why folks join any network marketing company.
According to the DSA, the following statistics were published in 2009.
Based on the above we can see that 20.1% of those who join are currently building a business. And to fall on a more critical side of the equation, if I add back in the 30.9% non-purchasers, and assume that they at one time ALL wanted to build a business, that would still show that 49% of all who join a network marketing company did so for reasons other than building a business. But what are the Herbalife figures? And do Ackman’s figure come close?
According to the Morgan Stanley 3rd quarter Herbalife Report, 80% of those who join as distributors, never build a sales team. In other words, they are consumers of the products. So, we can take them out of the math for determining the real net figure of who is earning money in Herbalife.
Now, let’s look at some other figures as reported by Herbalife in the above mentioned Morgan Stanley Report. (These figures do exclude China due to different laws and marketing plan.)
52% Retention of Sales Leaders (2011)
56% Sales Leaders Activity Rate (2012)
24% Sales Leaders Advancing to 5K (2012)
So, of the 20% of Herbalife distributors who are builders (which is in line with the DSA stats), we can see that 56% are active and 24% are growing.
And according to the latest Income Disclosure Statement we can also see the following:
“Over 25% of Distributors reach the rank of Supervisor and above (“Leader”), qualifying them for additional compensation which is paid by Herbalife based upon their activities and those they have sponsored directly and indirectly. The annual gross compensation paid by Herbalife to all Leaders during 2011 averaged $2,900 (with a median level of $741). Over 39% of Supervisors are “Active” (defined as those who generated at least 2,500 points of volume in 2011 after becoming Supervisor). The annual gross compensation paid by Herbalife to Active Leaders during 2011 averaged $7,354 (with a median level of $637).
The amounts above do not include the income Distributors can earn from their retail or wholesale income, so the actual compensation can be somewhat higher, depending upon each Distributor’s personal-selling efforts. Also, the figures above are gross, not net income.”
But, what about the “fraction of 1%” making all the money as Mr. Ackman claims? False! Of the 20% of distributors who are actively building a Herbalife sales force 2.3% earn $97,000 or more. (see the IDS linked above)
5. Mr. Ackman, feels the regulators, specifically the FTC does not like Herbalife, and he claims that the information he has accumulated in the above presentation and at the website Facts About Herbalife will provide the FTC the information they need to bring action against Herbalife as a pyramid.
Well, I am not sure if Mr. Bill Ackman and his team realize that the FTC hates Barry Minkow far more than they do, anyone at Herbalife. I say this, because Mr. Ackman uses convicted short seller, and securities fraud felon Barry Minkow and his failed Fraud Discovery Institute as part of their evidence that Herbalife is a pyramid. Their other “expert is Robert L. FitzPatrick, who was a friend of Barry Minkow, and who MLM Advocate Len Clements has already proven is clueless about direct sales.
Then let’s not leave out the guess blogger over at MLM Attorney, Kevin Thompson’s blog, Robert Chapman. Chapman is the founder of Chapman Capital LLC. He totally disagrees with what Mr. Ackman is claiming all the way around. And of all folks he should know. In 2000 Mr. Chapman was an Advocate Investor against Herbalife.
6. Mr. Ackman states the reason he released the presentation and made the rounds at all the business news outlets was so he could save the Herbalife distributors who would be re-qualifying before January 31st for the new year.
Well, this doesn;t seem consistent with his above statement where he was clear that the target market for Herbalife distributors were low-income or unemployed people. In reviewing the demographics of the financial news outlets once again doesn’t seem consistent with Mr. Ackman’s statements:
48.3 – Medium Age
43% – Attended College
76% – Own Home
$70K – Medium Income
Bloomberg TV Viewer Profile
Income Level $150,000 and above
Education Level Bachelor’s and above
Occupation Level Top Management & C-Suite
57.1 Medium Age
$75,000 Medium Income
95% Own Home
55.1 Medium Age
43% Attended College
70% Own Home
$55,000 Medium Income
(Stats come from Nation TV Spots)
So once again we see that Bill Ackman’s words do not seem to line up with the facts. But, many of people have been lured away from seeing the facts, with the payout is $1 billion dollars.
7. Mr. Ackman is in fear of his life because Herbalife CEO Michael Johnson stated “The world would be better off without Bill Ackman! Well let’s put that in context by watching the below interview…
So we can see that when heard within the context of the statement, Mr. Ackman doesn;t have to fear for his life. Well maybe his career life, if this stock play doesn’t bring him a home run!
You can review Mr. Bill Ackman’s full presentation by clicking here. Which might be good as I cover some of the slides…
Here are some additional resources you can review on the subject at hand.