A Defense of Bill Ackman

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Vikram Bath

Vikram Bath is the pseudonym of a former business school professor living in the United States with his wife, daughter, and dog. (Dog pictured.) His current interests include amateur philosophy of science, business, and economics. Tweet at him at @vikrambath1.

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  1. Avatar NewDealer
    Ignored
    says:

    I heard about this fight at least twice on NPR’s Planet Money.

    In general, I agree with you that Bill Ackman has a right to do what he is doing especially if he believes in good faith that the company in question are fraudsters and flim flam artists. If he is just saying that as pretext so is short succeeds, that is another issue and probably unethical.

    My issue with financial stuff like this and various other firm beliefs of “creative destruction” is as a squishy liberals who worries about the jobs that get destroyed when companies go under because of short selling. Maybe herbalife is a fraud and they seem to be but others are probably just nice and normal companies that are going about their business and filled with everyday people who just want to bring home a decent paycheck and support their families and themselves. When companies are destroyed because of these tactics, real people suffer, and handful get very rich if the short is successful. I am not sure why it is good for a hedge fund or investment company to generate lots of wealth for their investors while lots of admin assistants and others get laid off when a short-selled company goes belly up.

    What is wrong with an economic model that promotes reasonable growth but also a steady economy? I get that there will always be boom and bust cycles from time to time and speculation is part of human nature but it seems to me that this can be tempered in ways that does not cause mass misery from time to time. All of San Francisco is in a tech bubble mania and many companies including twitter and Sales Force have not made profits yet. Maybe they will one day and all will be good but the liberal in me does not like this new gilded age or a small handful of people having vast control over the fate of entire companies.Report

    • Avatar Kim in reply to NewDealer
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      says:

      Reasonable growth is 1%, maybe 2%.
      Do you really want that?Report

      • Avatar NewDealer in reply to Kim
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        says:

        I want something where ordinary people do not go through needless suffering because of the business decisions of others while the Wall Streets show no remorse and party on. I want a society that does not moralize against people who need a social safety net as moochers and says stupid platitudes about how people can’t dream when they are on welfare/food stamps.Report

      • Avatar Kim in reply to Kim
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        says:

        ND,
        The middle class is dying. I think if we could fix that, the rest of the ship would right itself.Report

    • Avatar Mo in reply to NewDealer
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      says:

      “What is wrong with an economic model that promotes reasonable growth but also a steady economy?”

      It doesn’t exist.Report

    • Avatar j r in reply to NewDealer
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      says:

      The problem is that you are ignoring the counterfactual. In the absence of short sellers, what does the market look like? If there were no short sellers, there would be less to check the irrational exuberance that often takes hold of markets. And when that happens, there is an incentive for companies to resort to all sorts of corporate finance shenanigans that make for great quarterly numbers but terrible long term prospects (see Enron).

      So, every once in a while, short selling brings down a company that might have otherwise made it, but it may also save lots of companies from the type of behavior that would eventually bring them down.Report

      • Avatar NewDealer in reply to j r
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        says:

        Fair PointReport

      • Avatar Mo in reply to j r
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        says:

        @j-r Not to mention, there is no direct mechanism by which the short seller can take down a company. Basically the only weapon is PR. If the stock price goes down, it has no effect on the coffers. If the business is good and still has a positive cash flow, the company could go from $100 stock price to $1 and no one, except the shareholders would be the wiser.Report

      • Avatar Kim in reply to j r
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        says:

        That toycompany that was shipping lead painted toys is still in business, aint’ it?

        Also, I completely cosign your entire argument, and am still furious at the government for banning shortselling of “financial stocks” [yes, this was temporary. STILL]Report

      • Avatar Kim in reply to j r
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        says:

        Mo,
        that’s probably not the case if the company has outstanding debt…Report

      • Avatar zic in reply to j r
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        says:

        The problem isn’t that he’s shorting the stock, however. That he’s shorting the stock is supposed to be the signal to the market that there’s a problem.

        That didn’t work.

        So he’s trying to use the regulatory structure to make his gamble on the short pay off. That’s the problem.

        If he just shorted, and watched to see if the market & regulators responded, that would be no problem. But he shorted, and then started a rumor campaign. And while the basis of that campaign might be true here, the concern is that it won’t be true for the next company; it creates a sorta, “Hey, nice place you got here, hate to see anything bad happen to it,” set of incentives to profit that detract from real value, not add value by finding and revealing flaws.Report

      • Avatar Dave in reply to j r
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        says:

        Not to mention, there is no direct mechanism by which the short seller can take down a company. Basically the only weapon is PR. If the stock price goes down, it has no effect on the coffers. If the business is good and still has a positive cash flow, the company could go from $100 stock price to $1 and no one, except the shareholders would be the wiser.

        I think it’s a little more complicated than this. In some markets, a consequence of something like this happening would be having a very hard time getting short-term credit.

        Companies in that position in 2008 would have hit a cash crunch because they would have lost access to short-term capital, which would have forced them to hoard cash. People were very afraid of this because it could have triggered technical defaults on bonds and caused all sorts of distress in the CDS markets.

        It all depends on the general conditions in the capital markets though.Report

      • Avatar Vikram Bath in reply to j r
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        says:

        he’s trying to use the regulatory structure to make his gamble on the short pay off. That’s the problem.

        If he believes that they have broken laws, is it still a problem?

        he shorted, and then started a rumor campaign. And while the basis of that campaign might be true here, the concern is that it won’t be true for the next company; it creates a sorta, “Hey, nice place you got here, hate to see anything bad happen to it,” set of incentives to profit that detract from real value, not add value by finding and revealing flaws.

        I acknowledge this risk–though companies that really have nothing to hide should be able to shrug such pressure off. An example also involving Ackman would be when he tried to pressure Target to do a sale-leaseback on its stores. He made his case, and management made its case, and management won (as I believe I was the right decision for the company).

        So, we do incur some small risk that an otherwise healthy company might be targeted–though they shouldn’t be too affected if they are patient. To compensate for this risk, we gain access to narratives about companies other than the ones the companies themselves want to sell to us. To me, that is a very easy bargain to make.Report

      • Avatar Mo in reply to j r
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        says:

        @kim Outstanding debt doesn’t matter because the company still pays the rate on the bond. There may be an effect on future debt issuance, but only if they can’t convince debt markets they can keep the FCF going.Report

      • Avatar Mo in reply to j r
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        says:

        @zic So he’s trying to use the regulatory structure to make his gamble on the short pay off. That’s the problem.

        If he just shorted, and watched to see if the market & regulators responded, that would be no problem. But he shorted, and then started a rumor campaign. And while the basis of that campaign might be true here, the concern is that it won’t be true for the next company; it creates a sorta, “Hey, nice place you got here, hate to see anything bad happen to it,” set of incentives to profit that detract from real value, not add value by finding and revealing flaws.

        But people that are long a stock do this all the time without the same amount of complaints.Report

      • Avatar Kim in reply to j r
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        says:

        Mo,
        see what dave’s saying. Companies are constantly floating new short term credit.Report

    • Avatar Vikram Bath in reply to NewDealer
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      says:

      If he is just saying that as pretext so is short succeeds, that is another issue and probably unethical.

      I agree. I’ve been following Ackman over a period of time and am willing to issue my judgment that he genuinely believes Herbalife to be a company that takes advantage of its distributors and in fact makes more money off its distributors than real end customers. I don’t know whether that is in fact true of the company or not, but I believe Ackman thinks it is.

