Is Herbalife actually a Pyramid Scheme?

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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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96 Responses

  1. Avatar Alberto says:

    I agree with you on many positions. I was asking myself, if becoming a “Herbalife franchising wholesaler” (more or less that is what a distributor is) would require a $xxxx annual fee (suppose that to be typical of many franchising issues), and Herbalife magnanimously offered to equalise that fee with ordinary herbalife products, would we still be discussing about pyramid schemes?Report

    • Avatar Stillwater in reply to Alberto says:

      One thing I’ve learned here: Herbalife’s capability to unleash a rapid-response strike force anytime the name is mentioned in a blog post.Report

      • Avatar NewDealer in reply to Stillwater says:

        I think this one of the wonders of Internet PR and response in general.

        Not just for big companies like Herbalife but for all sorts of blog posts.Report

      • Avatar Jim Heffman in reply to Stillwater says:

        One of the things that these companies make sure to do is to get their sellers really fired up about “social marketing”, which means “obsessively Google for any mention of the product, and make sure you go there and post a whole lot about how the product is great and you can make tons of money and anyone who disagrees is just a hater 😉 lol”Report

  2. Avatar Burt Likko says:

    On the strength and intellectual intrigue of your last post on this topic, @vikram-bath , I assigned it as a topic in my pending business ethics class. I should not be surprised to now see this analysis referenced by my student!Report

  3. Avatar J@m3z Aitch says:

    An admirably well-written case study, Vik.Report

  4. Avatar James Kalcheim says:

    Pyramid scheme or not, their business model’s success has been built on coupling a really bad “business opportunity” to their products. Even if the FTC were to put the pyramid scheme issue aside, and they only forced Herbalife to make substantive changes with regard to the advertising of “the opportunity,” I don’t believe their business model would work anymore.

    The appeal of this company to new distributors isn’t the ability to make “retail profits,” but to recruit others who will recruit others etc… if you take that away from Herbalife, the company will be all done cause they’ll lose their recruiting capability and, given their 90% turnover rate, it’ll all be over.

    This company cannot work without promoting their really bad “business opportunity.”Report

    • I’m not ready to make the judgment that it cannot work without bundling the business opportunity. I haven’t dug enough to come up with an estimate of how much of their volume is actually people wanting a protein shake and how much is from selling a dream to the unsuspecting. I’m comfortable saying that if the latter is cut out that this would hurt their volumes, but I’m not yet able to say it’d “all be over” with confidence.

      I should note also that I think if the FTC did make a judgment against the company, I think it’d be in the form of a fine, not a death sentence, and the company could probably operate in other countries as it has been.Report

      • Avatar James Kalcheim in reply to Vikram Bath says:

        I don’t believe fines come without consent agreements between the company and FTC to change business practices. Since I don’t think Herbalife would ever agree to changes that would require the de-bundling, because again I believe their core model relies on that bundling of the opportunity with the product, I think this issue ultimately gets resolved in a prolonged court battle.

        I have done some digging into this coupling issue, and specifically into former prominent members of Herbalife and seems like they are running this same coupling model, but with different widgets.

        Anthony Powell:
        https://www.vemma.com/verveenergy/

        Christopher Pair:
        http://www.lyfestart.com

        I also believe that any action against Herbalife in the US will start at least some copycat actions from other countries.Report

      • I believe their core model relies on that bundling of the opportunity with the product

        Roughly speaking, how do you think de-bundling would effect their volumes? Is your estimate closer to 30% or 70%?

        I think this issue ultimately gets resolved in a prolonged court battle.

        I have a hard time seeing how the FTC beats Herbalife in court given the current squishiness in the law and FTC guidance thus far.

        One complication I didn’t deal with in the piece is that when a potential recruit is sold to, he hears a bunch of stuff from an existing distributor (who is not an Herbalife employee) and signs a 200+ page distributor agreement with Herbalife the company. If the existing distributor misrepresents the opportunity, Herbalife might point to its own distributor agreement and promotion materials and say (convincingly) that they aren’t responsible for the opportunity being misrepresented.

        Thanks for the links. It’s an interesting twist that the Lyfestart product tries to tie consumption with charity: “For every three Nourish Nutritional Shakes sold, we provide a meal to a hungry child.” It’s also interesting that both sites give more or less equal billing to the product and the opportunity, with the product coming first on screen, which makes me think they are actually hoping more that you will buy into the opportunity.Report

      • Avatar James Kalcheim in reply to Vikram Bath says:

        Roughly speaking, how do you think de-bundling would effect their volumes? Is your estimate closer to 30% or 70%?

        Tough to really project numbers here, however my inclination is to believe that if the only business opportunity for new distributors was to make the wholesale/retail spread, Herbalife wouldn’t be getting nearly the recruits that they are. Given the high turnover of distributors in the company, presumably from having such hard time trying to hawk products to retail, I don’t know for how long the company could possibly hope to last.

        I have a hard time seeing how the FTC beats Herbalife in court given the current squishiness in the law and FTC guidance thus far.

