The Declaration of Stacie A. Bosley, Ph.D. was a key document in the FTC’s Complaint against Vemma Nutrition Company which alleged that Vemma was operating an illegal pyramid scheme. In my 1-Nov-2015 Seeking Alpha article I summarized the basic framework of the declaration and demonstrated how the key points also apply to Herbalife (HLF).
I have generated my own declaration (Part 1 of 6 below) to conclude that Herbalife is also a pyramid scheme by rewriting Dr. Bosley’s expert declaration with as few changes as possible. I recommend readers print the Declaration of Stacie A Bosley, Ph.D. and print my declaration and compare each paragraph side by side (viewing each declaration on two different computer screens also serves this purpose). The parallels are ominous.
Before I continue I need the acknowledge that I have relied heavily on the presentations of Pershing Square Capital Management. L.P. Without Pershing Square's work I would not have been able to generate the following declaration.
The Declaration of Stanley J. Holland
1. My name is Stanley J. Holland. I am not a pyramid scheme expert, but I play one on the internet.
Purpose and Materials
2. The purpose of this Declaration is to analyze the Herbalife program to determine whether it is a pyramid scheme.
Company Overview and Promotion
3. Herbalife offers people the opportunity to purchase and consume various nutrition, weight management, energy and fitness, and personal care products, and offers a business opportunity to people who seek to earn full or part-time income. Participants are categorized as “Member”, “Senior Consultant”, “Success Builder”, “Qualified Producer”, “Supervisor”, “World Team”, “Global Expansion Team”, “Millionaire Team”, “President’s Team”, “Chairman’s Club”, and Founder’s Circle”. Lowest level Members can only earn Volume Points. All other participants can also earn recruiting rewards, but the vast majority of recruiting rewards can only be earned after qualifying for Supervisor (Compensation Plan, discussed infra).
4. Herbalife CEO Michael O. Johnson presents the company as a solution to these tough economic times, as people around the world are seeking health, wellness, financial freedom and time freedom. CEO Michael O. Johnson states “Great product, great brand, incredible business opportunity, unlike anything that exists out there, because people can become millionaires at Herbalife” (Source: 2008 Investor Day transcript). Herbalife President Des Walsh states “Here is the reality. Our core training is for a new distributor who wants to build a business, if they talk to 10 customers today, 10 people a day about the products, the business opportunity. I have never spoken to any distributor who is doing that who is actively engaged who is not making money.” Chairman’s Club member Alan Lorenz states “What other business...without any limits whatsoever that you can get started, with no capital, working from home, part-time, this is it.” The Herbalife business opportunity is repeatedly presented as a way that ordinary people can achieve their financial goals with minimal start-up costs.
5. This paragraph deals with the magic of duplication. CEO Michael O. Johnson stated in a 2005 video that “recruiting...is the most vital part of our bloodstream.” John Tartol, a member of both the Board of Directors and the Founder’s Circle, states that “the name of the game is duplication...duplication, like I said, is so important here.” In an ABC News video (6:23), an Herbalife President’s Team member stated:
“The secret is to get five other people to do the same thing every month, and teach them to get 5 other people do the same thing every month. Before you know it, not only will you be a supervisor, but you’ll have 5 supervisors under you, who’ll have 5 supervisors underneath them, who’ll have 5 supervisors under them. That’s 155 supervisors. And if they’re each doing about 2000-2500 volume points a month, you are going to be making somewhere in the neighborhood of $42,000 a month….So, you don’t have to be some super salesman, you just have share the opportunity.”
Source: page 58 of Pershing Square's presentation Who Wants to be a Millionaire?
The 14th generation of 5x duplication exceeds the population of the world. At any given point in time the majority of the participants are in the last generation and when saturation is reached, the majority of participants are doomed to failure.
Club 100 also promotes a strategy of 5x duplication with each nutrition club operator purchasing at least 2500 volume points per month, and the trademarked Club 100 logo has 5 sided pentagon shape.
