FTC Herbalife Settlement

Hi, everyone out there. Kevin thompson here, Co founder of thompson, burton. And we finally have a resolution to the ftc's investigation into herbalife. At least for now we do. Before I start, I want to start off with an old adage that I heard recently. Think about this. A good matador doesn't go after a fresh bull. He sticks them, makes it bleed a little bit, and then he goes for the kill. And that might be what's happening here. Now, I'm not suggesting that herbalife is done long term, But I am saying that the ftc is not letting this go. This does not represent the end of the ftc's process with herbalife. And I'll explain why. So I've had a little bit of time to process the news. Understand that the information here might be a little imprecise. Because I've literally just read the orders once, I've read the complaint once, and I'm still processing new information. So there's the disclaimer. So what happened today? The ftc concluded the investigation. And herbalife and the ftc reached a settlement. Just to summarize a little bit of the history here, it all goes back. Bill ackman. He placed a billion dollar short bet. Arguing that the company was a pyramid scheme. And, you know, stocks and equities. I'm not sure logistically how these trades are done, but you can invest and bet that the company goes down. He said, herbalife's a pyramid scheme. Company's gonna go down to zero. Okay. He starts a very aggressive public campaign. Arguing the company's a pyramid scheme. And the ftc initiated an investigation two years ago. We now have a resolution with some really tight terms. The ftc chairwoman, edith ramirez, Gave some remarks in a conference today. She went really far to say that this settlement does not mean that the ftc considers herbalife not to be a pyramid scheme. Those were her words. She specifically said, we're not saying that herbalife is not a pyramid scheme. She said she was pressed multiple times, and she said she is avoiding that label. So in the complaint, which, by the way, you can't have an order, an agreed order, without there being some kind of a lawsuit. So a complaint was filed. In the complaint, they don't use the word pyramid scheme once. I interpret that to represent some kind of haggling that went on between the company and the ftc. Meaning, you know, don't call us a pyramid scheme. They didn't. But now, if you read the complaint. All the allegations in the complaint Are typically the kind of allegations you see, that would support a pyramid scheme lawsuit. Anyways, FTC says they're not using that label. People can draw whatever conclusion they want to draw. That's what they said. So have the complaint, we have this order. It's fascinating. First and sorry for not being very precise here, the FTC did say that they're going to issue guidance or guidelines for the MLM industry soon. So for those of you wondering what does this mean for me, I think you'll have really clear answers in the near future coming directly from the ftc, which is something that we've needed for a very long time. Now it's going to be interesting to see what the FTC does because the ftc, it's not like the European Union where you have unelected people that create rules. The ftc, they are not elected officials, they cannot make law. And the law currently says in the ninth Circuit that the issue of retail sales is largely undecided. Right. The ninth Circuit said, you know, how much retail sales is appropriate, we're not going to determine that issue. Is it 50%, is it 30%, 80%? They punted. And just to refresh your memory, why is the issue of retail sales important? Because you know, in network marketing companies you can buy product and you can resell or you can promote products to customers and they buy directly from a website and those are considered customers. Customers are important because it proves the product has value. If there's a market for a product outside of the network, it proves that the product has real value. Now if you're selling thousand dollar pencils, there's no market for that product outside the network. The primary motivation leading people to buy would be to qualify to make money by buying these expensive pencils. So retail sales, it's an important metric. Currently we don't have a hard and fast answer. Now fast forward to today. The FTC is pretty clear that they want to see a majority of revenue come via retail sales. Now again, they don't set the law, that's what they want to see. They took that approach in the Vemma case and remember the Vemma case, Vemma currently is under what I call Vemma overlay, where they have to show that 51% of the revenue comes via retail sales. If, if a distributor's downline does not consist of 51% retail sales, they don't get paid. And if you'll recall, and I will tell you, when I'm right, when I make a prediction, I'm right. I remind you, when I make a prediction and I'm wrong, I hope you forget. But I did say that one of the reasons why this discussion between the ftc and herbalife was going on for a long time is that the ftc was using this vemma logic and in the settlement talks and sort of imposing their vision of what. Of what the industry should be. And that's a really tight pill. It's a big pill to swallow. And it turns out I was right. So herbalife agreed to swallow the vemma pill. Instead of litigating, they said, well, we'll do it. So what does the pill look like, the company? It is pinched top and also bottom. You know, it's basically got some barbed wire fences around it. At the macro level, company wide, 80% of the revenue has to come from retail sales. 