      My issue with financial stuff like this and various other firm beliefs of “creative destruction” is as a squishy liberals who worries about the jobs that get destroyed when companies go under because of short selling.

      Companies can be harassed by short-sellers. Patrick Byrne, CEO of Overstock.com, makes a really good case that he was so targeted. I am, however, highly suspicious of the claims that businesses actually go under due to short-selling. The business itself is supposed to make money by providing goods and services to customers, not by pushing up its stock price. If it is indeed making money off the latter, that is probably more reason to want short-sellers to get involved and expose the company.

      Please note, however, that I am only really defending short-selling in particular. If you extend “financial stuff like this” to include things like leveraged buyouts, then I think there is a stronger case to be made that companies that would have otherwise have been healthy are put at risk.Report

      • Avatar Kim in reply to Vikram Bath
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        says:

        So we should do what with insurance companies, again?
        (Insurance companies are basically big walking moneypits,
        whose worth as an insurance company is based on how much
        money they have at any given point).Report

    • Avatar Mad Rocket Scientist in reply to NewDealer
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      says:

      Real people suffer? So only imaginary people, or maybe fake people, get rich? How does that work?

      In all seriousness, you are being a bit of a squishy liberal. First off, the only companies that can be shorted are those that have issued stock, so these aren’t mom & pop stores or small businesses. Second, if they fail because some fund manager waged a campaign against them, they weren’t very secure to begin with & they are probably wasting money & other resources. Finally, situations like this are exactly why liberals push a robust safety net, so “real people” can survive such events.

      Personally, I’d much rather have a more robust safety net for “real people” (including retraining & relocation assistance for those who are unemployed because a company folds) than any kind of corporate welfare or protection.Report

      • Avatar Don Zeko in reply to Mad Rocket Scientist
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        says:

        I agree wholeheartedly. If, in fact, Herbalife is basically a Ponzi scheme, then bringing it down is exactly the sort of creative destruction that even fairly die hard liberals ought to embrace. If that causes problems with unemployment of the former employees, that’s because we have crappy macroeconomic policies and a threadbare safety net, and the way to solve those problems is absolutely not to keep crappy companies afloat.Report

    • Avatar James K in reply to NewDealer
      Ignored
      says:

      @newdealer

      My issue with financial stuff like this and various other firm beliefs of “creative destruction” is as a squishy liberals who worries about the jobs that get destroyed when companies go under because of short selling.

      There’s two points I would make to explain the importance of short selling and creative destruction.

      1) Short sellers are no more the cause of business failure than migratory birds are the cause of the seasons. A short sale is a prediction of business failure, not the cause of business failure. If short selling didn’t exist, businesses would still fail, it would just come as a bigger surprise to everyone.

      2) Creative destruction exists because capital markets are an epistemic device. Like the Scientific Method, markets are based on the Enlightenment idea that the only way to determine whether a belief is true is to expose the belief to reality. Every business is an experiment designed to test the hypothesis that some product or business method will better meet the desires of the general public. Each of these experiments consumes resources – both capital and labour. People employed in a failed experiment can’t be hired by the next set of experimenters. All systems trend to failure over time, and that means failures will accumulate unless they are regularly weeded out. A society that inhibits creative destruction becomes sclerotic, new innovation is blocked and business become complacent, inefficient and stagnant. The idea of economic growth without creative destruction is like believing you can understand the universe through pure reason – an elegant idea that utterly fails in practice.

      That’s not to say creative destruction doesn’t have a real human cost, and that shouldn’t minimised. Too many market proponents overlook this downside as sadly it is human nature to deny that policies you agree with have nay downsides (just as it hard to admit that policies you dislike have nay good points).

      This is why I think the best way to deal with this issue is to focus on supporting the people who would suffer, both through social safety nets and through building support mechanisms that don’t assume perpetual job security (this is part of the reason why employer-provided pensions and health insurance are such terrible ideas). Let the compensate die, but help the people live on.Report

      • Avatar J@m3z Aitch in reply to James K
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        says:

        All systems trend to failure over time, and that means failures will accumulate unless they are regularly weeded out. A society that inhibits creative destruction becomes sclerotic, new innovation is blocked and business become complacent, inefficient and stagnant.

        Three add-on points:
        1. This is the theme (as no doubt JK knows) of Mancur Olson’s The Rise and Decline of Nations. Olson’s argument might be a little over-stated, but it’s got a solid foundation.

        2. This is part of the theory that underlies my argument for an anti-rent amendment. I worry about corporate-government coziness leading to the sclerosis James is concerned about. It’s not at all impossible that such sclerosis is part–not all, but part–of our current economic malaise.

        3. This is an area where markets–properly functioning competitive markets–have an important advantage over government. Because to some extent organizations are organizations are organizations, they share firms’ tendency toward bloat and stagnation–not because they’re government agencies, but because they’re organizations. But lacking the competition found in competitive markets, they face less pressure to reform (Congressional oversight is good, but it’s not remotely as effective at stimulating change as a negative bottom line), and the need (whether real or only perceived) need for the agency, and lack of competitors to replace it, means the bad ones only rarely fail and disappear to be replaced by better ones.

        That latter point is why I’m a supporter of governments contracting out work, not as a libertarian fever-dream of eliminating government or shrinking it until it’s small enough to drown in the bathtub, but as a more effective means of keeping it efficient and effective than elections are. A key concept here is that when we need government to “do” something, what we really need is for government to provide for it, to make it happen, and not so much that government needs to actually produce it. Of course the bidding for contracts needs to be open and legitimate, and government agencies need to be able to bid as well. There are cases of government agencies losing an operation to an outside competitor when a city decides to contract out, then when the contract expires and the task is put out to bid again, winning it back by presenting a better offer.

        Governments are not market organizations, and probably should not be (Nozick aside), but there are certain aspects of government that can benefit from market competition.Report

      • Avatar NewDealer in reply to James K
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        says:

        @james-k

        401(K)s and other non employer provided pensions have horrible records in the US and basically never beat the market but do help the companies that make them earn huge fees

        http://www.npr.org/templates/story/story.php?storyId=104784014Report

      • Avatar Kim in reply to James K
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        says:

        ND,
        401K’s are a ridiculous scam, based on people not understanding what “taxed later” really means.
        You’re much better off using a roth and having control of your money.
        I’d be much more pleased if 401ks would let you short.Report

      • Avatar Kim in reply to James K
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        says:

        James,
        Perhaps not on a federal level, but different ideologies and solutions do compete in government. I wish we were better about “spreading good news” and retesting things that worked. But it does happen. And there are places (like Minnesota) where a significant amount of innovation does happen in government.Report

      • Avatar j r in reply to James K
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        says:

        It really depends on the 401(k). My employer, the federal government, matches my contribution up to 5%, so 5% put in my TSP is better than 5% in a Roth IRA because it’s getting matched. And when it comes to retirement savings, capital accumulation probably matters more than interest.

        Also, whether or not the 401(k) plan offers no fee funds matters a lot. If you have matching and a no-fee option, there is really no reason not to put money in your 401(k).Report

      • Avatar Kim in reply to James K
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        says:

        jr,
        Does your plan come with vesting? Because most do, and if you don’t think you’ll be there X number of years, even the matching isn’t a good thing.Report

      • Avatar Troublesome Frog in reply to James K
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        says:

        Also, whether or not the 401(k) plan offers no fee funds matters a lot. If you have matching and a no-fee option, there is really no reason not to put money in your 401(k).