        A court decision one way or another is what settles the Herbalife issue ultimately. I’m fairly confident of this. FTC has had success against other questionable MLM companies and a lot of people following this saga are paying close attention to the FTC’s case against BurnLounge, which thus far the FTC has been winning:

        http://ftalphaville.ft.com/2014/03/21/1806772/keep-an-eye-on-the-ftc-vs-burnlounge/

        Herbalife might point to its own distributor agreement and promotion materials and say (convincingly) that they aren’t responsible for the opportunity being misrepresented.

        This may prevent executives from being prosecuted criminally (assuming the had no knowledge) but this would NOT prevent the company from being liable for civil damages, particularly when the company has benefitted from those misrepresentations. In 2004, a Herbalife recruiting group was promoting their “Newest Way to Wealth” system signing up distributors, getting them to sign up distributors, etc. Obviously, a lot of people lost money.

        one person’s story here:
        http://ftalphaville.ft.com/2014/03/21/1806772/keep-an-eye-on-the-ftc-vs-burnlounge/

        A class action was filed in CA and Herbalife obviously tried to put distance between themselves and this group and they could not. The case was ultimately settled for millions of dollars. Also notice how Anthony Powell is a defendant in the suit (Verve Energy Drink)

        Initial Suit:

        http://www.mlmwatch.org/04C/Herbalife/classaction/suit.pdf

        Settlement:

        http://factsaboutherbalife.com/wp-content/uploads/2012/12/Declaration-of-Michael-Rosenbaum-on-behalf-of-Claims-Administrator-sworn-to-August-23-2005.pdfReport

      • Given the high turnover of distributors in the company, presumably from having such hard time trying to hawk products to retail, I don’t know for how long the company could possibly hope to last.

        They seem to have some distributors joining who are regular visitors to nutrition clubs and want the product for themselves. We also have a non-negligble number of distributors who are recruited as “supervisors” into the opportunity and seem to know nothing about the product (i.e. the pyramid side of the business). I don’t yet know how to estimate how many people fall into each group. The supervisor-track seems to require a higher investment, so even if they are less numerous than the more-legitimate customers, the harm to the company could be disproportionate to their number.

        Thanks for the link to the Burnlounge case. I’ve updated the post with it.

        …this would NOT prevent the company from being liable for civil damages, particularly when the company has benefitted from those misrepresentations.

        Excellent point.

        Thanks also for the court links. The excerpts from the “Newest Way to Wealth” marketing are gobsmacking. It’s hard to imagine they thought that could be legal.

        I agree with pretty much everything you have to say on this, but I remain uncertain as to how to quantify the effect of a modification to their business.Report

    • Avatar Alberto in reply to James Kalcheim says:

      reality is what you think is. bad practices are common in business, but not at all. I’ve been working for big companies in “non mlm markets”. they always asked “how much” and never asked “how”. good practice is a tool everybody has inside. companies are only tools you use to do your work. Herbalife, Vodafone, FCA (I’m Italan!!) live or die on product sales. If you were the producer would you prefer a flat line of sellers or sellers with sub-agencies? and, btw, what is the “nice opportunity” your company is actually selling you? business is business, ethic is ethic that’s all.Report

    • Avatar Kim in reply to James Kalcheim says:

      90% turnover rate is indicative of poor selection at the beginning.
      I’ve been in a company that took that attitude (and paid people zilch if they didn’t succeed. Blame Ralph Nader the Scab.)Report

  5. Avatar Troublesome Frog says:

    I like how Herbalife points to its retail chains as evidence that it’s not a pyramid scheme. It seems to me there’s no reason a company can’t have a “pyramid scheme” arm and a “retail” arm and enjoy profits from both. I mean, it’s apparently possible to be a charity that also sometimes blows up civilians, or a construction company that also launders money for organized crime, so why isn’t it possible to be running a scam from one office while also legitimately selling products from another?Report

    • Avatar James Kalcheim in reply to Troublesome Frog says:

      This is a great point.Report

    • TF, that is a good point, and it bears consideration when trying to figure out just how ethical the company is.

      My non-expert reading of what the FTC has to say, however, is that having retail chains does indeed provide the company with a solid defense against being considered a pyramid scheme. If there is a real product, then the “scam” part of the business isn’t really a scam because the people they are scamming could conceivably just sell the product.Report

      • Avatar Troublesome Frog in reply to Vikram Bath says:

        I’m not sure that the option to sell retail does much to absolve them of the pyramid scheme side of the business. In fact, one could argue that those who could sell retail but don’t have chosen the MLM side of the business primarily to receive the kickbacks from money-losing downlines. In short, they’re choosing the MLM side over the retail side precisely because of the aspects of it that make it a pyramid scheme.Report

      • The downlines aren’t uniformly money-losing. And I think that’s what Ackman gets wrong. He sees all these distributors not making it and draws the legal conclusion that it’s a pyramid scheme. When I went to look at what the FTC looks for in a pyramid scheme, they don’t seem to care what fraction of distributors lose money.

        With the usual IANAL disclaimers:
        To the FTC, your product is either legitimate or it is a token product, with nothing in-between. As long as some people are using the product at some prices, then for at least those people it is legitimate. And I think from the FTC’s perspective that will be enough to say that they cannot intervene. My interpretation is that this is the opposite of a lake in which a single drop of pollution contaminates the lake. Instead, if Herbalife can show that a single drop is clean, the FTC can’t condemn the whole lake.

