Saturday, 22 October 2016

UK 'Herbalife (HLF)' adherent steals £100 000 to keep buying her 'MLM' fix.

Once upon a time in the land of 'Herbalife' there lived a perfectly beautiful, happy, healthy and prosperous Princess called Leanne:

Leanne Rungay

Leanne Rungay

World Team Member at Herbalife
Basildon, Essex

I've always been the type of person that looks after people. My friends and family I dote on. But I felt like I needed to do more with my life and for other people. I wanted to make my mark and build a community.

I didnt really know how I was going to do this but what I did know was the beginning of last year I looked in the mirror and realised I had made everyone a priority but myself. At 5 ft 8 and 17 stone I wasn't at my best, I was overweight and lazy. 

That is when Herbalife found me at a time of need. I have gone on to lose 4 stone so far, over 10% body fat and ive increased muscle mass. But most of all I have tonnes more energy, lots more confidence and live a much more positive life. 

I have since gone on to build my own business with Herbalife and I work this around my daughter and my job. Its the best thing I have ever done. I now help other people feel great and reach there health and wellness goals. I support them all the way and the job satisfaction you get from this is like no other.
Before Herbalife I couldn't afford a holiday and this year I qualified for 2 trips with them, to Mallorca and Barcelona, they were the best holidays of my life and it was a reward for helping others.

If you would like my help to earn an extra income around your current commitments or want more information on the nutrition programme and how I can support you then please email me at


Meanwhile back in the adult world of quantifiable reality:

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Tubby payroll clerk who pilfered nearly £100k from bosses to fund transformation into glamorous lifestyle coach faces jail

Leanne Rungay, 28, lost pounds in weight as she made them in cash by stealing from her recruitment company

A TUBBY payroll clerk who stole almost £100,000 from her bosses to help fund her transformation into a glamorous lifestyle coach is facing jail.
Leanne Rungay, 28, lost pounds in weight as she made them in cash by stealing from the recruitment company where she worked.

Leanne Rungay stole from the recruitment company where she worked
Leanne Rungay stole from the recruitment company where she worked

The fiddling fatty lost five stone in weight and dropped five dress sizes, from an 18 to a slender eight, as she used her ill-gotten gains to transform herself with diet and exercise in the gym.
After losing weight, Rungay posted sexy selfies in skimpy outfits on Instagram and continues to promote herself on the site as a ‘wellness’ coach and distributor for American diet product giant Herbalife.
The mum, of Basildon, Essex, boasts of being able to “help others look and feel great” and tells in a promotional advert how she joined a Quickstart Wellness fit club after starting her diet at the start of 2014.

She used her ill-gotten gains to transform herself with diet and exercise in the gym
She used her ill-gotten gains to transform herself with diet and exercise in the gym
The fiddling fatty lost five stone in weight and dropped five dress sizes, from an 18 to a slender eight
Leanne lost five stone in weight and dropped five dress sizes, from an 18 to a slender eight

Rungay lost 13 per cent of her body fat and gushed : “I don’t ever see myself without my Herbalife products.
“I have loads of energy, I am not bloated and it’s convenient for me as it saves me time whipping up a shake while I am working and being a mum.
“Having the support from my coach and the community at the fit clubs helped me stay on track and most importantly helped me find me again.”
Before and after photos posted online by Rungay show her dramatic weight loss as she morphed from obesity into a pouting beauty with a new wardobe of clothes.
But the diddling dieter now faces life without Herbalife behind bars.
Six months after she began her diet, Rungay began siphoning money from Central London-based employers Spencer Ogden, a specialist energy sector recruitment firm.
She transferred a total of £94,934.83 from the company into her own savings account during a 15-month period while her weight was continuing to plunge.

She transferred a total of £94,934.83 from the company into her own savings account
She transferred a total of £94,934.83 from the company into her own savings account

London’s Westminster Magistrates Court heard how Rungay worked in the billing and payroll department at the Charlotte Street firm.
Prosecutor Kate Shilton said : “‘Whilst employed by Spencer Ogden between 21st June 2014 and 16th September 2015, in the billing assistance and payroll department, the defendant transferred money from the company business account to her own savings account.
“The amount was just short of £95,000.”

However, the diddling dieter now faces life without Herbalife behind bars
Leane now faces life without Herbalife behind bars
Rungay admitted one count of theft by employee.
Deputy District Judge Adrian Turner ruled the case was too serious to be dealt with by magistrates, whose powers are limited to imposing tariffs of up to six months imprisonment.
Instead, Judge Turner bailed Rungay to appear for sentencing at Southwark Crown Court on a date to be fixed.

The Sun (copyright 2016)

Tuesday, 18 October 2016

Robert FitzPatrick - The Orwellian response of the 'Herbalife(HLF)' mob to the FTC's continued moral relativism.