        This is why I’m very skeptical of the 401(k). The government gives me a tax incentive to lock my money into a long-term relationship with a fund provider whose fees tend to be high relative to the market as a whole. I look at the numbers and find that it’s still the best possible decision, even accounting for the fees and do it. It would be easier for the feds just to cut a giant check directly to fund managers than to set up such a Rube Goldberg way of making it happen.

        The way we encourage (or pretend to encourage) retirement saving in this country is truly strange.Report

      • Avatar Kim in reply to James K
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        says:

        tf,
        most people’s retirement savings bank is called “their house”Report

      • Avatar James K in reply to James K
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        says:

        @newdealer

        401(K)s and other non employer provided pensions have horrible records in the US and basically never beat the market but do help the companies that make them earn huge fees

        I’m not surprised that they don’t beat the market, since no-one does (yeah there’s Buffet, but he’s doing more than just investing). As for the high fees, this strikes me as a problem with the way the programme is implemented. Actively-traded funds have poor track records and high fees (since you have to pay the people who decide what securities to buy and sell), but tend to be popular with everyone who hasn’t read the research on their effectiveness. If passively-traded funds (which track a market index instead of trying to beat it through cunning investment) were promoted instead (this is an area where I think some nudging might be appropriate), I think you’d see a very different result.

        Also, the returns of employer-provided pensions belie the risk. If your company goes bust you lose not only your primary income but your health insurance and your retirement savings. That’s a lot of eggs to put in one basket, and it flies in the face of one of the fundamental rules of prudent investment – diversify your risk.Report

      • Avatar Kim in reply to James K
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        says:

        James K,
        WTF? I’m pretty sure harvard beats the market most years. Most “highly paid” hedge funds do manage to beat the market or they don’t stay in business. These are folks where an 8% year is considered average, and 10% isn’t out of line.

        Are these folks thieves and worse? Yup. But hell, you wanted to get rich, AND impoverish small countries, didn’tcha?Report

      • Avatar James K in reply to James K
        Ignored
        says:

        @kim

        Beating the market requires making persistently higher returns for equivalent risk. It’s easy to make high returns by taking high risk, but doing so exposes you to the possibility of catastrophic reversals.Report

      • Avatar Vikram Bath in reply to James K
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        says:

        It’s easy to make high returns by taking high risk

        This is what the theory says, but I dispute whether this is actually “easy” in practice.Report

  2. Avatar Will Truman
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    says:

    Doh! Now I have a post to rewrite.Report

  3. Avatar Dave
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    says:

    For the benefit of those that may not fully grasp short selling…

    Unacknowledged Fact #3 – Short sellers are taking on far more risk than long investors.

    Short sellers “borrow” shares to sell with the intention on buying them back. A short seller’s maximum gain is effectively the price paid for the share. Theoretically, the maximum loss is infinite. If I short a stock at $50, the most I have to gain is $50 (transaction costs excluded). If the price increases to $1000 overnight and I have to buy back that share at the new market price of $1,000, I’m out $950.Report

  4. Avatar Dave
    Ignored
    says:

    Should Ackman not speak out against a business he seems to genuinely believe is taking advantage of people?

    If I recall, in early 2008, David Einhorn did exactly this when he criticized the senior management of Lehman Brothers.Report

  5. Avatar j r
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    says:

    That is a funny article. Hedge fund vs Herbalife is a pretty interesting story and one with lots of wrinkles. Too bat the Times chose the “hedge fund billionaire attempts to leverage political power” angle. It really might be the least interesting way to view this story. Of course, it fits in with a larger established narrative.

    The article goes a little into how Herbalife works, but stops short of coming out and mentioning that it’s a multi-level marketing operation. Here’s how it first describes Herbalife:

    a company that sells vitamins and other health supplements through independent distributors, many of whom are lower-income Latinos or African-Americans.

    Get it? Wall Street billionaire squashing the hopes and dreams of poor folk. The article does go on to imply that the Herbalife business model might be more about churning members than selling a product, but it buries that information well towards the end of the article.

    This is pretty much par for the course at the NY Times.Report

    • Avatar Dave in reply to j r
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      says:

      I wouldn’t wipe my ass with the business section of the Times. It’s worthless.Report

      • Avatar j r in reply to Dave
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        says:

        Thanks for the visual.Report

      • Avatar zic in reply to Dave
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        says:

        Actually, isn’t this a party plan model? Seems to me the problem with herbalife might be FDA.
        https://www.youtube.com/watch?v=atak-S80g4c

        I not defending herbalife; I suspect there problem is using direct selling to get around regs from FDA concerning health supplements that make medical claims. But the whole industry is weird; vitamin/supplement/performance enhancers are weird. And right now, herbal remedies are weird; overly regulated on the one hand, and subject to claims that 1) don’t have backing clinical research and 2) fail to consider placebo effects, which is the rainbow magic pony of health care.Report

      • Avatar Dave in reply to Dave
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        says:

        I’m not sure if it is that zic. I have a friend on FB that is a Herbal Life rep and I’m not aware of anything like that (I suppose it could happen).

        But the whole industry is weird; vitamin/supplement/performance enhancers are weird. And right now, herbal remedies are weird; overly regulated on the one hand, and subject to claims that 1) don’t have backing clinical research and 2) fail to consider placebo effects, which is the rainbow magic pony of health care.

        I have a half-written draft post about the supplements market. I was going to publish it after another one of those never-ending OT discussions involving markets and regulation (the ones that are so abstract they put me to sleep).

        That market is a mess. In my opinion, it’s under-regulated, but supporters of supplements have such animus towards the pharmaceutical companies that they see any regulation of their products as working in favor of Big Pharma. In a way, it’s irrational.

        I don’t care about fish oil, but I am concerned about the way that sports supplements are manufactured and marketed. The claims are bullshit and if you’re dealing with certain categories like pre-workout supplements, you have no idea what you’re putting in your body. Last year, a pre-workout sup was pulled from the market after it was discovered it had a compound similar in composition to methamphetamines. Oops.

        Several years ago, dozens of products were pulled from the shelves after it was discovered they were spiked with steroids. Oops again.

        A lot of the weight loss supplements sold at a GNC or Vitamin Shoppe are geared towards body builders when they’re cutting (i.e. OxyElite Pro). These aren’t designed for people that are not in shape and looking to lose weight. They can cause all sorts of havoc on people that don’t have the bodies to withstand the stress they will put on them.

        Not that I have any personal experience with sexual supplements for men, but having read the list of banned supplements, it seems that the manufacturers tend to add chemicals used to treat erectile dysfunction and not disclose it. Of course, if you’re taking certain kinds of medication (nitrates) and aren’t aware of this, this could kill a man.

        Fun stuff.Report

      • Avatar j r in reply to Dave
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        says:

        From that Wikipedia page:

        “Direct selling through the party plan typically uses multi-level marketing (salesperson is paid for selling and for sales made by people he recruits or sponsors) rather than single-level marketing (salesperson is paid only for the sales he makes himself)”

        Generally, there are two kinds of multi-level marketing companies. Companies where the underlying product is actually marketable and where someone could make decent money just from selling it. Mary Kay, Avon, Pure Romance are all companies where it seems that people actually buy the products. There are others, however, where the product is crap and the only way to make money is to keep bringing in members underneath you.

        I don’t know enough about Herbalife to say which category it is in.