        The linked Kevin Thompson post says that the FTC hasn’t been very clear with its guidance. I should note that I am in fact just guessing here as to what will happen. That’s part of why this isn’t investment advice. 🙂Report

    • Avatar LeeEsq in reply to Troublesome Frog says:

      Correct, sir or madame. Even if Herbalife isn’t a pyramid scheme, it is a snake-oil merchant and that is unforgivable.Report

      • Avatar Vikram Bath in reply to LeeEsq says:

        Unforgivable…but possibly legal!Report

      • Avatar LeeEsq in reply to LeeEsq says:

        It shouldn’t be though. The FDA was created partly to go after snake-oil merchants.Report

      • Avatar Glyph in reply to LeeEsq says:

        Unforgivable…but possibly legal!

        Well, now I know how my next set of business cards is going to read.Report

      • Avatar J@m3z Aitch in reply to LeeEsq says:

        The FDA was created partly to go after snake-oil merchants.

        And what am I supposed to do when my snakes dry out?Report

      • Avatar LeeEsq in reply to LeeEsq says:

        Give them baths? Don’t forget to water them on a regular basis?Report

      • Avatar Kazzy in reply to LeeEsq says:

        Clearly, something had to be done about Big Snake Oil.Report

      • Avatar Rod in reply to LeeEsq says:

        @jm3z-aitch , I’m partial to AstroGlide,personally.Report

      • Avatar King Cobra in reply to LeeEsq says:

        you would characterize a product portfolio of tea, vitamin b/caffeine drinks, and high-protein/low-calorie shakes as “snake oil”. I’m having a difficult time seeing how you draw that conclusion.Report

      • Avatar Burt Likko in reply to LeeEsq says:

        These things won’t kill you, to be sure. But they also aren’t going to do you much good.

        Protein shakes AND a sensible diet AND appropriate daily exercise will produce about the same weight change, in most people, as diet and exercise alone. Herbal teas are diuretics — they make you pee a lot. Which is kind of like a lot of liquids. If I want B vitamins and caffeine, black tea with soy milk should do the trick. Or a Red Bull, although personally I think Red Bull tastes nasty.

        Contrast this not-significantly-better-than-placebo result set for Herbalife’s products with claims made about them. Thus, “snake oil.” Seems to me the shoe fits.Report

      • Avatar LeeEsq in reply to LeeEsq says:

        King Cobra, manufacturers and merchants of certain products should provide some evidence that their product will do what they say it does. The product does not have to be harmful in order for it to be snake-oil just simply misleading. If your saying that your products and system lead to more weight loss than ordinary dieting and exercise than you have to prove it. I do not believe in caveat emptor.Report

      • Avatar LeeEsq in reply to LeeEsq says:

        King Cobra, manufacturers and merchants of certain products should provide some evidence that their product will do what they say it does. The product does not have to be harmful in order for it to be snake-oil just simply misleading. If your saying that your products and system lead to more weight loss than ordinary dieting and exercise than you have to prove it. I do not believe in caveat emptor.Report

      • Avatar Dave in reply to LeeEsq says:

        King Cobra, manufacturers and merchants of certain products should provide some evidence that their product will do what they say it does.

        The number of supplements companies that do this is equal to zero. The number of supplements companies that should do this is probably close to zero as well.Report

      • Avatar mdsmedia in reply to LeeEsq says:

        Since when has this case had anything to do with the quality of the products? If it has, maybe have a look at the 60 million documented testimonials about results people have had from Herbalife products before coming to the completely unqualified conclusion that it’s snake oil.

        At least the writer has the decency to qualify his comments, and they are thoughtful. Saying that the products are snake oil, without any sort of qualification…I dunno….”I am not a doctor?….is a little bit lame!Report

      • Avatar Burt Likko in reply to LeeEsq says:

        You’re going to have to do better than that, @mdsmedia . Testimonials prove only that someone was subjectively happy with the product. I’m looking for double-blind studies demonstrating Herbalife products do objectively better than placebo for the claimed health benefit. Got links? I’ll read ’em if you do.Report

      • Avatar Vikram Bath in reply to LeeEsq says:

        As a consumer, I would regard the proposition of Herbalife’s products as uninspiring at best. They are commodities, and they are not the sort of things that I would expect have a lot of scientific backing of the sort Burt talks about (though people might incorporate them into other lifestyle changes that might not otherwise have happened, in which case good for them).

        Perhaps I am too much of a heartless capitalist, but I would be willing to invest in Herbalife at a price significantly below where it is now despite my suspicions about their products. All else being equal, I’d prefer to invest in companies whose products I see more value in, but it wouldn’t be a deal breaker for me even if I didn’t. If this is snake oil, it’s legal snake oil, and every corner drugstore sells the same sort of things.Report

      • Avatar Burt Likko in reply to LeeEsq says:

        Sure what that is referring to is an entirely different sort of fraud: the sort of fraud that happens when a company executive misrepresents the earnings of the entity, inflating the stock price beyond what the market would reach were an honest report issued. A high P/E ratio may not necessarily be indicative of that kind of fraud, because it might just be a bubble or some other kind of market misfire. What’s really at issue is whether Herbalife gains most of its earnings from selling membership in its sales pyramid, or whether those earnings come from the sale of the herbal teas and antacids masquerading as diet pills, and whether the company lies about this in its SEC filings.Report

  6. Avatar Stillwater says:

    But Burt says the same of law schools, and they are still around.