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Robert FitzPatrick

The Fact Herbalife Cannot Deny And The FTC Dares Not Name

By Robert FitzPatrick


Lack of a "pyramid scheme" charge has been cited for Wall Street's ignoring the FTC settlement and continuing to back Herbalife. Some accepted Herbalife's Orwellian claim it was "exonerated.".
The actual reason for Wall Street's and Herbalife's ridicule of the FTC is the agency did not confront the cause of Herbalife wrongdoing, its unlimited income promise with pay-to-play requirements.
The FTC's failure to acknowledge the root cause of Herbalife wrongdoing was a "tell" to investors that the FTC would not challenge the MLM lobby. They've bet on Herbalife's escape.
As cause for the FTC's silence in the face of Herbalife's and Wall Street's scorn some also note FTC Commissioners and officials using MLM as a lucrative post-government career destination.
Wall Street's bet against the FTC may be wrong if Herbalife must prove retail sales. The true facts about Herbalife's recruiting scheme could compel FTC law enforcement.
Three months have passed since the FTC presented its formal Complaint against Herbalife (NYSE:HLF), following a two-year investigation. The Complaint detailed pervasive deception and extensive consumer harm, i.e., unfair and deceptive trade practices under Section 5 of the FTC Act.
Beyond "Pyramid Scheme"
Some have focused on the absence of the term "pyramid scheme" in the FTC statement. Actually, the FTC vividly described the workings of a Herbalife pyramid scheme - payments related to recruiting, financial losses and churning rates of participants, false income promises, and absence of retail profits. Not naming or attempting to prove a pyramid scheme is a legal strategy, also recently used by the Dept. of Justice in criminal fraud charges against the CEO of the MLM, Zeek Rewards. Pyramid schemes are complex "long cons" and there is no federal law against them. Section 5 infractions are much easier to prove.
It was not the avoidance of "pyramid scheme" that is significant but rather the FTC's omission of the underlying foundation of a pyramid scheme, the well spring and the cause of Herbalife's deception and consumer losses. This underlying and uneconomic factor defeats, from the start, any chance of retail sales, and always produces 99% loss rates.
That factor is Herbalife's "unlimited income" promises based on its "endless chain" structure. The endless chain income promise, the most fundamental of all elements of a pyramid scheme, is the factor the FTC does not name because, officially, it endorses this endless chain proposition in its endorsement of "legitimate multi-level marketing", aka "MLM."
Not Denied, Not Even Hidden
Herbalife, for its part, does not - and cannot - in any way try to hide or deny its endless chain model. It is proclaimed as a legal and normal pillar of commerce, passing GAAP and regulatory standards. Herbalife defends the "endless chain" as the foundation of its pay plan and its recruiting activities and the hallmark of the business sector shared with hundreds of others of its type, "multi-level marketing."
In the FTC case against Herbalife, the archetype of MLM, deception and consumer losses were singled out for FTC action. Yet, because the unrestricted endless chain is permitted by the FTC in its endorsement of MLM, the agency dared not speak of the "causes" of Herbalife's global law breaking. The wrongdoing is named, but motive and opportunity are not referenced? Instead, Herbalife was said to be, in some unexplained way, endemicallyfraudulent, requiring "restructuring" to "start operating legitimately."
What then did cause Herbalife, among its MLM peers, to do such bad things and warrant FTC action? While the cause of the illegal practices was not named, the FTC did indicate what were not the causes. It was not due to a ringleader. None was named, like the CEO was in the MLM, Zeek Rewards. It was not accounting malfeasance, as in Crazy Eddy's and Enron. The SEC has not weighed in. It wasn't "rogue" salespeople or complicit managers, who took the fall at Wells Fargo bank. The Consumer Financial Protection Bureau remains silent. Herbalife's wrongdoing, the FTC stated, was embedded in its compensation formula and expressed in its core mission. For this premise to be true, Herbalife must be the ultimate "rogue" MLM, yet the FTC did not claim this either or argue that Herbalife was harming its fellow MLMs.
Exoneration not Condemnation!
Even though the operation of a "pyramid scheme" was not claimed and the causal factor underlying the FTC's list of Herbalife misdeeds was not named, it still would be reasonable that Wall Street analysts and the financial news media would dig deeply into the FTC's condemnations of Herbalife that led to a huge fine and major corrections.
As we know, none of that happened. Instead, Wall Street, and its news media minions, were captivated by Herbalife's stunning, Orwellian response that the FTC's Complaint-Settlement was not an order for fundamental restructuring at all but instead was a government exoneration and vindication of its existing"MLM" business model.
The FTC's litany of specific Herbalife wrongdoings and the punishing measures imposed on Herbalife for it to be allowed to stay in business, including disgorgement of $200 million, were ignored as if they did not exist.
The Fraud Whose Name Dare Not Be Said (by the FTC)
Astute observers have looked past Herbalife's mind-boggling but still predictable denials, and even the media's (also predictable) compliance. They wondered how and why the FTC would allow its own findings and official actions to be publicly negated, grossly misrepresented and misused by a company it had just prosecuted for deceiving consumers!
I submit that the explanation for Wall Street's defiant repudiation of facts and scorning of the FTC is the same factor that also accounts for the FTC's own self-destructive silence while its prosecutorial work is publicly trashed and the Defendant moons the Commission's authority.
The common factor is that the FTC did not and, apparently, feels it cannot address the main and central fraud involved in the Herbalife case, the endless chain income proposition. It is this position that undercuts the entire prosecution and has led some speculators to bet against FTC enforcement.
Indicators of Regulatory Capture
