Herbalife declared NOT fraudulent (Edited)

More disappointing news on the legal front today. Herbalife is in the clear after years of dogged pursuit accusing them of fraud.

Herbalife wins dismissal of U.S. ‘pyramid scheme’ lawsuit | Reuters.

Herbalife Ltd won the dismissal of a lawsuit that claimed the maker of weight-loss and nutritional products fraudulently portrayed itself as a legitimate company, and that shareholders lost money because it was actually an illegal pyramid scheme.

U.S. District Judge Dale Fischer in Los Angeles said on Monday that shareholders led by two pension funds did not show that questions raised about Herbalife’s business by hedge fund manager William Ackman and various investigators showed that the company had fraudulently inflated its stock price.

Fischer rejected claims in the proposed class action that news about concerns from Massachusetts Senator Edward Markey, a Federal Trade Commission probe, weak quarterly results, and even questions raised by Ackman and hedge fund manager David Einhorn were “corrective disclosures” that revealed Herbalife’s fraud.

Herbalife always denied they were a pyramid scheme. The judge decided there was nothing hidden here so there was no fraud involved.

We have frequently reported on the troubles facing Herbalife, a company that sells nutrition, weight management and skin-care products through distributors, not directly to customers. There is no doubt that this is multi-level marketing where participants profit off of recruiting others more than from the sale of actual products. There are plenty of companies that do this. [Edited – removed company names] It’s not illegal. Herbalife was claimed to be profiting off of investors, not the product itself.

Hedge fund manager, Bill Ackerman has made sinking Herbalife a personal quest since 2012. He thought he could deliver the death blow to the company by convincing investors to pull out based on his expose of deceptive practices. It didn’t work.

The bottom line appears to be that the individual investor must be ultra careful about stepping into such a situation. No one can protect you from your own ignorance and lack of math skills or sound judgement.

  9 comments for “Herbalife declared NOT fraudulent (Edited)

  1. Eric
    March 18, 2015 at 2:53 PM

    I wonder if the hedge fund would have been more successful targeting herbalifes products instead of the structure of multilevel marketing. As you stated in your piece above many many well known companies use the MLM structure and have for decades and decades.

  2. March 18, 2015 at 6:07 PM

    There are many MLM out there and some are schemes and some actually have a great product. It is up to the individual consumer to figure out which ones are real and which ones are fumes. Before the internet it is harder, but now with the internet right on our finger tips it is a lot easier. So do your research before jumping into an MLM.

  3. Michael Edwards
    March 18, 2015 at 6:32 PM

    Sharon-

    Your classification of Multi-Level Marketing (MLM’s) and specifically Avon as being companies where “participants profit off of recruiting others more than from the sale of actual products” isn’t accurate. At a company like Avon, its a direct sales model through independent distributors. New reps should pay for a $10 starter kit, but that cost is often absorbed by their upline distributor (who are charged for it). If your downline people don’t sell any products, there is no money to be made. You don’t make money off of sign-ups. Many people erroneously lump MLM’s with pyramid schemes.

    A pyramid scheme is an unsustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public. Avon, for example is a publicly traded company that has been using the direct sell concept for the last 125 years.

  4. MisterNeutron
    March 18, 2015 at 8:20 PM

    Misleading headline. The judge did NOT decide that Herbalife is not a pyramid scheme. The judge decided that Herbalife did not “reveal to the market something previously hidden or actively concealed,” thereby opening itself to a charge of stock price manipulation. Not the same thing.

    Herbalife has not actively concealed anything about its business model. That doesn’t mean that it’s a good business. Anyone looking at the figures has to conclude that it’s mostly a sham, but the evidence for that is plain for all to see.

  5. March 18, 2015 at 9:23 PM

    I made some edits to clarify.

  6. Adam
    March 19, 2015 at 7:21 AM

    Something could be legal and still completely, contemptibly immoral and evil. What I don’t get is why enough people get suckered into MLMs to sustain this form of business. It’s not hard to find hundreds, thousands of horror stories. You’d think this would scare off enough people for the whole scheme to collapse.

  7. Lagaya1
    March 19, 2015 at 3:39 PM

    I remember during the Jodi Arias murder trial her boyfriend worked for an MLM that sold lawyering services by the year. I think. One of the witnesses that worked for the same business in a fairly high-up position was called to testify. His testimony had to be delayed, however, because he wanted, but had no attorney! The irony!

  8. March 20, 2015 at 5:38 AM

    Actually, Sharon, your “clarification” still leaves the article as wrong and Michael is correct. It depends on how you define the terms, but while “product-based pyramid schemes” might be considered an (illegal) subset of Multi-level Marketing, the defining characteristic of illegal pyramids vs MLM is that you *don’t* make money by recruiting others. In Herbalife for example, if you recruit a thousand people, how much do you make for that? Nothing. Profit is only made through the sale of products.

    Ackman (and, alas, many skeptics) have promoted a lot of misinformation about the model and how it works. The main concern with Herbalife (product efficacy aside) is that they have some inbuilt incentives for new recruits to “inventory load” to get better discounts – in other words people may be buying the products in order to try and get others to join rather than because they actually want them for their own use or to sell. You then have a product-based pyramid scheme.

    Ackman, after 2.5 years and tens of millions of dollars, has however failed to offer any evidence it occurs on any significant scale. The FTC came to the same conclusion when investigating the industry as a whole a few years ago – the way many “skeptics” believe MLM works simply isn’t the way it works, they’re arguing against a straw man.

  9. March 20, 2015 at 6:34 AM

    It’s not hard to find thousands of people who believe in UFOs,and bigfoot, and astrology etc. Sooner or later you have to decide whether you base your beliefs on anecodotes or on professional, expert analysis.

    The same type of myths that Sharon has promoted here (eg in MLM you make money by recruiting) have been dismissed by official investigations and experts for more than 40 years, yet they still prevail, often while promoting and linking to pseudo-experts on the internet with ridiculously poor “research”

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