Source: page 129 from Pershing Square's presentation The Big Lie
6. In paragraph 6 of Dr. Bosley's declaration she states “While representations of Vemma’s system might vary slightly, the essential components include (1) purchase of initial product (typically an Affiliate Pack), (2) consistent monthly product purchases (typically an auto-delivery), and (3) recruitment of others to do the same.” Senior Herbalife distributors urge members to 1) get to Supervisor, and 2) recruit others to do the same. I agree with page 23 of the Pershing Square presentation Side-by-Side: A Comparison of Vemma and Herbalife which states “Differences between Vemma and Herbalife do not alter the fundamental reality that both systems incentivise distributors to focus their efforts on recruiting rather than making bona fide retail sales to customers outside the network.”
7. Similarly, the essential components of Club 100 include, after graduation from systemized training, 1) start a Nutrition Club, 2) grow consumptions to 25, 50, 75, 100, etc. per day, 3) duplicate.
Source: page 155 from Pershing Square's presentation The Big Lie
Herbalife CFO John DeSimone states “So it depends on the marketplace, but the clubs can vary from $5000 to $6000 to open to something greater than that.” Pershing Square estimates that graduation from the systemized training program costs approximately $3000 and states that the trainees are essentially conscripted consumers that go on tours of Nutrition Clubs that have at least 25 consumptions per day. PSCM also states that Club 100 requires that distributors place set volume point orders every month to back up that they have the claimed 25, 50, 75, or 100 consumptions going on daily at their club. Nutrition Clubs which fail to requalify as having ‘25 or More’ consumptions are taken off the tour list. Only clubs with ‘50 or More’ consumptions are allowed to conduct systemized training.
8. Chairman’s Club member Doran Andry states in this video (1:59) “All of you, if you you just dream you also too can have everything that we have and much more.” Founder’s Circle member Susan Peterson states in this video (1:25) “If you are not getting rich today in Herbalife, I’m just going to be honest, it's wrong. It's really wrong.” Page 24 of the Herbalife Sales and Marketing Plan quotes founder Mark Hughes “Your success is only limited by your own imagination and your hard work.” Chairman’s Club member Dan Waldron states in this video (5:21) “The only way anybody’s ever failed in Herbalife, and I’ve been around for over 20 years, is that they dropped out.” The central message: anyone can do it, stick to the simple system, and success is assured if you don't quit.
9. The Notion of “passive income” is a consistent selling point in Herbalife promotional materials. Such income is achieved when duplication results in significant downline teams, yielding continuing monthly income without further effort.
Source: slide 55 from Pershing Square's Who Wants to be a Millionaire?
10. Herbalife documents and videos suggest that the opportunity remains the same for any new member, regardless of economic conditions. After stating that he and his wife became members of the President’s Team in three years, an Herbalife newsletter quoted John Tartol as follows:
“Distributors can make it even faster today than we did,” says John. “There are so many more sales and marketing tools now and a support system everyone can plug into. We’re not only working for ourselves, but for the Company as a whole. When the team succeeds, there’s more for everyone!”
11 thru 13. Dr. Bosley used paragraphs 11 thru 13 to describe how Vemma targeted young adults. I will just refer to pages 31-49 of Pershing Square's presentation The Big Lie to show how Herbalife commits affinity fraud.
14. Company promotional materials devote some attention to product attributes, but do not emphasize sales to ultimate users as a source of compensation and do not typically provide training or support specifically aimed at sales to ultimate users. The product discussions contained in the presentations appear to be primarily designed to lend credibility to the business opportunity being offered.
15. In sum, it is clear from my review of Herbalife’s promotional materials that Herbalife is primarily promoting a business opportunity that can supposedly generate substantial, even life-changing income. The business opportunity is presented as a way to capitalize on social networks and word-of-mouth advertising to promote the product, the emphasis is almost exclusively on promotion of the business opportunity and income potential rather than the product itself. It is also clear that Herbalife emphasizes recruitment of downline distributors as the primary method of obtaining substantial income, rather than retail sales of the product. As will be discussed in the Compensation Plan analysis, the compensation plan strongly incentivizes recruitment and provides few incentives for a distributor to make sales to ultimate users.
Scope of Assignment and Conceptual Framework
paragraphs 16 thru 20 - boilerplate - copy from Dr. Bosley's declaration & replace “Vemma” with “Herbalife”
Continue to Part 2 of 6