    Ouch!Report

    • Avatar Burt Likko in reply to Stillwater says:

      As a society, we need lawyers. Perhaps not as many as we have, but the number needed is greater than trivial. The same cannot be said for people who recruit other people to sell vitamins, herbal teas, and protein shakes.Report

      • Avatar Kim in reply to Burt Likko says:

        As a society, do we need 401k’s? They seem vastly oversold, and the Gen X folks are likely to be left holding the bag as the Boomer Generation deflates the market.Report

      • As a society, we need lawyers.

        Care to say that under oath?Report

      • Avatar mdsmedia in reply to Burt Likko says:

        The need for nutritional products, given the obesity epidemic, may out-weigh the need for lawyers.

        Again, maybe have a look at the quality of the product, rather than the generalization about “people who recruit other people to sell vitamins, herbal teas, and protein shakes”.Report

      • Avatar Burt Likko in reply to Burt Likko says:

        I’ll take fat people living lawfully over skinny people killing and stealing from each other any day of the week.

        ‘Course, not everyone is fat and not everyone is a criminal or a thief. So not everyone needs either of these things, especially not all the time.

        When you do, well, there’s a substitute for Herbalife that is effective at losing weight: it’s called a “diet.” “Exercise” helps too. Don’t believe me? Try diet and exercise without Herbalife and see what happens.

        As far as I can tell, there’s really no substitute for a lawyer when you need one. Don’t believe me? Get crosswise with the law, waive your right to counsel, and see what happens.

        But here’s the really great thing, @mdsmedia . I don’t have to buy Herbalife and you don’t have to hire a lawyer. Cheers.Report

      • Avatar Burt Likko in reply to Burt Likko says:

        Alsotoo, @mdsmedia , there is a difference between the product itself, and the manner in which it is sold.Report

      • Avatar Tod Kelly in reply to Burt Likko says:

        @burt-likko “I’ll take fat people living lawfully over skinny people killing and stealing from each other any day of the week.”

        And you call yourself a Los Angelino…Report

      • Avatar Coke-Encrusted Hollywood Exec in reply to Burt Likko says:

        I’ll take fat people living lawfully over skinny people killing and stealing from each other any day of the week.

        I don’t see it. OK, maybe if we can get John Goodman and Melissa McCarthy. I’ll call you.Report

  7. Avatar Stillwater says:

    Vik,

    I’m curious if what you’ve learned about Herbalife’s business model and etc. has changed your views about the conflict of interest issues (or lack) outlined in your first post.Report

    • No, I don’t think my views have changed much on that. The conflicts of interest are there. Most of the people speaking on the issue have some financial interest in the stock one way or the other.

      I don’t see the world benefiting from removing voices that have conflicts of interest in this particular domain. It’s an inalterable fact that management is the best source of information on a company and that management has a pro-company bias. So, banning all voices that have a conflict of interest, as you might do in other situations, isn’t going to work here.

      So, I am absolutely in favor of short sellers saying all they can say, and as an investor I try to actively seek out their voices on the companies I consider.

      Of course, when that moves on from just doing a CNBC interview to getting a congresswoman to write a letter to the FTC, the situation gets more uncomfortable. But I think the questions I asked then still need answering. Should Ackman not let government officials know if he genuinely thinks a company is defrauding the public? And should a congresswoman not act on her concerns simply because the person who brought the issue to her attention originally had a conflict of interest?Report

      • Avatar Stillwater in reply to Vikram Bath says:

        Yeah, I hear ya on the last part. And I don’t have any answers, even for myownself. It’s a tricky problem, yah? Or a problem that appears tricky but really isn’t?

        I do think there’s enough evidence (if the NYT story was accurate) to comfortably criticize the CCer, for whatever that’s worth. But that seems to me like a separate issue.Report

  8. Avatar Brandon Berg says:

    I think their best move from here is to leverage their name to expand into the nascent legal marijuana market.Report

  9. I had to do some research to be sure, but having done so I can report: At least once upon a time, Herbalife did offer a substantive and worthwhile product that I did actually purchase regularly. They were early leaders of ephedrine vendors and I was an ephedrine consumer and I purchased Herbalife. (It didn’t help me lose weight, but was an effective stimulant.)

    Arguably, after ephedrine was banned, what they sold was no more useful than snake oil. But that’s because the government made them.Report

  10. Avatar Jim Heffman says:

    There’s nothing particularly special about Herbalife. There are any number of other companies with similar business models. Obviously there’s Amway and Mary Kay, but also various perfume companies, cutlery companies, jewelry, all sorts of things. If nothing else, Herbalife can point to these other companies’ existence and say “look, if what we’re doing is a scam, then what about all those other guys?”