        I admit that I don’t know enoughReport

      • Avatar Kim in reply to Dave
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        says:

        Dave,
        oh, boy. you would FLIP if you knew what some folks can sneak through the FDA’s “inert ingredients.”
        [no, there will be no sources cited for this one. I may be chatty, but i’m not insane.]Report

      • Avatar zic in reply to Dave
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        says:

        @dave it gets into weird stuff like herbal remedies (I grow herbal remedies in my herb garden) and dosage requirements and if I want to drink a tea out of Chaga (my preferred herbal treatment), I don’t much give a fig what the FDA says; I collect my own, and don’t hesitate to give it to others. But I’m allergic to many of the compounds used in anti-inflammatory drugs like Ibuprofen (the binders in pills), and have a lot of structural injury that causes chronic pain and migraine; chaga works for me, it was recommended to me by my doctor. There’s no dosing standards whatsoever, though in Japan, they’re developing standards as a companion treatment to chemo because of its immune-boosting properties.

        So in some ways, I’m totally with the hippies.

        But I seriously have my doubts about most vitamin supplements (in part because I couldn’t take them, including neonatal vitamins, due to that allergy to binders), or anything ‘macrobiotic’ that is so diluted it’s in parts-per-billion, like the dry martini that you wave the vermouth over. And I’m really aghast to the whole super-food-as-medicine-in-a-shake thing. Eat food, not too much, mostly vegetables; shop the edges of the store. It’s not medicine, it’s the sustenance of life and soul.

        So I hope you do write that post. Because it is weird.Report

      • Avatar Kim in reply to Dave
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        says:

        zic,
        Oh, god. I found some tea at work. had some odd ingredient in it. I bring it home, show it to a friend. “What the hell is this?” Well, he looks at it and says, “It’s used for mixing poisons. I’m not sure why it’s in this tea.”

        Not dead yet.Report

      • Avatar zic in reply to Dave
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        says:

        @kim this becomes a really big deal when you start to integrate Chinese and Indian medicine into American health care regulations, too.

        it’s a huge can of worms.Report

      • Avatar Kim in reply to Dave
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        says:

        zic,
        I can only suppose its worse when your doctor can mix up date rape drugs for you.
        (also, that such things are probably not labeled terribly well — not that ambien has half the warning labels it needs…).Report

      • Avatar Dave in reply to Dave
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        says:

        @j-r

        Don’t mention it. First one’s free.Report

      • Avatar Dave in reply to Dave
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        says:

        @j-r

        Generally, there are two kinds of multi-level marketing companies. Companies where the underlying product is actually marketable and where someone could make decent money just from selling it. Mary Kay, Avon, Pure Romance are all companies where it seems that people actually buy the products. There are others, however, where the product is crap and the only way to make money is to keep bringing in members underneath you.

        The issue I see with this company is that while the products are marketable (and some of them are quite good), ones that I’ve priced are substantially more expensive than the comparable products that one can purchase at a GNC or a Vitamin Shoppe. I’d have to check prices but we’re not talking about a difference in price of 10% to 20% but rather 75% to over 100% in some cases.

        I don’t think there’s enough of a quality difference to justify the price for the typical fitness enthusiast/body builder/gym rat, etc. However, their products are good for professional athletes because they have a good reputation for being clear of banned substances. You can end up buying something at Vitamin Shoppe and have no idea what’s in it. For pro athletes that get paid to stay clean, that’s important.Report

    • Avatar Will Truman in reply to j r
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      says:

      JR, that’s really interesting. I thought that the article conveyed the Ponzi aspect of Herbalife adequately. As in, I didn’t know that Herbalife had that business model before reading the article, but knew that it did after reading it. Following your quote, it mentions what Herbalife says that it’s not doing, which I immediately took to mean that’s what its critics say that it is doing.Report

      • Avatar j r in reply to Will Truman
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        says:

        I think the part that does allude to it is buried at the end. Also, were you familiar with mutli-level marketing companies before you read it?

        If you weren’t and you read that article, would you have picked up on it?Report

      • Avatar Will Truman in reply to Will Truman
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        says:

        It’s the seventh paragraph. Not the lede, but not entirely buried (IMHO).

        I did know what multi-level marketing means. I suspect most people know what a “pyramid scheme” is or at least have an idea. And the article mentions that they’re accused of being one.Report

      • Avatar Vikram Bath in reply to Will Truman
        Ignored
        says:

        The article does not refer to it as multi-level marketing. I think using the term might have come across as passing judgment, and the piece was intended to be an attack on Ackman, so I think they felt the less they said about Herbalife the better.Report

      • Avatar j r in reply to Will Truman
        Ignored
        says:

        There’s no passing judgment. Multi-level marketing is a positive description of the practice of reimbursing distributors for both sales and recruiting new members. Herbalife uses multi-level marketing. That is a factually correct claim.

        The fact that the times didn’t want to muddy their narrative by reporting this just proves my point.Report

      • Avatar zic in reply to Will Truman
        Ignored
        says:

        It’s what they do, @will-truman — their like tupperware, only not so squeaky clean. The shadow medical system.Report

      • Avatar Will Truman in reply to Will Truman
        Ignored
        says:

        @zic I know it’s what they do (and I think @j-r is right that they should have flat-out said multi-level marketing), the question being whether or not their enterprise is built on their product (like Tupperware or some ecigarette brands) or whether it’s built on the layers (a pyramid scheme, basically) in a way that the participants/sub-distributors are clearly being scammed.Report

  6. Avatar Kim
    Ignored
    says:

    Vikram,
    Spurious question I ask in the hopes that you might know an answer:
    Do indian physicians (and herbalists) take the hypocratic oath?Report

  7. Avatar Tod Kelly
    Ignored
    says:

    I’m going to push back on this a little.

    It seems to me that there are a number of things we collectively agree on in a capitalistic and democratic society. For example we agree that sometimes companies will go out of business because a rival successfully competed for their customers. Or, we agree that in the interest of the public good, sometimes government oversight and intervention may be necessary with privately held businesses, and that this might be detrimental to individual businesses out there.

    I’m not sure we’ve agreed that it’s ok to for the government to drive a company with employees and shareholders out of business merely because someone with enough capital has made a “bet” that they would fail, and stands to make a lot of money from that happening.

    From my examples above, there is a social good that comes from one competitor driving another out of business: better and/or cheaper products and services. There’s also a potential social good that comes from government oversight: a lessening of corporate malfeasance.

    What is the social good of allowing very rich people to become more rich by using the government to help force businesses they are not competing against to go belly up? It seems a relevant question, because there is a lot of social bad: greater unemployment, less production of goods and services, less choice in the market place. What is it we get for this trade? And unlike the stuff that happens in the “free market,” it seems like when the government is used as a tool to make an individual more wealthy at the end of the day than he was at the start, there has to be a compelling reason that it is for the social good.

    I know they are (somewhat) different things, but I can’t help but recall that we’re just getting out of a rather substantial financial crisis that was caused to a great degree by a few people getting the government to intervene on the behalf of their financial instruments without any regard to the trade offs they were making at the time.Report

    • Avatar Will Truman in reply to Tod Kelly
      Ignored
      says:

      This was my response, more or less. It’s hard for me to appraise this situation without a feeling of “it stinks” though I could have been lead to that conclusion precisely by the article that wanted to lead me there. There is an argument for going against Herbalife and perhaps Ackman really thinks that the company will (hence his bet) and should (hence his lobbying) go down.