The FTC's revealing failure to acknowledge Herbalife's fundamental flimflam, on which is based its "infinite" structure and "unlimited" income promises, as well as being the root cause of the consumer losses was the "tell" for some on Wall Street of the government's unwillingness to cage the beast it had poked, the beast called "multi-level marketing." The FTC's failure to acknowledge the very nature of the scam gives evidence to some on Wall Street that the "settlement" will follow the FTC's historic - since 1980 - acceptance of MLM as politically insulated from law enforcement by "influenced" members of Congress and, besides that, because MLM is a lucrative career destination for some FTC Commissioners and officials.
Smart money took note that two former FTC Commissioners and one high level official are now on the Herbalife payroll:
  • Pamela Jones Harbour, Commissioner
  • Jon Leibowitz, Commission Chairperson
  • Eileen Harrington, FTC Bureau of Consumer Protection (1987-2009), "with direct responsibility for the FTC's enforcement and regulatory oversight of business opportunities like Herbalife."
Other FTC Commissioners and officials have worked as lobbyists or consultants for MLMs, before or after leaving the FTC:
  • Timothy Muris, Commission Chairperson (Primerica)
  • Jodie Bernstein, Director, Bureau of Consumer Protection (Amway)
  • J. Howard Beales, Director, Bureau of Consumer Protection (Primerica)
  • David Scheffman, Director of the Bureau of Economics (Equinox)
The appearance, at least, of revolving door and other, potentially, close connections between former FTC Commissioners and officials and MLMs involve intermediary law firms:
  • FTC Commissioner Julie Brill recently resigned to join the law firm of Hogan and Lovells, a firm that lists Amway and the Direct Selling Association among its clients, and in which partner Deborah Ashford is General Counsel to the DSA "Education" Foundation of which former FTC Commissioner and now Herbalife employee, Pamela Jones Harbour, is a board member. Hogan and Lovells, where Commissioner Brill now works, also filed an amicus brief,opposing the FTC in its case against the MLM, Burnlounge.
  • FTC, Director of the Bureau of Competition, Richard Feinstein, returned to the law firm, Boies Schiller Flexner, soon after the firm was retained by Herbalife in 2012. Feinstein was appointed to his position at the FTC in 2009 by Commission Chair, Jon Leibowitz, who is now on Herbalife's payroll. Feinstein has moved back and forth between the Boies Schiller and the FTC several times. Boies Schiller recently helped Herbalife fight revelations by short-seller Pershing Capital and to secure a quick and minuscule cash settlement in the most recent consumer class action case of pyramid scheme charges against Herbalife.
Heart of the Pyramid
The "endless chain" is the genesis of all pyramid and ponzi schemes and various other swindles. In the world of "business opportunity" solicitations a perpetual endless chain income promise is equivalent to what a perpetual-motion-machine would be in patents and inventions. Unlike the complex factors involved in a "pyramid scheme" racket, the fraudulence of a perpetual endless chain income promise is pure and recognizable. By its very nature, it meets the conventional definition of fraud: deliberate deception to secure unfair or unlawful gain.
At Herbalife, in classic MLM fashion, this recruiting-based proposition is codified in a contractual agreement with participants of advance-fee collection (fees and quotas of product purchases) with promised rewards (bonuses and royalties) payable upon the perpetual recruiting of new contractors under the same terms, with the new investments serving as funds for the promised reward to the recruiters. This proposition is then marketed as a viable livelihood for millions of people.
In its Complaint and Settlement, the FTC went beyond choosing not to prove Herbalife is a pyramid scheme. It chose to leave out any reference to the source of the racket from which all the itemized wrongdoings and abuses flow, including a definable status of "pyramid scheme." Ignoring the beating heart of the Herbalife scam - the continuous endless chain income promise - gave this classic tool of fraudsters the status of a legal, normal and matter-of-fact business "incentive."
Like Herbalife's astonishing claim of FTC exoneration, the FTC's treatment of the Herbalife "endless chain" created its own reversal of reality. Omission implied legitimacy and viability to this classic trickery. Thus, to bring charges against Herbalife, the FTC had to claim Herbalife had misused the endless chain pay plan and structure of "legitimate MLM", as if a continuous endless chain income promise to all could possibly operate honestly and fairly and really could deliver its promised benefits to all who pay and participate!
Never Denied, but Always Disguised
As an almost magical force capable of mesmerizing millions, the MLM version of the endless chain promise is never denied by Herbalife, but its shifty and voracious countenance is prudently covered with a mask, called "direct selling." In this disguise, the siphoning of money from doomed participants at the bottom is sanitized through product purchases to mimic ordinary consumer transactions and divert attention from the "incentivizing" role of the endless chain promise. The products operate like chips in Las Vegas or a form of crypto-currency, like Bitcoin. Between 35% and 55% of the price of the chips (products) is transferred to the chain of recruiters, with the majority of that total allocated by formula to those in the top 1% of the chain.
With two years of fact-finding, aided by whistle-blowers, independent researchers and consumer activists and with the whole world watching, the FTC had a historic opportunity to escape its political leash by merely acknowledging and describing the foundation of Herbalife's business model. It could have explained and illustrated how the endless chain income proposition itself compels the marketing program toward recruiting and thereby snuffs out retail sales potential. It could have shown how it produces by design, 99% consumer loss rates year after year and necessitates cover-up "disclosures." Instead, the FTC chose to treat the "infinity" aspect of the proposition, an economic Unicorn, as if it really exists, while condemning its effects, as if they were preventable.
Gallery of Endless Chains
To put the MLM endless chain proposition into perspective, it is useful to consider other areas of commercial activity where the endless chain income proposition, under certain conditions, can be legal and permissible or even harmless. These include lotteries, securities and chain letters. Lotteries, chain letters and securities-trading - due to their inherent risk and their win-lose nature and even when they are abused and operate criminally - do not portray themselves as viable Main Street "income opportunities" to replace higher education, trades, jobs and other business ventures. MLMs do exactly this.