80%? Yeah. Now, there might be room in that 80% for internal consumption. I'm not really sure. Right. So I apologize for that. But 80% has to come from retail sales. And maybe there's some room there for a little bit of internal consumption. Provided the internal consumption does not exceed a certain amount. But that's company wide. Company wide, you have to show lots and lots of retail sales. If you don't, the total compensation is reduced to 41%. Basically, the way I interpret that is it's a penalty on your top leaders. So if the sales force is not generating enough retail sales, the top leaders, which those are the people in charge of the organization, they're taxed because they're the ones that receive the majority of compensation, as per the ftc's complaint. So they're being taxed basically 10%. That's company wide. And again, is there room for internal consumption in that 80% number? Not precisely sure. Now, what we are sure about, the bottom level, what I call the cellular level, the individual distributor, in order for the distributor to be paid 66% of their total group volume, needs to come via retail sales. 66%. 33% can come via internal consumption, Provided the internal consumption is reasonable. So, you know, distributors spending thousands and thousands of dollars on product. I think it's capped at $200 a month, year one, year two, it actually goes down. Where distributors would. Would be rewarded less for internal consumption. Anyways, in order for the distributor to be paid, 66% has to come via retail sales. That's tighter than the vemma restriction. So how are these retail sales going to be verified? Well, the order clearly fences in these reps. And they say that defendants shall take reasonable steps, including random and targeted audits, to monitor retail sales. So Just imagine people getting phone calls. Hey, show me your receipts. They've got to do it. And the receipts have to be produced. We'll see what this means. There are also some restrictions in the order to deal with refund and income claims. Also, in order for rank advancement. This is interesting. In order to qualify for certain ranks, the metrics have to be exclusively driven via retail sales. So there's not even a downline group volume component? Well, there is a downline component. You can count the retail sales that occur in the downline. But you can't count any personal commission. None. So herbalife has to rejigger its rank advancement standards. To be tied to retail. So in order to qualify for deeper commissions, you have to have a lot of retail activity in your organization. Basically, there's a lot of switches in here. That sort of rebuild the herbalife organization, as the ftc said. And it's tough. Now, let me go back to the original quote that I gave you. About the matador not going after a fresh bull. I've said since day one. On the pyramid scheme front, the ftc has a really tough argument. Because pyramid scheme law is tricky. And they never had sufficient bullets to win in litigation on a pyramid scheme basis. They just don't. Now, in a case against vemma, where you can sucker punch somebody, get them under an immediate injunction, and put them out of business within a week. Different story. Herbalife, different company. So they never really had the high ground there. What they've done is they've. And by the way, there's a 200 million dollar fine as well. So herbalife has to pay a 200 million dollar fine for unfair business practices. The FTC is taking money off the table. Okay, we'll take that money today. You're not a pyramid scheme. Okay, fine. Prove it. Over seven years. Here are the terms. The four corners of the order. Here are the terms. If herbalife slips up in seven years. And the numbers aren't good. Or they violate the order somehow, the ftc doesn't have to sue them as a pyramid scheme. They can sue them and say you violated the order. And the order is very precise. So the matador analogy, Instead of going after a fresh bull, you poke it a little bit, you let it bleed, and maybe something happens. Maybe there's action on this. I don't know. Maybe there's never action. Maybe herbalife can honor the terms of this injunction. Maybe it hurts domestic sales. Keep in mind, I think 20% of herbalife's revenue comes from the US. This order does not impact the international business. So stocks are up. Currently, it's up 11%. Originally, it was up 18%. Now it's softening up, I think, as analysts realize. Well, crap. Long term, who knows what's gonna happen? So, anyways, it's not quite an uncork the champagne bottle kind of moment, but the investigation is over. Herbalife gets a chance to prove itself. With some pretty tight modifications. Again, those modifications are company wide. 80%. If it's not 80%, there's a 10% tax on what the company can pay out. Bottom level distributors don't get paid unless 66% of the volume comes via retail. Rank advancement. It only happens based on exclusive retail metrics. And of course, there are some other things here. But pretty clever on both sides. Herbalife for getting it resolved. And for the ftc, it's kind of like an alligator that, you know, Takes its prey down to the lake. Where it has an advantage. Pyramid scheme argument. Ftc doesn't have the advantage here. We have a crystal clear agreement. So we'll see. What does this mean for the industry in general. It means the ftc wants retail sales, period. And there needs to be incentives in the plan. That lead to meaningful retail sales, period. Also, part of the restriction here is that there can be no order requirements. For herbalife distributors to qualify. Ftc doesn't like this whole auto ship business. So we're going to do more analysis on this. I just wanted to push this out there. Now that my thoughts have crystallized. And I've read more and studied it a little bit more. Ask questions, right? It's a developing deal. Ask questions. And I'm happy to help you out.