    It really does matter whether the sellers are expected to move product. Maybe it’s overpriced, maybe the business model depends on friends-and-family, maybe most of it actually ends up in personal use or unpaid gifting. But, in the end, every dollar of Herbalife’s revenue results from goods changing hands.Report

    • I actually think the Herbalife bears *do* think the entire MLM industry is largely fraudulent and are counting on the government doing something about it.Report

      • Avatar Mike Schilling in reply to Vikram Bath says:

        Of course, if you aggregated the revenue streams from different Herbalife sellers, divided them into tranches, misrepresented their safety, and sold the result as high-grade investments, that would be even more fraudulent, and we know for a fact that the government would do nothing about that.Report

      • Avatar Dave in reply to Vikram Bath says:

        @mike-schilling

        …and we know for a fact that the government would do nothing about that….

        My friend, a lawyer at Standard & Poors, may beg to differ on that one given his involvement in the government’s case against the company.Report

      • Avatar Kim in reply to Vikram Bath says:

        “a lawyer at Standard and Poors”…
        Is that worse or better than being one of the Nazgul?
        (yes, honest question. Of course, I’m talking about IBM’s lawyers
        — calling them that wasn’t MY idea.)Report

      • Avatar Dave in reply to Vikram Bath says:

        @kim

        “a lawyer at Standard and Poors”…
        Is that worse or better than being one of the Nazgul?
        (yes, honest question. Of course, I’m talking about IBM’s lawyers
        – calling them that wasn’t MY idea.)

        I like him a lot better than I like you. Good enough for you?Report

      • Avatar Mike Schilling in reply to Vikram Bath says:

        S&P didn’t create the toxic mess, though it’s true they did help disguise its true nature. Let me amend that to “the government would not go after the true miscreants, and would at most sue some of the peripherally involved for damages rather than charging fraudsters criminally.”Report

  11. Avatar Damon says:

    I’d quibble with the definition of pyramid scheme; “pyramid scheme = product has no market, sold to network members and sitting in their basements, commissions paid for recruiting rather than retail sales” because then there’s the whole Bernie Madoff (sp?) deal. That’s called a pyramid scheme as well and no products are sold, unless you consider investments sales, but people gave him money for higher than average mkt returns.

    I don’t think this company is a pyramid scheme, but it is “dubious” just like all MLM deals.Report

    • Avatar Rod in reply to Damon says:

      Madoff ran a Ponzi scheme, where outsized returns are paid to early investors from capital raised from later entrants, who typically lose everything.

      There are similarities but they’re distinct kinds of scams.Report

      • Avatar Kim in reply to Rod says:

        Yeah, debatably, 401ks are a Ponzi scheme at this point.
        Certainly people in the stock market before they rolled them out made OODLES, and the Boomer Generation removing their money from the exchange is likely to deflate the market considerably.Report

      • Avatar Patrick in reply to Rod says:

        The Boomer Generation removing their money from the exchange is likely to deflate the market considerably.

        Um.

        Citation needed on that one, old bean.Report

      • Avatar Kim in reply to Rod says:

        Patrick,
        Okay, so about 80% or so of the market is “dumb money”
        (this is billions of dollars: http://www.forbes.com/sites/jakezamansky/2013/02/12/the-dangers-of-the-dumb-money-joining-the-great-rotation-into-stocks-4/).

        We know that there are more Boomers than the generations beneath them, and that boomers have invested more heavily in their retirement (due in large part to a more stable economy that has historically meant less raiding of retirement funds — see also raiding the house kitty in 2003-2007).

        As the Boomers pull money out, there will be less money floating around — therefore there’s less upward pressure — this is a simple analysis, not accounting for “pump and dump” brands like Exxon.

        You’re aware, surely, of the idea that folks should put more money into bonds as they get closer to retirement. (can cite if needed). Again, dumb money is likely to do that.

        There’s another facet in this Ponzi Scheme argument: “Spend Now, Taxed Later.” The idea is: the government can (and is quite likely to) raise taxes on those investments. It’s an easy kitty to go raid, particularly as the younger generations see exactly how much the Boomers have screwed them over.Report

      • Avatar Patrick in reply to Rod says:

        Um, Kim?

        The worldwide stock market is something on the order of forty trillion dollars (not counting derivatives). The market cap for the NYSE is about $14 trillion according to this, with a trade value of about $20 trillion. I don’t know if that’s authoritative, granted, but I don’t see any particular reason to doubt it.

        $30 billion is not 80%.

        $30 billion is statistical noise, almost.

        (That’s also retail investors, not people with money in retirement accounts.)

        We know that there are more Boomers than the generations beneath them, and that boomers have invested more heavily in their retirement (due in large part to a more stable economy that has historically meant less raiding of retirement funds — see also raiding the house kitty in 2003-2007)

        Uh, no. There are not more Boomers than there are generations beneath them. People 62 an over make up 21% of the population.

        This is a demographic bubble, to be sure, but it’s not anything near like half of the workforce.

        Also: retirees are living longer, and thus they have to make their retirement last 20+ years instead of 5. This means that they aren’t going to be grabbing all of their liquidity on the day after they turn 65 and blowing all their cash. They’re going to move to lower return, lower risk investments but a solid chunk of their money will stay in the market, probably for decades after they actually retire.

        You’re aware, surely, of the idea that folks should put more money into bonds as they get closer to retirement.

        Yes, but you realize that money is fungible, right? If you take money out of the market and put it into bonds, the bond yield will go down until it achieves nearer to equilibrium and the stock market will become more attractive again.