Due to the near total losses that lotteries must cause among virtually all participants, state governments oversee or directly operate them. Actual odds to win must be published. Accounting of revenue and rewards is strictly monitored. Most important, lotteries present themselves as games of chance, never as livelihoods to replace jobs. MLMs do exactly this.
Securities must be registered with the SEC. The nature of a security in which value is dependent on future actions of other parties define them as "speculative", and thereby require government oversight. The floating value of a security, based ultimately on what the latest investors believe and will pay, without limit, and always vulnerable to manipulation, is offset by disclosure requirements, government monitoring, and independent analyses of revenue, earnings, book value, and the performance of comparable companies. Security-trading, even under regulation, disclosure rules, monitoring and analysis, does not portray itself as a replacement for jobs for millions of people. MLMs do exactly this.
Only in the MLM version is the endless chain proposition permitted without registration, regulation, oversight and no disclosure requirements of any kind. Only in MLM is the endless chain allowed to be portrayed as a rational replacement for jobs for millions of people. Only in MLM is the investment in an endless chain proposition allowed to be to be called "risk free".
MLM's endless chain marketplace, called the MLM "industry," is not studied by universities and its data are not gathered or monitored by any government agency. There are no independent data beyond those promoted by MLM's own PR and lobbying group, the Direct Selling Association, repeatedly shown to be skewed, exaggerated or at best "anecdotal." There are no independent analysts examining factors of saturation, competition, or historical performance for the investors (participants).
  • If the MLM "distributorship" were a security, it would be an unregistered penny stock hyped in a boiler room by unlicensed brokers, manipulating the price and lining up buyers and sellers to kite the price.
  • If MLM were a lottery it would be selling tickets to yesterday's drawing.
  • If MLM were a chain letter, the persons at the top of the list would never be taken off as more people signed at the end and sent money to those listed above.
The Endless Chain Detonator: Pay to Play
The endless chain in business is potentially toxic by design and, history shows, if not regulated and monitored, it can destroy whole markets or even nations and it can lead individuals to insane and self-destructive actions. By its nature as a transfer, there is no equitable exchange of value. If you profit from it, someone else on the chain or perhaps many others did not.
However, if no money is required to participate, the illusions and fantasies conjured by the income promises of an endless chain become only fanciful and rather innocent. Chain letters, the original endless chain schemes, exemplify this principle. When they charge money for participation, they are illegal in the United States. Why? It is their impossible reward promise based on an illusory "endless" structure. They are fraud per se.
Herbalife's structure and income promise are based on that same model, understood to be inherently deceptive in a chain letter. Yet, at the press conference on Herbalife, the FTC suspended recognition of the inherentlydeceptive nature of Herbalife's structure and related income promise, and FTC officials lamented only that Herbalife did not fulfill its impossible income promises to participants.
When chain letters do not charge money, but only solicit participants to sign on and then send the letter to potential new participants, they become harmless parlor games promising good fortune or offering the chance to spread a wise or silly admonition. The activating spark that makes an endless chain financially lethal is the "pay-to-play" component, sometimes called "payment of consideration."
Yet, besides being unable to acknowledge Herbalife's dangerous endless chain proposition at its core, the FTC also could not take notice of the long and brightly colored fuse attached to the Herbalife explosive, the pay-to-play components built into the MLM pay plan. Herbalife, like all MLMs, is steeped in and totally dependent upon pay-to-play charges.
The legal prohibition against chain letters charging money should be the guide for how the FTC can summarily stop Herbalife's law-breaking: prohibit Herbalife from charging money to participate in its illusory reward plan based on "endless" recruiting.
Reward-based Purchasing
Among Herbalife's pay-to-play costs are registration fees, but those are just the start and not the main ones. The modest registration fees for "startup kits" may be outside the reward plan and not exceed their base costs. The important pay-to-play charges are product purchase quotas to "qualify" for receiving recruiting-related rewards under the pay plan, then monthly maintenance of the qualifying purchase quotas. Personal buying can fulfill or top off the quotas. There are escalating purchase quotas for higher rewards which if not met, result in penalizing lower rates and lead to significant purchasing to avoid the penalty. Add to these, back office and website charges, shipping costs, marketing material purchases, seminar registrations, books, videos, and more. MLM's pay-to-play costs add up to thousands or tens of thousands of dollars for those who bite the hook attached to the end of the chain.
Defusing the MLM Bomb
The simple solution to deactivating MLM's financial IEDs is presented in twoSeeking Alpha articles, one by me, and one by attorney Douglas Brooks. The articles explain that to remove the danger the FTC would just need to prohibitpersonal purchases from being used as qualifiers or measures for recruiting-related rewards. Buying for personal use or for retail marketing purposes or for any other reason would be unaffected, but personal purchases would never count toward the buyer's own quota related to recruiting-related rewards. Everyone on the chain would be free to buy the goods, but personal buying would not help or hurt the buyers themselves regarding their future-oriented, recruiting-related rewards.