      My now-aborted (I think) post actually looked at this mostly from a campaign finance perspective. Mostly that I just don’t think anything can really be done about it. He has a right to speak and lobby his mind, and he has a right to make investments, and I’m at a loss as to how we might disentangle the two.

      That was all predicated on looking at the situation as a problem. Which appears to be strongly contested.Report

    • Avatar Dave in reply to Tod Kelly
      Ignored
      says:

      I’m not sure we’ve agreed that it’s ok to for the government to drive a company with employees and shareholders out of business merely because someone with enough capital has made a “bet” that they would fail, and stands to make a lot of money from that happening.

      Ackman bet on the failure based on the belief that the company was operating a Ponzi scheme. This goes far beyond a short position on the basis that the company’s stock is too high and into the possibility of illegal activity. If it is indeed a Ponzi scheme, Ackman’s actions would also prevent more people from being sucked into it and would prevent people in it to get themselves further into it. Yes, he stands to make a lot of money if this happens, but if it’s allowed to continue and it’s genuinely a fraud (I don’t know one way or the other), there will be no small number of victims.

      As Will mentioned, it stinks, but the alternative is worse. Should we allow something that may be a fraud to continue simply because the person making the biggest stink about this stands to make a lot of money? That doesn’t make much sense to me.Report

      • Avatar Tod Kelly in reply to Dave
        Ignored
        says:

        I’ll answer both you and Vikram here on this point.

        Herbalife may, or may not, be a “bad” company. I would argue that this is irrelevant, especially in an era of electronic media and PR. I mean, the Koch brothers were able to convince an entire political party that telling kids to stay in school was a signaling that we were enter in the Fourth Reich.

        In every professional instance I am aware, Conflict of Interest is taken seriously as a corruption of morals and good practice in and of itself, precisely because it’s too easy to talk yourself (or others) into “I only have the best intentions at heart.”

        If Herbalife has an immoral or illegal business practice, than let it stand or fall without the specter of COI muddying the waters.Report

      • Avatar Stillwater in reply to Dave
        Ignored
        says:

        If Herbalife has an immoral or illegal business practice, than let it stand or fall without the specter of COI muddying the waters.

        Exactly. Two different issues. What’s weird about a lot of the comments on this thread is that defenders of Ackman/critics of Herbalife are accusing other people (eg, the NYT among others) of failing to present the negative case against Herbalife as if that information is relevant in determining the COI issue, even as they apparently continue to think it is. That is, given that Herbalife is a sham, Ackman is entirely justified in trying to destroy it.

        Whether or not what Ackman is doing constitutes COI or not – and I think lots of his defenders are saying it doesn’t, it’s just markets WAI – is really a separate issue, it seems to me. An interesting one, but one that doesn’t require forming a view about Herbalife’s actual business model to be argued one way or the other.Report

      • Avatar Vikram Bath in reply to Dave
        Ignored
        says:

        Herbalife may, or may not, be a “bad” company. I would argue that this is irrelevant, especially in an era of electronic media and PR.

        I think you believe this because it’s true within your world of the media. It is very much relevant if you are someone looking to become a vitamin distributor. My guess is that the client base for Herbalife is not really keeping track of which hedge funds are long and short the stock and for what reasons.

        As I mentioned elsewhere, if it were all about media and PR, Walmart would already be out of business.

        In every professional instance I am aware, Conflict of Interest is taken seriously as a corruption of morals and good practice in and of itself…

        True. But then why only object to conflicts of interest when it is the short sellers saying something? Why not object every time someone promotes a stock he owns? Why not object when politicians visit factories and give speeches about what great work they are doing there?Report

      • Avatar j r in reply to Dave
        Ignored
        says:

        Cosign @vikram-bath. Conflict of interest has a somewhat different meaning in the world of financial services. And generally, conflicts of interest are fine so long as the parties involved fully disclose those conflicts and that there’s nothing else illegal or unethical involved.

        Investors and asset managers don’t really have any obligation to what you might call the public interest. Asset managers have an obligation to follow the laws, faithfully represent their clients, and uphold the integrity of capital markets. If Herbalife’s market capitalization is based on smoke and mirrors and unsustainable business practices, then Ackerman is doing nothing wrong and is, in fact, supporting the integrity of capital markets. Therefore, the issue of whether or not Herbalife is a fraud or not is definitely relevant.

        I will add that this is all based on my amateur understanding of these things. Any securities lawyers or CFA charterholders ought to have a more informed view.Report

      • Avatar Vikram Bath in reply to Dave
        Ignored
        says:

        generally, conflicts of interest are fine so long as the parties involved fully disclose those conflicts and that there’s nothing else illegal or unethical involved.

        I’m not a charterholder, but I’ve reviewed their rules. This is not correct as a general principle, but it *is* correct with respect to public statements, like the ones Ackman is being criticized for making in the article. Every time he talks to someone about Herbalife, he should say that he has a short position in the stock. (And actually, I would have done the same in this post if I were either a shareholder or short the stock.)

        Part of the reason such speech even in the presence of a conflict of interest is allowed is that it would be a very onerous requirement if you could never say anything about a company you are a shareholder of. It’s inescapable that the people who are most knowledgable and most likely to have something valuable to say all have conflicts of interest. Additionally, remember that management has a conflict of interest (they are both shareholders and are paid by the company), but they are the primary way that we can hope to get information about the company.Report

    • Avatar Vikram Bath in reply to Tod Kelly
      Ignored
      says:

      I’m not sure we’ve agreed that it’s ok to for the government to drive a company with employees and shareholders out of business merely because someone with enough capital has made a “bet” that they would fail, and stands to make a lot of money from that happening.

      If a company were to fail merely because of a hedge fund manager’s accusations, that would be bad. But I don’t think that is going to happen in this case and it will rarely happen in any case. Herbalife will suffer if and only if the investigations find wrongdoing, if victims are found, and if the company’s business proves unsustainable for reasons unrelated to the actual stock. Those all belong in the first category of “good reasons for companies to fail”.

      There’s also a potential social good that comes from government oversight: a lessening of corporate malfeasance.

      It is generally acknowledged that the SEC doesn’t have enough resources to do all the investigations that might turn up something. Having short-sellers do research and highlight it for regulators is a way around this problem and tends to lessen malfeasance. It’s notable that the discoveries with respect to Enron and Lehman were the result of short-sellers publicizing their findings through the media, not of regulators regulating.

      What is the social good of allowing very rich people to become more rich by using the government to help force businesses they are not competing against to go belly up?

      Every Enron soaks up capital that could be deployed by some other company to do something valuable. If Herbalife isn’t creating value for its customers and distributors, it would definitely be a social good for them to go out of business. Yes, it does have the byproduct of making Bill Ackman even more rich, but its still benefits the public.

      And unlike the stuff that happens in the “free market,” it seems like when the government is used as a tool to make an individual more wealthy at the end of the day than he was at the start, there has to be a compelling reason that it is for the social good.

      If the government indeed takes Ackman at its word without investigating, then I’d see your point. But that isn’t how they work. They will only investigate his claim if they find it credible, and they will only penalize Herbalife if the investigation produced proof of wrongdoing. The SEC is not bought and paid for by Bill Ackman.