        Look, you can do four things with money. You can invest in governments (local or national), you can invest in businesses (bonds or stocks), you can buy real estate, or you can buy commodities. That’s pretty much it. You can’t take your money “out” of the system, all you can do is choose which of those four things you’re putting your money *into*.

        Well, unless you’re putting all your cash into a mattress, I suppose.

        The bond market sucks. Thanks to the fed, the bond market will likely suck for at least another decade. So whether or not the smart historical play is to take money out of stocks and put it into bonds, I will hazard a guess that is no longer the smart play.

        I don’t know what the smart play is, any more.Report

      • Avatar Kim in reply to Rod says:

        Patrick,
        my bad — misread that. Will pull a different cite when I get a chance.

        You’re right, of course, the boomers are a bubble, but not a huge one [I was unclear, and you’re right to call me on it.]

        The smart play? Ha. The smart play is to make sure the SEC won’t prosecute you for theft. And then steal as much as possible, in as many ways as possible. Big fish are hungry, right now, and they’re gobbling up little fish as quick as you can say “Stop” (finance joke).

        Naturally, you can do quite a few other things with money — futures and shorts spring to mind. But they’re so risky that folks won’t let you do that with your retirement fund.Report

      • Avatar Patrick in reply to Rod says:

        The smart play is to make sure the SEC won’t prosecute you for theft. And then steal as much as possible, in as many ways as possible.

        With that, I’ll agree, sure.Report

    • Avatar Vikram Bath in reply to Damon says:

      There, I was trying to paraphrase the FTC’s legal definition from the linked sources, not provide my own.Report

    • Avatar Damon in reply to Damon says:

      @kim
      If you’re calling out 401ks as ponzi schemes, be good enough to add Social Security, because it is.Report

      • Avatar Kim in reply to Damon says:

        Damon,
        SS was not actively lobbied for by people who were going to get rich. Yes, there will be bag holders (though not many, as SS isn’t nearly as insolvent as people keep saying– That Is MEDICARE, which is a Different Program).Report

      • Avatar Damon in reply to Damon says:

        @kim
        Yes, I’m aware that SS is LESS insolvent than Medicare, but really, we’re arguing about a degree of insolvency? Doesn’t matter about the lobbying. Financially, they are both unsustainable given the status quo.Report

      • Avatar DRS in reply to Damon says:

        Getting off topic a bit, aren’t you?Report

      • Avatar Kim in reply to Damon says:

        DRS, aren’t we always?
        Damon, yeah, I’ll go with Medicare being a Ponzi Scheme.
        Obamacare’s working real hard to fix it (throwing fistfuls of dollars at that, in fact).
        [Winner: Taxpayer. Loser: Cheating doctors.]Report

      • Avatar LWA in reply to Damon says:

        SS and Medicare are Ponzi schemes if you think of them as investment vehicles. I am not sure why this should be so.

        Asking one generation to pay for another is what people have done for millennia.

        For that matter, SS can be made solvent for generations, simply by raising the cap on contributions.Report

      • Avatar Damon in reply to Damon says:

        @kim
        Ending one insolvancy by having a different group pay really doesn’t “solve” the problem. If you really think that the ACA will solve this problem I do have a nice bridge in NYC for sale you might want to invest in. 🙂

        But we’re deviating off topic a lot now, I’m ima go home and work out now…Report

      • Avatar Kim in reply to Damon says:

        Damon,
        EHRs remove much of the need for medical billing people.
        And I don’t care bloody much if thieves are forced to get paid what everyone else does. (will that mean fewer thieves? Yup! Fine with that!)Report

      • Avatar Brandon Berg in reply to Damon says:

        Social Security is a pyramid scheme, period. It has never at any point in its history been truly solvent—only “solvent for now.” Each generation has been promised benefits that could not be paid without a broadening of the pyramid’s base (the Baby Boomers) and/or higher taxes on future generations. Hence the periodic tax increases and the state we find ourselves in now despite those tax increases.

        Social Security didn’t have to be a pyramid scheme. If it had promised more modest benefits, such that it didn’t require an ever-expanding base to deliver on them, it would not have been one. But the need for an ever-expanding base is the defining characteristic of a pyramid scheme.Report

      • Avatar LeeEsq in reply to Damon says:

        Social security also suffers from the fact that its funding is occassionally diverted to pay for other funding. You can get rid a lot of the funding problems by giving it access to general funds when necessary and stop using it as a slush fund. It still manages to work fine. The crisis is always predicted but never comes.Report

      • Avatar Kim in reply to Damon says:

        BB,
        or, you know, if we moved the limits for SS with a cost of living adjustment, we’d be perfectly fine.
        But no, you’d rather we cut benefits rather than tax the rich a little bit more.Report

      • Avatar Damon in reply to Damon says:

        @LeeEsq
        “Social security also suffers from the fact that its funding is occassionally diverted to pay for other funding.” Occasionally? The money comes in from taxes to the SSA and is immediatly transferred to the general fund and replaced with Treasure notes. The notes SSA holds are paid of from the general fund when required. This allows the administration/congress to count the money from SSA against the current spending deficit, reducing the apparant debt.