With the fuse to the bomb removed, the FTC would then have no need to monitor "retail selling" rates, which is an after-effect of pay-to-play recruiting and which is impossible to do anyway. FTC monitors would just need to read the terms of the MLM's pay plan and enforce the prohibition against any pay-to-play provisions.
Endless Chain Math and Geometry
Just as whistle-blower Harry Markopolos asked the SEC when he famously and unsuccessfully presented that agency with Madoff's impossible ROI data, consumer activists asked the FTC to look at Herbalife's math. The Herbalife income proposition is based upon continuous exponential expansion without regard to saturation. The promised success of each new MLM participant's investment is based upon a mathematical impossibility. "Infinite" expansion and the promise of "unlimited income" are obviously pseudo-economic phenomena. If the FTC had only recognized the implausible claims along with Herbalife's historical recruiting and payout data over multiple years, the investigation would be finished in short order. As Markopolos noted when he realized Madoffs' trading records had to be bogus, it only takes about 5 minutes to see such fraud.
As we know, Herbalife's business, despite the absurd promises and the devastating data, or perhaps because of them, befuddle many people. I have explained and presented to countless journalists the runaway numbers in a typical MLM plan based on each participant recruiting just five others. After the 13th recruiting cycle, the earth's entire population is enrolled, if the chain is not broken. The numbers are indisputable, yet because the MLM scheme endures and continues to recruit, the numbers don't penetrate some minds.
At that point, I turn to pyramid geometry and the work of the recently retired expert on pyramids at the FTC, Peter Vandernat. Dr. Vandernat left the agency with a trove of precise declarations including an explanation of the design of endless chains showing that financial disaster for millions of participant-investors is pre-ordained by the model itself.
He wrote,"In a pyramid scheme the large scale failure to obtain the proposed rewards is not postponed until market saturation. For as long as a successful recruitment pattern is maintained, the names of the most recent recruits change over time, but the percentage of members constituting the most recent layers of recruits does not appreciably change. At whatever enrollment the program may be considered, whether the total membership be large or small, saturation or not, the rules and implementation of the program ensure that the vast majority of members are not in a position to obtain the proposed rewards. For the promoters of the scheme, this feature always limits the liability for required payouts, while also favoring relatively few participants who are at or near the top of the structure. This description is typically true for all stages of recruitment, including those stages that are still far from market saturation. Also, in a pyramid scheme the number of people who lose money increases exponentially for as long as a successful recruitment pattern is maintained. From the perspective of consumer protection, it is always better that a pyramid scheme fail sooner rather than later."
Applying his description to the "each get just 5" chart, it shows that the hapless and unprofitable recruits in the bottom two levels make up 96% of the total downline! Yet, even with the math calculations and Dr. Vandernat's explanation, the mystifying capacity of the MLM endless chain scheme to endure leads some otherwise perceptive individuals to swallow the "direct selling" narrative and ignore the recruiting reality.
The Secrets of Saturation and Breakage
The math projections and the pyramid's malevolent design are often overwhelmed by reports of continued recruiting, pious denials of wrongdoing by well dressed MLM executives and scenes of ecstatic new recruits pouring into "extravaganza" recruiting rallies. The mind cannot easily hold those apparently positive images alongside the gruesome facts of 99% "losers", perjury about retail sales and 50-80% annual churn of "quitters." MLM persistence becomes an unfathomable mystery to some people.
As in the Wizard of Oz or a Tony Robbins "fire walk", the explanation for the mystery is behind the curtain and through the smoke. In the MLM case, the saturation of whole populations that the recruiting model would seem to lead to is mitigated and managed - for the MLM enterprise - by Factor X, the undisclosed or obscured rates of quitting. In the "biz", the quitting pattern is called "breakage."
Insiders understand breakage as the key to a MLM enterprise's longevity and a windfall to top recruiters. As lower-level recruiters finally quit, whatever residual revenue they may have created from recruiting flows to the levels above. At Herbalife, 66% of all rewards wind up in the hands of the top 1% of recruiters. This is no accident, but the planned result of a carefully formulated top-loaded reward plan with the upward transfer compounded by "breakage" which the plan's authors fully anticipate.
Ironically, the fitful and profitless migration of millions of unwitting consumers joining and quitting MLMs constitutes MLM stability. The quitting keeps the MLM from imploding. The churn and loss rate are not signs of abuse of the MLM model but an integral and necessary part of it. The model is based, as all endless chains are, on transferring money within the chain from later participants to earlier ones. Each "winner" requires many losers, which leads to large-scale quitting.
The fabled MLM income plan dazzles the new recruits with visions of an explosively growing downline - 5+25+125+625 = 780 in just 4 cycles! In reality, 70-80% of new recruits quit within a year as "failures" and most are unable or unwilling to recruit others. The entire chain turns over at a 60% rate. Recruiting often does not keep up with quitting. Only by invading more geography is the MLM enterprise able to show continued "growth". This "growth" is not from building upon a base but is only the net gain of relentless recruiting over constant quitting. Huge troughs of saturation and decline in established areas are papered over with "growth" in new areas, the classic "pop and drop."
If it can replace its 60% of quitters, the MLM enterprise itself does not face "saturation." But the hundreds of thousands joining each year at the end of its "endless chain" are robbed blind by it. For any significant number among that huge base of new recruits to build large "downlines" is mathematically, demographically and economically impossible. They are doomed by design, and fated to lose from the start, as Dr. Vandernat explained.
