Bill Ackman decided to send a warning letter to Herbalife’s new head of compliance Pamela Jones Harbour. Here are some of the highlights from that letter.
As you know, Pershing Square has been a vocal critic of the Company. Based on our extensive investigation over the past three years, we believe Herbalife operates the largest and best-managed pyramid scheme in the world.
Consider what would happen if, in all meetings with potential recruits, the recruiters were required to remind the audience clearly of certain key facts, for example:
- 88% earn nothing from the Company;
- Most money goes to the top 1%;
- Members churn rapidly and leave the system;
- Most distributors suffer net losses after accounting for time and money spent;
- Herbalife does not track retail sales;
- Millions of recruits have come and gone in recent years.
Or, consider what would happen if the recruiters at Herbalife meetings were not permitted to show pictures of their mansions and cars, or if recruiters were not allowed to tell ‘income stories,’ as the Company calls the personal rags-to-riches tales that are shared with recruits.
We believe Herbalife is changing its practices not simply because of “negative publicity around HLF’s business model”, but because of genuine legal infirmities in its practices. Herbalife’s recent changes, however, are largely window-dressing – or worse, as they allow Herbalife and its top distributors to keep misleading consumers while claiming to clean up their practices.
Like all pyramid schemes, Herbalife depends for its survival on the constant recruitment of new participants, nearly two million per year at current rates. Herbalife and its senior distributors work closely together in developing “Business Methods” (Herbalife’s phrase) and marketing strategies to maximize recruitment in existing markets and to penetrate new markets where they can find new pools of potential recruits. In public filings, Herbalife touts its programs to monitor methods being used around the world and to propagate the most effective methods. Lead generation, Nutrition Club “training” programs, questionable “University” qualifications with “graduations” and “certifications,” and Wellness Coaching are just a few of the most successful Business Methods and marketing strategies that Herbalife and its senior distributors have developed and proliferated.
None of these methods are geared toward promoting true retail sales. If there were genuine retail demand for Herbalife products as branded consumer packaged goods, it is difficult to explain the enormous annual turn-over of both Supervisors and non-Supervisors and their pronounced lack of brand loyalty. Des Walsh has stated that customers leave because they ‘reach their goals,’ but one doesn’t reach a ‘goal’ when taking vitamins. Formula 1, according to Herbalife’s own Dr. David Heber, is supposedly effective for weight loss, weight gain and weight maintenance; on this basis, there is no reason ever to stop using it. Yet customers overwhelming flee within a short period. Moreover, to whatever limited extent there may be retail sales, the vast majority of distributors making retail sales are nonetheless losing money on a net basis after taking into account their time, expenses and opportunity costs. Only the very few who develop these Business Methods and marketing strategies, and place themselves at the top of a large downline, have any hope of succeeding with Herbalife. As years go by, the likelihood of scaling the heights of the pyramid grows more remote. Even in that tiny group of those who start to ascend, most fail. Yet they continue to promote an appearance of extraordinary financial success, even as some go through personal bankruptcy because of Herbalife—taking to the extreme Mark Hughes’ exhortation to “fake it ‘til you make it.” Of course, these senior distributors sit atop huge organizations of downline distributors, and it is the image (true or not) of their financial success that motivates existing distributors to continue investing time and money, and arms these top distributors with an essential deception that they use to lure new recruits into the scheme. Meanwhile, at the bottom, nearly two million people per year churn through the system.
Every day, new victims are sold on the “dream” of making substantial income working from home by selling protein shakes and diet powder to friends and family. The “dream” is an utter fantasy. The overwhelming majority of recruits lose thousands of dollars or more and drop out of the scheme rapidly. Millions of people have been fooled and have lost billions of dollars in the process.
– Source Letter To Pamela Jones Harbour