        It’s all bogus.Report

  12. Avatar DRS says:

    Colby Cosh of Canada’s Macleans Magazine wrote on this just the other week:

    http://www.macleans.ca/economy/business/herbalife-or-death-the-wall-street-war-the-worlds-watching/

    Money quote: “…hedge-fund billionaire Bill Ackman…concluded about two years ago that Herbalife is a pyramid scheme—a deceptive, predatory business destined for mathematically certain doom, and also one consigned to Hades by the laws of most civilized realms. He took up a short position against the value of Herbalife’s stock, betting on it to shrink, in time, to a value of zero.

    He then publicized this action, started releasing the ugly results of research reports on Herbalife, and began pressing regulators and investigators to look into this curious company that keeps on growing by ceaselessly building distributor networks in ever more far-flung markets—without ever advertising its products or really coming to general public notice at all.”

    A good column worth reading as it details Ackman’s findings and gives an idea how HL is a careful pyramid scheme that is sophisticated about hiding its methods. Ackman’s PDF about his research is well worth reading: http://factsaboutherbalife.com/wp-content/uploads/2013/01/Who-wants-to-be-a-Millionaire.pdfReport

  13. Avatar j r says:

    It is helpful to stop for a moment and consider the nature of the word “scheme.” It is a bit of an odd word in that, as a noun, it is simply defined as:

    a large-scale systematic plan or arrangement for attaining some particular object or putting a particular idea into effect.

    At the same time, we have the verb “to scheme,” which means:

    make plans, esp. in a devious way or with intent to do something illegal or wrong.

    To describe something as a scheme is not, in itself, a pejorative, at the same time the word carries the negative taint of the verb definition. It doesn’t have to, though. Economists talk about pension schemes or insurance schemes and not in any sort of devious way.

    So, Herbalife’s business model is most definitely based, in part, on a pyramid scheme or, if you prefer, a multi-level marketing scheme. The real question is: how much of their business model is based on that MLM scheme and whether the average Herbalife distributor has a fighting chance to make any money?

    MLM schemes are quite fascinating. I have an uncle who has, at any given time over the past 20 years or so, been involved in one MLM company or another. There is something about the idea that draws people in.Report

    • Avatar Dave in reply to j r says:

      @j-r

      So, Herbalife’s business model is most definitely based, in part, on a pyramid scheme or, if you prefer, a multi-level marketing scheme. The real question is: how much of their business model is based on that MLM scheme and whether the average Herbalife distributor has a fighting chance to make any money?

      Having done a very cursory analysis of Vikram’s arguments as well as reading Ackman’s presentation, if someone presented me with the opportunity to become a HL distributor, I would run and fast.

      My issue with Herbalife’s products isn’t the fact that they are snake oil but they are ordinary commodities priced well above comparable products offered by competitors. I recently priced Herbalife’s post-workout supplement in the 24 series, Recovery. Prices at Amazon.com were in the low $60 range for 30 servings. That’s over $2 per serving. Not only is the cost per serving very high, but the amounts per serving of the supplements included in the shake (branch chain amino acids and l-glutamine) were remarkably low.

      Heck, I’ve seen protein powders from reputable supplements companies (i.e. EAS (Abbott Labs) and Optimum Nutrition) that have more BCAA’s per serving in their product) and cost 60% to 70% less than Herbalife.

      I have no idea what people think they are paying for to justify the additional cost.Report

      • Avatar Patrick in reply to Dave says:

        I have no idea what people think they are paying for to justify the additional cost.

        Typically I’d guess that they are supremely under-informed consumers and the Herbalife business model is a weeding out process that produces a small volume of really excellent salespersons, who drive the actual real sales outside of the feeding on the feeder fish model that churns through the less-than-excellent salespersons.

        Of course, most models like this, you find the good salespersons realize in short order that they’re just good at selling stuff, and they form connections with other industries, and pretty soon they’re selling insurance or bonds or high end automobiles or real estate or something else, and they’re not peddling around with this stuff any more.Report

      • Avatar Dave in reply to Dave says:

        Typically I’d guess that they are supremely under-informed consumers

        As a regular user of “snake oils”, I’d have to agree.Report

  14. Avatar Patrick says:

    Generally speaking, if “pyramid scheme” can even be arguably used to describe your business model, you probably are one even if you don’t qualify as it according to the letter of the law.

    The disadvantage of the pyramid scheme law, as a security system to prevent pyramid schemes… is that it is open, and thus the folks who want to skirt the law can design their pyramid scheme to not qualify (or be defensibly disqualified) on one of the criteria.

    Note that this isn’t necessarily a rejection of the quality of the product. Cutco knives are distributed basically under the same pseudo-really-close-but-isn’t-by-the-letter-of-the-law mechanism, and I like my knives just fine.

    The greyscale between “outright pyramid scheme designed solely for the purpose of fleecing somebody” and “product sold by an arguably exploitative business model” and “product sold by a business model that is disadvantageous for most people who try to become salespersons and extremely lucrative for those who succeed” isn’t exactly starkly defined. Plus, in defense of the far end of the spectrum, there are folks who can sell stuff and there are folks who will never learn to sell stuff and if you’re not going to respond to a business model that places huge incentives on volume selling… eh. It’s effective at figuring out who can sell stuff, that’s for sure.