Saturation may be a distant forecast for the MLM enterprise itself, as long it can keep replacing quitters and expanding globally. The baffling and brutal consequences of saturation are "externalized" by the MLM scheme to all new recruits soon after the scheme is launched. Any significant number of recruits at the end cannot possibly "duplicate" the recruiting numbers of the "winners" on the extravaganza stage. Saturation for the participants is not a far-off event. It is the immediate and permanent MLM state. Constant "breakage", experienced as loss, disappointment, and self-blame among millions of "losers", is how the MLM manages saturation, while it proclaims another year of "growth."
Hidden Data
There is a critical data point that no one has ever seen and the FTC did not report, despite two years of fact-finding with subpoena power. If known, it would instantly reveal the savage impact of saturation on Herbalife recruits and the ill-gotten profit to the company and its top promoters.
The data point may be expressed in this analytical question: How many people, in the USA for example, have ever become paying contractors (distributors) for Herbalife since it opened its doors in 1981? Out of all those millions of individuals, how many ever gained any net profit?
If only 1% can be shown to be profitable during one year, the percentage of profitable participants among all who paid in over the last 35 years would be infinitesimal. The 1-percenters remain in place year after year while the 99-percenters churn and accumulate. The actual winners, stated as a percentage of the true total would be as close to zero as one could graphically illustrate.
Memory Recovery
Could it be that the FTC does not know about the inherent fraudulence of anyendless chain allowed to operate unregulated and unmonitored?
  • Does it really not have data on the historical destructiveness of MLM income propositions and "business opportunity" solicitations?
  • Is it really unaware that MLM's "incentivize" personal purchases with recruiting-based rewards as stated in the compensation plan?
  • Does it not see how its enforcement policies since 1980 have created a protected haven for the nation's only "endless chain" enterprise without regulation, disclosure or oversight?
  • Does it really not know that the endless chain will, by geometric design, always produce massive loss rates, and that MLM schemes survive by churning and replacing 60% of the participants every year?
  • Could it be that the FTC believes most MLMers make money from retailing? Does it think MLM retailing is even feasible, when the MLM enterprise perpetually inundates all areas with competitive "salespeople" and offerswholesale pricing to anyone breathing?
Or could it be that the FTC - and many of us too - have forgotten? Are we like people under a dictatorship who forget what free speech and assembly are? Have we forgotten that an endless chain income proposition is inherently deceptive? Did we forget that law enforcement used to stop this kind of virally-spreading fraud from infecting commercial markets?
Fortunately, there are some who do remember and there are statutory records to reference, laws still on the books that just need dusting off after years of lack of use. Consider the language prohibiting " chain distributor schemes in Wisconsin :
"Unfair trade practice: The promotional use of a chain distributor scheme in connection with the solicitation of business investments from members of the public is an unfair trade practice under 100.20 Stats. When so used the scheme serves as a lure to improvident and uneconomical investment. Many small investors lack commercial expertise and anticipate unrealistic profits through use of the chance to further perpetuate a chain of distributors, without regard to actual market conditions affecting further distribution and sale of the property purchased by them or its market acceptance by final users or consumers. Substantial economic losses to participating distributors have occurred and will inevitably occur by reason of their reliance on perpetuation of the chain distributor scheme as a source of profit."
Similar clearly-worded state statutes are in North Carolina and in California among others. Additionally, there are attorneys, regulators and economists to help with memory recovery. The author of the Wisconsin statute and regulations, Bruce Craig, retired Asst. Attorney General, continues to offer his experience and insights to the FTC, universities and the business media.
Despite the FTC's conspicuous omission of the source of Herbalife's wrongdoings - its endless chain structure and compensation plan and the incendiary factor of "pay-to-play" purchasing - the FTC Settlement with Herbalife is a game-changer in one important way. Herbalife is to be required to show that 80% of all its sales are made to people who are not part of the pay plan, true end-users, outside the chain. Herbalife's model and reward plan are based on a closed market that focuses on recruiting and transferring money among the recruits inside the chain. Any significant level of bona fide retail sales have never been documented.
Most important under the Settlement terms, Herbalife, not the FTC, must bear the burden of proving the existence of these mythical retail sales. Until now, the FTC carried that impossible responsibility of searching for what did not exist, and proving the absence of retail sales by extrapolating data among millions of churning individuals who are "independent" of the offending MLM enterprise.
End Game Scenarios
Could it be that Wall Street's reading of the FTC "tell" is wrong? Many observers were so skeptical of FTC's prosecutorial-will they expected the two-year investigation to conclude with a shameful white wash. They were happily proven wrong and have acknowledged the FTC for breaking a 30-year precedent in taking on Herbalife.
There is also a plausible case to be made that the FTC has soberly recognized its historical dilemma and the impossible mission of "proving" retail sales as the anti-dote for an inherently deceptive endless chain business model, now called "multi-level marketing." And, rather than take on the MLM lobby directly and its paid friends in Congress, the FTC will just let the facts of Herbalife - the poster child of MLM - come to light and serve as a mandate and guide for law enforcement on all MLMs.
If that is true, it is no wonder Herbalife has gone into full-blown denial. In the reality-based world where Unicorns, perpetual-motion-machines and "endless chains" don't exist Herbalife has no other option.