      It’s also worth noting that *not* performing the investigation could be seen as simply making George Soros and Carl Icahn even more rich. Some rich people are going to become more rich no matter what. 🙂

      I know they are (somewhat) different things, but I can’t help but recall that we’re just getting out of a rather substantial financial crisis that was caused to a great degree by a few people getting the government to intervene on the behalf of their financial instruments without any regard to the trade offs they were making at the time.

      Yes, you’re right that they are different things. 🙂Report

      • Avatar Tod Kelly in reply to Vikram Bath
        Ignored
        says:

        “Herbalife will suffer if and only if the investigations find wrongdoing… Having short-sellers do research and highlight it for regulators is a way around this problem and tends to lessen malfeasance… If Herbalife isn’t creating value for its customers and distributors, it would definitely be a social good for them to go out of business… They will only investigate his claim if they find it credible, and they will only penalize Herbalife if the investigation produced proof of wrongdoing. The SEC is not bought and paid for by Bill Ackman.”

        I’m not sure how to answer any of this, except to say that I think we have been observing two very different worlds these past ten years.Report

      • Avatar Mad Rocket Scientist in reply to Vikram Bath
        Ignored
        says:

        @tod-kelly

        Shorting a stock & reporting possible fraud to the government seems OK in my book. If there is no fraud, all is good. If there is, better to find it now rather than later.

        Getting a legislator to write a letter saying that the government is starting an investigation for fraud, then getting a copy of that letter and showing it to others before the official announcement is getting into the not so OK territory.Report

      • Avatar Vikram Bath in reply to Vikram Bath
        Ignored
        says:

        @tod-kelly , Can you present a reason to suspect that Bill Ackman has influence over the SEC that Carl Icahn and George Soros would lack?Report

      • Avatar Stillwater in reply to Vikram Bath
        Ignored
        says:

        I’ll just note – and not antagonistically (I hope) – that this sentence

        If Herbalife isn’t creating value for its customers and distributors,

        isn’t the sort of judgment that I usually associate with libertarians and libertarianism since the prevailing view is that value is subjectively determined, and presumably the evidence on that score is already in. On the other hand, perhaps you *meant* to say “If Herbalife is defrauding customers or distributors…” then it’s a different claim, in which case the evidential argument makes more sense to me.

        Personally, I have no view of whether Herbalife is a scam or not. I don’t know the first thing about their products. If they’re engaging in fraud, then there is presumably legislation on the books that would cover the offense. If their products are unregulated and there are questions about the quality of/ingredients in the products, then extend existing regulatory requirements to them.

        But the argument that consumers need to be protected from their own uninformed choices seems like a very un-libertarian argument to me. Especially in the context of justifying Ackman’s active attempts to destroy the business he’s betting against.Report

      • Avatar Vikram Bath in reply to Vikram Bath
        Ignored
        says:

        No antagonism was inferred!

        I should note that I’m not actually a libertarian! As someone interested in businesses, I find the questions of whether they are adding value to distributors and customers and whether they are defrauding them both interesting.

        They are a company, but I don’t know that it is settled whether they truly are adding value in the long term to these groups. Ackman’s claim (on which I submit no opinion) seems to be that they have mostly succeeded in convincing distributors that riches await them without actually delivering on those promises. So, I don’t take the have-they-added-value question as yet settled.Report

      • Avatar Stillwater in reply to Vikram Bath
        Ignored
        says:

        I should note that I’m not actually a libertarian!

        Dagnabit! A vague recollection that you don’t identify as libertarian flashed across my mind simultaneous with hitting submit. Sorry about that.Report

      • Avatar Stillwater in reply to Vikram Bath
        Ignored
        says:

        Vik,

        Just wanted to follow up on this a bit. You wrote

        Ackman’s claim (on which I submit no opinion) seems to be that they have mostly succeeded in convincing distributors that riches await them without actually delivering on those promises. So, I don’t take the have-they-added-value question as yet settled.

        Here’s some data from Wiki:

        The company was founded in 1980, and it employs around 6,200 people worldwide. Herbalife reported net sales of US$4.072 billion in 2012, an 18% increase over 2011, and net income of $477.19 million, a 16% increase over 2011.[2] Incorporated in the Cayman Islands,[1] its corporate headquarters are in Los Angeles, California, United States.[3]

        The company distributes its products in 91 countries (as of November 2013) through a network of approximately 3.2 million independent distributors,[1] some of whom earn profit on product sales and additional commission from a multi-level marketing (MLM) compensation structure.

        As far as evidence regarding sustainability and (subjectively determined) consumer value is concerned, it seems like that data really does settle the issue, and it seems increasingly apparent that his bet was predicated on his access and ability to use congressional power to manipulate stock prices.

        And *that’s* a different issue than making an otherwise legitimate bet on the lack of sustainability of Herbalife’s business model or that an awareness of the lack of value of the products being supplied will drive down sales.Report

      • Avatar Vikram Bath in reply to Vikram Bath
        Ignored
        says:

        I don’t doubt that they have “organizational” success. Additionally, they have earnings, which is a very good indicator of financial success. It fails to be a perfect indicator, however. Ackman’s concern seems to be what that “net income of $477.19 million” consists of. Is it income from products sold to end users (who are likely to be repeat buyers) or are they payments from distributors who are hoping to get rich someday?

        Incidentally, Charles W. Mulford and Eugene E. Comiskey’s “Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance” is an excellent book on the topic of how sometimes the numbers can paint a positive picture of the present that is unlikely to persist in the future.Report

      • Avatar Stillwater in reply to Vikram Bath
        Ignored
        says:

        Yes, sure. I didn’t mean for those two paragraphs to be the end of the matter. And I surely make no claims to being a financial genius (much to my wife’s disappointment, I might add). I cited that only to show that it seems reasonable to conclude that Ackman bet against Herbalife based on some set fundamentals, and as the bet looks increasingly unlikely to pay off he’s resorting to a congressionally-backed smear campaign to make his bet payoff, and on a specific set of pretenses. Namely, the now otherwise incorrect assessment upon which his initial bet was made.Report

      • Avatar Stillwater in reply to Vikram Bath
        Ignored
        says:

        That last sentence should read:

        Namely, the now otherwise incorrect assessment upon which his initial bet was made.Report

      • Avatar Vikram Bath in reply to Vikram Bath
        Ignored
        says:

        Herbalife is certainly more resilient than Ackman seems to have been aware of. And one thing that I did feel I learned from the Times article was that they haven’t actually found people who felt they were cheated. Now that they are advertising to locate victims, if they don’t turn up quick, I think it’d be fair to say he was wrong.

        And I ought to note that Ackman has been wrong before. He is far from infallible. He’s a bright-enough guy that I do track what he’s doing to see if I should follow him, but he failed to convince me on this one. (Also, I don’t really short stocks.)Report

  8. Avatar Shazbot11
    Ignored
    says:

    I’m okay with A.) attempting to influence the political process up to a point (where that point is is a complex question), and also B.) shorting a company, as long as it is regulated.

    Here the guy is doing both A and B, which is fine -though a little morally unsettling about influencing politics for personal gain and not the benefit of the polis- if it is just a one off (or rare thing) that doesn’t become regular practice. But I think the NYT writer is worried that this will become common practice. Short a company and then influence the political process to kill it. If that becomes common practice, there are all sorts of nasty and pernicious moral hazards that could far outweigh any good that comes from short selling and/or from allowing business influence in politics and regulation.