    Herbalife is objectionable to the extent that it’s mostly utterly woo-driven, but that’s hardly grounds for burning the place to the ground.Report

    • Avatar Tod Kelly in reply to Patrick says:

      I have been thinking out my Cutcos as well throughout this conversation.Report

      • Avatar Patrick in reply to Tod Kelly says:

        I paid $250 for my starter set. I bought them because I figured they were worth that. They definitely have been worth way more than that in the twenty years I’ve owned them.

        Then again, my idea of what constitutes reasonable purchases is much more highly skewed towards durability and long term quality than affordability.

        But I knew I was going to be a shit salesman after two weeks of trying to sell them. I can’t say that this worked out badly for me, or Cutco, or any of the guys I knew who made a lot of money selling stuff for Cutco, either.

        And Cutco is significantly enough like Herbalife that I see the battle to keep one around and get rid of the other is probably futile, given the limitations in the law. We can differentiate between Herbalife and Glaxo, but we can’t really differentiate between Herbalife and Cutco, easily.

        So it comes down to prosecutorial discretion and how good of a legal/accounting team companies like Herbalife are gonna bring to the battle, really.Report

      • Avatar Troublesome Frog in reply to Tod Kelly says:

        It seems to me that if you have a product that’s worth buying, you should be able to make it work without a pyramid-shaped sales force. Cutco seems like one of those operations.

        I don’t think we need to dig too deeply into the nature of the products to deal with this sort of thing. If we ban the pyramid scheme payments from downlines so that salespeople are in the business of selling products rather than recruiting into the pyramid, I’d expect worthwhile operations to stay around and scams to shrivel up without needing to decide whether selling decent knives at a huge markup is better or worse than selling magic water at a huge markup. Aside from the fact that pyramid schemes are very profitable for the top of the pyramid, what is the redeeming value of the MLM structure?Report

      • Avatar Burt Likko in reply to Tod Kelly says:

        Cutco does seem to make a pretty good product, one that I’d consider buying for a starter kit of decent knives. The price is competitive with other mid-level knives (aimed at the hobby home chef, but still a step below what the pros use).

        MLM is a useful way to build a sales force quickly and without overhead. There’s certainly a place for it in the world — the terms need to be fair, but there no reason they can’t be. I suppose I am skeptical of Herbalife’s structure, but that’s from reading so many bad experiences and seeing some of the actual products and being underwhelmed with chamomile and calcium carbonate.Report

      • Avatar Kim in reply to Tod Kelly says:

        Cutcos seem to be overpriced for what you get (are they really using 440A?.).
        I got an outstanding deal on my Shuns (and they’re made
        with legendary powderized steel), with free sharpening to boot.
        [http://zknives.com/knives/kitchen/misc/articles/kkchoser/kksteelp2.shtml]Report

      • Avatar Patrick in reply to Tod Kelly says:

        Well, @troublesome-frog …

        I’m pretty convinced that we could make our private market work without limited liability too, but that doesn’t mean it doesn’t have its uses. Like Burt said, there are some advantages to the MLM model. In fact, the MLM model is a lot closer to the historical norm for mobile selling of goods than the retail storefront. Traveling salesmen bought their wares in place A and sold them in places B.. N because the guy selling the stuff in place A had no real guarantee that he’d ever get his didge back if he accepted commissions.Report

      • Avatar Troublesome Frog in reply to Tod Kelly says:

        @patrick

        What you just described is not MLM, though. In fact, it’s exactly what I had in mind when I proposed that we eliminate the MLM part of the business. You can have independent sales people who buy their own inventory without turning it into a pyramid scheme (assuming you have more than a token product). You don’t need the recruitment / downline kickback model unless you’re using those recruits to subsidize an otherwise inviable business model.

        If you need to grow your business by giving salespeople a stake in the growth, grant them stock in the company. That’s typically what legitimate companies do when they’re not yet stable and they want new hires to take on some of the business risk to grow it into a viable operation.

        These products are sold at an enormous markup. They have to be in order to keep the pyramid scheme side of the business enticing enough to join. If you simply let the person who sold the product have all of the money you would have distributed through the pyramid, you’d either have a viable business that can sustain a sales force or a business that collapses because the products don’t justify the prices. In an MLM pyramid scheme, you can hide the fact that the product itself is a loser by using an every growing pool of failed “business owners” to subsidize it.

        If we had access to more data we could tell which operations would survive. By taking the inventory of failed resellers out of the “revenue” column, you’d see which operations were actually moving product to end consumers and which ones were pure scam. Or, just make it one level and let the whole thing work itself out.Report

    • Avatar Burt Likko in reply to Patrick says:

      So…

      1. They sell woo.
      2. They use an exploitative sales structure.

      What redeeming value do you see?Report

      • Avatar Patrick in reply to Burt Likko says:

        None.

        But I don’t see redeeming value in a lot of crap that I wouldn’t legislate out of existence, either.

        I agree that the fine detail is how much of their sales are actually sales to the public as opposed to sales to the captive audience that is the salespersons. But I doubt that the numbers will be so cut-and-dried that I’d agree outright they’re exploitative to the extent that we ought to be worried too much about them.

        I’d much rather see government regulators crawling up somebody else’s behind.Report

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