Robert FitzPatrick (copyright 2016)

Christine Richard reveals more of the reality hidden behind the 'Herbalife (HLF)' fairy story.

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Christine Richard

Herbalife's Qualification Crowd Is In Trouble

By Christine Richard


Herbalife has less than a year to prove to the FTC that its US business is based on sales to distributors with Retail Customers who purchase products at prices that generate real profits.
We consider the buying patterns of a small and highly influential group of Herbalife’s top distributors who account for an outsized share of the company’s sales.
We find standing qualification orders, phony accounts, collapsing pyramids of qualification buyers, millions of dollars of products donated to charity and thousands of dollars spent on storage space – all suggesting top distributors lack Retail Customers.
By the way, Herbalife would prefer if you didn’t call these top distributors to ask them about how their businesses operate.
Remember those Herbalife (NYSE:HLF) buttons? "Earn What You're Worth." It's time to find out what that really means.
On July 15, the Federal Trade Commission (FTC) imposed new requirements on Herbalife Ltd. and its payment of commissions. In a Stipulated Order for Permanent Injunction and Monetary Judgment, the FTC and Herbalife agreed that after May 2017, Herbalife must principally pay rewards on three types of transactions: (1) sales by a distributor to a Preferred Customer (a distributor who signed up with Herbalife in order to buy the products at a discount for personal consumption but who is not pursuing the business opportunity), (2) sales to Preferred Customers in a distributor's downline organization, and (3) Profitable Retail Sales by Supervisors in a distributor's downline to Retail Customers outside the Herbalife distributor network.
In yesterday's article, we discussed why we think Herbalife will fall short when it comes to Preferred Customers. We looked at a proxy for Preferred Customers and determined that less than 2% of Herbalife's US sales are attributable to distributors who signed up only to consume the product at a discount.
Now we consider the other 98% - sales to distributors who signed up with Herbalife in order to pursue the business opportunity. What are these distributors doing with the products they purchase? Do the majority resell products to Retail Customers? For Herbalife's US business to survive the FTC settlement, they have to.
FTC Sees Insufficient Retail Demand
While Herbalife continues to insist that the vast majority of its products end up in the hands of Retail Customers, the FTC disagreed. The agency found little retail demand for Herbalife products and certainly not at resale prices that generate material profits for distributors. The FTC mentioned this several times in its Complaint for Permanent Injunction and Other Equitable Relief, which was filed in Federal Court on July 15, 2016 and publicly released alongside its proposed settlement agreement with Herbalife:
If all this is true, how is it that Herbalife's top distributors are running successful businesses? If they can't retail the product themselves and the huge number of people they recruit can't retail the product, what exactly are they doing with it?
Don't Ask
One group of Herbalife distributors is key to answering this question. These are members of the TAB Team and higher, a tiny but influential group. They make up the Millionaire Team, President's Team, Chairman's Club and Founder's Circle and are Herbalife's highest paid distributors, receiving tens of thousands or even millions of dollars a year in commission and bonus checks.
In our previous article, we used various data sources, including the recent FTC complaint, to determine how much of Herbalife's US sales can be attributed to purchases by various categories of distributors, including those in the TAB Team or higher:
As the table above shows, "TAB Team or Higher" members account for just 0.7% of all distributors, but as a group purchase 13.5% of Herbalife products sold. We also estimate that these distributors each purchase about 40,000 volume points per year. That's the equivalent of around 1,670 canisters of Formula 1 a year, or 140 canisters a month.
How can we possibly square this with the FTC's statements that there is no real retail opportunity for Herbalife products? What in the world are these top distributors doing with the products?
One way to get to the bottom of those questions would be to simply ask top distributors about their businesses. But Herbalife is discouraging this approach.
Here's a message the company sent to TAB Team members shortly after the FTC settlement was announced:
Here's another message, posted by an influential Herbalife distributor who also runs a business helping Hispanic distributors in the US with accounting and tax issues:
It's interesting that HerbaTax encourages Herbalife distributors to turn down $300-$400 "for answering some questions," while the FTC found that half of Sales Leaders average only $5 per year in net profits.
We haven't tried to reach any of these distributors since the FTC settlement was announced, but based on the above, we suspect trying to interview members of this group won't be a fruitful exercise.
That doesn't mean we can't find clues to how top distributors operate their businesses.
The Petersons' Standing Order
Susan Peterson is one of Herbalife's top distributors. She has frequently been named the #1 Herbalife distributor in the world and is one of a handful of distributors who are part of Herbalife's Founder's Circle.
We get a glimpse into how Susan Peterson manages her business in a document filed as part of a legal dispute over assets jointly owned by her and her late ex-husband John Peterson.
These documents describe the operation of numerous companies and accounts jointly owned by the Petersons. Included in the documents is one detailing the operation of J&S Vision Marketing, Inc. - a company that is 50% owned by John Peterson's estate and 50% owned by Susan Peterson, which operates the couple's Herbalife distributorship.
According to the document, J&S Vision Marketing has contracted with an administrator to oversee aspects of the business. Among the administrator's responsibilities is to monitor sales volume and purchase 2,500 volume points of products from Herbalife every month without fail:
Under Herbalife's compensation plan, distributors need to purchase 2,500 volume points a month in order to qualify for the maximum commission on their downline Supervisors' purchases. Herbalife also counts purchases made by non-Supervisors immediately underneath the distributor toward this threshold.
We have no idea how many non-Supervisors Susan Peterson has in her organization at any given time, though one would expect there to be many if Peterson continues to actively retail, recruit and teach recruits. One would also, of course, expect Susan Peterson to have developed and maintained a substantial base of her own loyal retail customers over the decades that she's worked as an Herbalife distributor.
Instead, the standing order makes no mention of existing Retail Customers and recognizes that the purchases by non-Supervisors in the Petersons' organization can't be counted on. Therefore, the standing order has been established to assure that the Petersons' distributorship earns its maximum commissions every month.