    And the NYT writer is right to note that financial folks have gotten awfully good at taking things like this and using them until they harm the whole of society. That trend line is sort of one of the biggest problems facing the modern U.S. economy.Report

    • Avatar Vikram Bath in reply to Shazbot11
      Ignored
      says:

      Yep,
      A + B = Conflict of Interest
      But note that the reverse where the investor is long and seeks to make a positive change for the company is rarely critiqued.Report

      • Avatar Will Truman in reply to Vikram Bath
        Ignored
        says:

        @vikram-bath I think that’s a bit because it’s dog bites man versus man bites dog. Which is to say that people do complain about people trying to get the government to help out their company. That’s a big part of why people argue for campaign finance reform: GE spends a lot of money to influence policy in ways that are favorable to GE.

        This story, on the other hand, is different. A person trying to get the government to destroy a company that he has invested against. You make a solid case that this is actually no worse. I’m still mulling it over. But even if it is no worse, it is different and more interesting for it.Report

      • Avatar Vikram Bath in reply to Vikram Bath
        Ignored
        says:

        people argue for campaign finance reform: GE spends a lot of money to influence policy in ways that are favorable to GE

        Fair point. I didn’t make it really clear in the original post, but I am referring to the business media. That means Bloomberg, not Slate.Report

  9. Avatar J@m3z Aitch
    Ignored
    says:

    I’d kind of like to think somebody could benefit financially from outing a company that’s doing wrong. Seems like a good incentive there.

    The question, I think, is whether the incentive hits too broadly, causing people to work at harming companies that aren’t doing wrong. It seems possible, plausible even, but I’m not (yet) persuaded it’s probable enough to be problematic.

    Which side is it fair to say bears the burden of proof here?Report

    • Avatar Vikram Bath in reply to J@m3z Aitch
      Ignored
      says:

      The one’s wielding the accusations have to disclose their conflicts of interests, so they automatically should and do bear the burden of proof*. All the mentioned managers have attacked various companies for various things at various times, and it is never a foregone conclusion that they will win.

      Icahn right now is in a fight with eBay, accusing them of selling Skype at a $4 billion discount to one of its own directors (Marc Andreessen). I think its unquestionably good that someone is asking the question. And, yes, there is a rich guy looking out for his own interest wielding the accusation, but it’s not like a guy like Andreessen can’t handle himself in such a fight.

      * I find your use of “burden of proof” intriguing. It implies that we have a default judgment that we should go with if one side does not prove its case. I realize this is necessary in a courtroom where “I’m not really sure” isn’t an acceptable ruling, but when investing it is a very acceptable conclusion. From that perspective, I’d say both sides bear the burden of proof, and absent such proof you keep your money elsewhere.Report

      • Avatar J@m3z Aitch in reply to Vikram Bath
        Ignored
        says:

        I think I wasn’t clear.

        On one side are people taking the position that encouraging such attacks on misbehaving firms won’t lead to harmful attacks on law-abiding firms.

        On the other side are those who think law-abiding firms will be harmed by ruthless shorters.

        Does one of those positions bear a greater burden of proof than the other?Report

      • Avatar Vikram Bath in reply to Vikram Bath
        Ignored
        says:

        Ah.

        Among those two groups, I’d say that the burden should be split. Companies aren’t people, and we don’t send them to jail, so I would say letting a bad company escape criticism is morally equal to harming a law-abiding company.

        I could perhaps be convinced otherwise…Report

  10. Avatar Brandon Berg
    Ignored
    says:

    As an individual investor, the only way to survive in such an environment is to severely discount anything good I hear about a company and look carefully for what isn’t said so as to infer the bad. It’s similar to reading a dating profile. “Smart and tall” means obese. “Smart and skinny” means short. “Tall and skinny” means idiot. It has taken me years to learn the refined pessimistic art of inferring the worst of what is left unsaid.

    This works in reverse with criticism. My favorite example of this was a kerfuffle several years ago over some sorority which kicked out 3/4 of its members. A reporter from the New York Times, trying to put a racial spin on it, said that every black, Korean, and Vietnamese member had been kicked out. That struck me as oddly specific, from which I inferred that there must have been at least one Asian member, probably Chinese, who hadn’t been kicked out. CNN reported that this was in fact the case, and that non-white members weren’t even overrepresented among the expelled.Report

    • Avatar Vikram Bath in reply to Brandon Berg
      Ignored
      says:

      I am often critical of others of trying to sell a narrative, as it seems the Times is in your example. At the same time, clearly they do have boundaries. They weren’t willing to simply lie and say “every Asian member”. Perhaps they thought they would be caught, but I give them the benefit of the doubt and think they simply didn’t want to lie even if doing so would improve the narrative.

      Companies, I think, have even more to lose from lying than journalists. They really could conceivably go to jail for intentional misstatements. But there is so much freedom in what they must say and how that it really does require fine parsing. I likewise would have bet money that some other non-Korean, non-Vietnamese Asian was retained, and I often do bet money on similarly telling phrasings in financial statements.Report

      • Avatar Kim in reply to Vikram Bath
        Ignored
        says:

        *spits* Enron’s entire scheme was spelled out in filings.
        A toymaker selling lead-based toys was spelled out in filings (pictoral — I’m certain they’ve never seen a chem lab).

        Nobody reads filings, but you will get in trouble if you’re not honest.

        OTOH, Washington Post will put their own byline on whatever you say. At which point, you damn well aren’t responsible. (and, by damn, you’d better not admit they put your press release under their byline).Report

  11. Avatar David Tan
    Ignored
    says:

    It’s not the spreading of info that I object to. It’s Ackman’s spreading of false info and bad analysis (see his “pump & dump” history with Prepaid Legal Services, another MLM). He also appeared to have written identical letters the members of Congress, and no proof of actual “victims.”Report

  12. Avatar Judy Brown
    Ignored
    says:

    I am late to the party here but I liked the essay and I have been studying the MLM industry for over a year now so I wanted to comment.

    Those in the comments here who characterize Ackman’s efforts as a smear campaign against Herbalife, I think have it backward. Ackman’s money, for the most part, has gone toward creating a case, an almost legal case, uncovering factual evidence about a troubling, highly obfuscated “business model”. Sometimes Shorts do serve a healthy purpose in the market, and one such example is when they expose fraud. This is what Ackman is doing. All the evidence he presents (in his dec 2012 presentation, or at Herbalifepyramidscheme.com, for example), is backed up with valid sources, it is independently verifiable.

    Herbalife’s responses to Ackman’s efforts, on the other hand, are much more in the character of an ad hominem “smear” campaign. HLF could easily clear everything up by presenting sales data, but they steadfastly refuse to do so, which we have to guess would reveal that sales to non-participants in the scheme are insignificant (which is the key question, to the regulators). The “evidence” HLF has provided to defend themselves is extremely flimsy, for example, the highly suspect survey they commissioned from Lieberman (for which Lieberman refuses to reveal methodology).

    Moreover, Herbalife outspent Mr. Ackman by a factor of ten last year on lobbying and related activities. If they are honest and blameless, why? The MLM industry as a whole has been buying legislative, state attorney general, and regulatory influence for, literally, decades. Honest, old fashioned efforts to reform the industry have been derailed due to the political power that the MLMs wield. To see one example of this, look up the “Business Opportunity Rule” and how MLM won a last minute exemption.

    Believe me, I don’t like to find myself on the same side of an argument as a hedge fund manager and his money. However, it’s starting to feel like regular, honest people and honest efforts don’t stand a chance. We have no voice against Amway, NuSkin, Herbalife, the DSA and their millions. It was a relief when a big wheel like Ackman stepped in and began to shine a bright spotlight on this poorly understood “industry”. Is it ideal having Ackman as a champion? No. But given the reality and the injustice of the situation, I guess I’ll take it. Ackman has pledged to charity any profit he might personally make from his bet.

    One other rebuttal I would like to make to the argument (in this, as many other HLF comments sections) that the victims of MLM only have themselves to blame. Those who make this argument are naive about the social-psychology dynamics at work. I would recommend to you further reading on the topic. The science has been done and we know a lot about how it works. Interesting scientific studies to explore are: the Asch Conformity Experiment, the Smoke Filled Room experiment, the Milgram Experiment, the Stanford Prison Experiment and many more. You don’t have to hold a gun to someone’s head to take money away from them. People are easily hypnotized, shockingly easily in group settings.

    When freedom of mind has been removed, Caveat Emptor no longer applies. Our criminal justice system currently does not deal well with this fact.

    Bernie Madoff’s victims all “voluntarily” invested with him. Should Bernie Madoff still be a free man, and still be allowed to operate his scheme? I say, no, that is not a world I want to live in. MLM also needs to be reigned in, they have been getting away with murder for far far too long. I hope the FTC can handle the Herbalife investigation skillfully and with a healthy outcome for honest American consumers.Report

    • Avatar Kim in reply to Judy Brown
      Ignored
      says:

      Is it worth noting that some of Bernie’s investors knew he was dirty? Got in, made money, got out?

      Might well ask folks if they’d rather see Ackman doing this or Anonymous? And who they’d be happier seeing doing the expose…Report

    • Avatar Judy Brown in reply to Judy Brown
      Ignored
      says:

      For anyone interested, here is an excellent white paper just released by three top experts on MLM case history. This will bring anyone quickly up to speed:

      http://pyramidschemealert.org/wordpress/wp-content/uploads/2014/03/The-Pyramid-Scheme-Industry-FINAL.pdfReport

    • Avatar Vikram Bath in reply to Judy Brown
      Ignored
      says:

      Thank you for the comments, Judy. I was curious about the claim that Herbalife outspent Ackman on lobbying and found this http://www.reuters.com/article/2014/03/09/us-herbalife-idUSBREA280OH20140309

      Hedge fund manager William Ackman, who is betting $1.16 billion that Herbalife is a fraud, spent $264,000 last year on lobbyists to press his case against the company, according to government documents filed in recent weeks.

      That amount is dwarfed by the nearly $2 million Herbalife spent in 2013 on federal lobbying as the nutrition and weight loss company fought the billionaire investor’s claims it runs a pyramid scheme.

      That’s not quite a factor of 10, but close enough.

      the victims of MLM only have themselves to blame

      That isn’t the sort of argument that tends to gain many followers on this site. 🙂Report

    • Avatar DavidTC in reply to Judy Brown
      Ignored
      says:

      I think we need some very strong regulations of MLMs, basically to the point where they are not allowed to make money on people who sign up to sell their stuff and then quit.

      Of course, them shipping any unsold merchandise or selling aids back is required. (Which is okay, because the MLM companies isn’t making money from that.), and I’d be okay with some sort of small restocking cost on top of that. A very small restocking fee, limited by law.

      If it costs you $500 to join an MLM, if you give up a month later due to not selling anything, you damn well better get $450 dollars back from them when you send your kit back in. I think a cap of 10% would be reasonable.

      In fact, I think an argument can be made that it should be even lower than that, or 10% of the cost of the non-stock items. I.e., if they give you $20 dollars of pamphlets and displays and whatnot, and $480 worth of stock to start selling, you should get back 100% of the stock value, because it’s *unopened* stock they can just sell, and 90% of the display and pamplet value, which admittedly they do have to restock back in the boxes.

      Or maybe we should just say ‘This entire thing is stupid.’ and not allow MLM companies to charge anything for their stuff upfront. At all. They send you $500 worth of stuff to start, well, they’re going to keep the first $500 of your cut. (Although one suspects they’d start sending people only $50 to start with.)

      There’s not any real reason that *useful* MLMs wouldn’t be able to keep functioning, and there’s a real question of why, exactly, we need any ‘MLMs’ at all. Why can’t companies just give *referral* payments?

      What almost all MLMs are doing is hiring people at *negative* wages, and then having them work up past 0 on commission. This is stupid enough for the law to allow *even when it works*. When it *doesn’t* work, when the company is instead making money by the $500 they start people in the hole, it’s incredibly stupid to allow.Report

      • Avatar Vikram Bath in reply to DavidTC
        Ignored
        says:

        @davidtc ,
        I’d be supportive of some regulation, though I would quibble on some of the details.

        I do think it’s an interesting, non-obvious question as to whether the world would be better off if we simply didn’t have MLMs. You’d lose some legitimate companies like Tupperware and Avon. I’m guessing that prospect doesn’t exactly bring a tear to your eye, but some people have benefitted from them, and I’ve never heard of people getting tricked into thinking they would become a Tupperware czar.

        A regulation I could perhaps endorse would be to limit the tiers of downline distributors you can get paid for. I can understand getting money when you sell stuff. I can understand getting money when someone you recruit sells stuff. Once you start asking to get paid because you recruited someone who recruited someone who sells stuff, I start to get nervous, and beyond that, it just seems ludicrous. Avon only pays its saleswomen for 3 tiers, and I think the industry would benefit if that rule were adopted more widely.Report

      • Avatar DavidTC in reply to DavidTC
        Ignored
        says:

        @vikram-bath

        I have no problem with an infinite number of tiers getting a cut. I think that’s a somewhat goofy business plan, but have no actual objection to it.

        My objections all center around people *paying* to enter this system. If no one has to pay, or at least can get their money back if they fail at selling things and quit, I have no object to MLMs at all.

        The point where they change from ‘something that is a silly money-making venture’ to ‘scam’ is directly at the point where they *cost money to participate in*. But, of course, legit MLMs need to cost money upfront. They make you buy both sample products and products to resell, because otherwise you could just get free stuff by signing up!

        I think an interesting compromise might be to require MLM hand over the money from everyone who bought a starter kit but did not earn enough to pay for it in a year to *the government*.

        Not give the money back to the people who got the kit, that would let people sign up to steal stuff. But giving it to the government means it’s not a workable business model for the MLM to just make money by conning people into signing up.Report

      • Avatar DavidTC in reply to DavidTC
        Ignored
        says:

        Actually, instead of ‘a year’, it would probably be better to let the MLM set the rules. By which I mean, ‘we believe their ads’.

        If the MLM says you can make $1000 a year and it costs you $50 to sign up, then logically you should make that $50 back in…20 days. Obviously, there’s some shipping and handling in there and getting up to speed, so we’ll even be generous and extend that time by double. (It said you *can* make that much, but perhaps maybe not quite that much from the start.)

        But if someone who signed up doesn’t make back their $50 in the first 40 days, the company has to forfeit $50 to the government.

        An alternate way of doing this would be to have the government hold the money in escrow, and if the deadline is met, the government hands the money *back* to the person who signed up. I.e, instead of the MLM paying them for their first $50 of profit, they get their original signup check back from the government, and the MLM doesn’t pay them for that $50.

        If the deadline is *not* met, the government simply keeps the money, which of course means the MLM got no money for the signup. (And, of course, the MLM now has to write a check rewarding the first $50 in profit, if that ever happens.)Report

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