This is qualification buying, and Susan Peterson has outsourced it to an office manager so she doesn't even have to think about it.
$8 Million in Donated Product
The Petersons aren't the only ones at the top of the Herbalife marketing plan who engage in qualification buying. Sometimes that qualification buying is more complex and involves multiple accounts, as the FTC noted in its complaint:
Not only was this distributor buying products for which he or she had no Retail Customer demand, the distributor also was buying for numerous accounts in his or her downline organization for which there was no underlying Retail Customer demand.
When a distributor sets up multiple accounts, buying product under those accounts and earning commissions, this is known as "stacking." Each account allows the distributor to reach further down into the pyramid, taking multiple commissions on the massive churn that occurs as people attempt the business opportunity.
Stacking is prohibited under Herbalife's compensation plan and so is qualification buying. Yet both have clearly been used with impunity by those at the top of the marketing pyramid to qualify for layers of commissions.
Kim's Collapsing Pyramid
Sometimes qualification buying extends to an entire organization, and Korean Chairman's Club members Tai Ho Kim and Hyun Mo Koo provide us with an excellent example. They are among Herbalife's most successful distributors and, like Susan Peterson, are members of the exclusive Founder's Circle.
Herbalife inadvertently revealed some details about Kim's business in an email sent by an Herbalife executive to the head of the Herbalife Family Foundation, in support of Kim receiving the Foundation's annual Humanitarian Award in 2013. The email appeared on the Foundation's website.
In the email, the Herbalife executive tells a story of how Kim's business, which was generating $500,000 a month in Herbalife commission payments, collapsed after Herbalife's now late founder Mark Hughes postponed the opening of the Korea market.
If Kim's organization had been composed of distributors with actual Retail Customers, his downline would have continued to purchase product even after the news of the delayed market opening. Distributors in his downline might have been disappointed by the loss of recruiting opportunities, but they wouldn't have stopped buying products from Herbalife altogether. The problem was that their purchases were driven by a desire to reach a high position in the marketing plan ahead of what was expected to be a dramatic expansion in the number of potential recruits in Korea. That's called qualification buying.
Doran Andry's Storage Space
Another one of Herbalife's most successful distributors is Chairman's Club member Doran Andry. We get a glimpse into how Andry's business works thanks to details provided in his ongoing divorce battle in California. Filings in that case include financial information for Andry's Herbalife distributorship, which is run through a company called HB International Group, Inc.
In 2014, HB International reported $2.6 million in commission and bonus payments from Herbalife. Yet, the business reported just $15,700 in revenue from product sales. It seems that while Andry earned huge commissions on the volume purchased by people recruited into his organization, his own retail business was a disaster.
HB International generated just $15,730.43 by selling products (which we assume to be Herbalife products), while also reporting that it spent $142,557.55, in two separate line items, to buy what we assume are Herbalife products. (We believe F.S.S. stands for Financial Success Systems, another company owned by Andry.)
If these goods were in fact Herbalife products, then Andry bought products with a Suggested Retail Price of around $284,000 and made just$15,700 selling them.
This wasn't a one-time problem either. In 2013, HB International reported revenue from product sales of $32,419.99 and product purchases of $196,699.68, the equivalent of $394,000 in Herbalife products at the Suggested Retail Price.
Why does Andry buy product that he can't sell? In 2014, his purchases helped to qualify Andry for $2.6 million in commissions, and in 2013, the product purchased by Andry and his downline distributors unlocked $2.9 million in commission payments.
What in the world does Andry do with all the products that he doesn't sell?
One of HB International's larger expenses is an item called "Public Storage," which amounted to $55,113.00 in 2014.
We don't know what Andry's Herbalife distributorship is storing in all that space, but it sure would hold a lot of unsold Formula 1.
Missing Retail Demand
Will Herbalife's top distributors be able to meet the FTC-imposed thresholds and show that the vast majority of their organization's purchases are made by Preferred Customers or by distributors with actual Retail Customers? Top distributors have cheated in the past and will surely try in the future. We've already heard that some top distributors believe it will be easy enough to use the names of friends and relatives to create fake accounts and to place orders on behalf of these individuals. But going forward there will be an outside monitor reporting to the FTC checking up on them.
As it stands, we believe there is substantial reason to doubt that Herbalife's most successful distributors will be able to honestly prove they have armies of Retail Customers.
  • It appears, given her standing instructions to an administrator, that Susan Peterson can't count on Retail Customers or her downline distributors' Retail Customers to come up with even 2,500 volume points a month; that's about 100 canisters of Formula 1.
  • The charitable donor described above, almost certainly a Founder's Circle or Chairman's Club member, not only relies on a charity to create "demand" for the products he or she purchases but appears to have used controlled downline member accounts to simulate even more demand.
  • Kim built a business that paid him $500,000 a month in commissions, yet his entire organization collapsed when the demand for qualification volume was pulled out from under the business by the delayed opening of the Korea market.
  • Chairman's Club member Doran Andry bought product with a retail value that is 10 to 20 times higher than the amount his business generated through product sales.
The problem for Herbalife's top distributors going forward is that fake demand or qualification buying won't count toward earning commission checks after May 2017. The FTC was quite clear that in order for product purchases to count toward commissions, the products must be sold in "Profitable Retail Sales." That means distributors must sell to real customers who pay full Retail Price or close to it and provide their names and contact information to the company. Volume that is donated or is part of a standing order, that ends up at a charity or in a storage locker won't count either.
Combine this with the fact that a deminimis amount of product is being sold to Discount Buyers, and Herbalife is going to have major problems clearing the FTC-imposed hurdle on paying commissions.
In this sense, Herbalife may be right to discourage top distributors from wasting their time taking calls from curious investors. The button may still say: "Earn what you're worth," but if Herbalife's top distributors are going to continue to get the same checks they received in the past, they need to find an awful lot of real Retail Customers and they need to find them soon.

Christine Richard (copyright 2016)