Herbalife Announces FTC Investigation

Hi, everyone. Kevin thompson here, mlm, attorney and managing partner at thompson, burton. And as you can see, I am not in the office. I'm currently away out of town visiting with another client of mine. But there's some big news happening, and this video is very important. So herbalife today has announced that the ftc has initiated an investigation. Herbalife probably received a subpoena. Where the ftc is looking to learn more about the business. And as a publicly traded company, herbalife is required to disclose the investigation. So this video is important because just today, as the news is breaking, and people on cnbc and bloomberg, and they're all talking about it, There's a lot of bullshit about the implications of what this investigation means. And the future of the network marketing industry. And I want to give you my opinion. So here's the deal. A regulatory agency can lead with an investigation before making a decision. If they're going to file a lawsuit, it doesn't mean they're going to file a lawsuit. The ftc, in every situation that I've seen them operate, usually they lead with a handgun, and then they pull the trigger, and they ask questions later. This is a scenario that's a little bit different. They send a subpoena, probably, and they want information. Now, the point I want to get across here, Herb greenberg is really quick to say that there's an article written by the ftc's expert. It was published about a month ago. And, you know, if that article represents the position of the ftc, then herbalife is in trouble. And I want to talk about that. The article came out a month ago, and I'll publish it on my blog, and we'll talk about it here. The article essentially was an argument. It was an argument that the law needs to be clarified. There's a historical analysis of pyramid cases. And various interpretations of internal consumption were given in the article. Internal consumption, as you know, is paying commissions. When distributors in your downline buy and consume the product, for the most part, it's legal. The law, as it stands today, is that it's legal to pay commissions on internal consumption. Period. End of story. Now, the issue always boils down to how much internal consumption is appropriate. At what point does it get to be ridiculous? Suppose we're selling thousand dollar pencils, okay? It's a product. Commissions are driven by product sales. 100% of the revenue is from the network. That would be a problem, okay? So the issue is how much revenue needs to come from sales. And I'm saying right now, the law, as it's Written and as it's organized and all these various cases and statutes and what have you. Because mlm law is a mess. It's how I make a living. The law as it stands today is that internal consumption is legal. Now, in that article, vandernat, along with bill keep, who co wrote the article, mischaracterized the 70% rule. They just flat out mischaracterize it and say that the law says that 70% of a distributor's order, product, order needs to be sold. And that's not reality. This is what really frustrates me when I watch the news. You see all these opinions from people out there. They have no idea what they're talking about. Now, van der naad, I put him in a different category. He's got a lot of experience, and he's the ftc's go to person when it comes to breaking down the pay plans and the behaviors driven by the pay plans. But the bottom line is, that's not accurate. It's not accurate to say that 70% of all orders needs to move to customers. So when you have that assumption going into the argument, you can control the outcome essentially with that. With that argument. Herbalife's a pyramid scheme, right? People buy product because they want to use it, because they want to lose weight, because there's value in what they're buying. And they're not reselling 70% of it to customers. Although apparently 30% of all of herbalife's orders are drop shipped to customers, right? That's a pretty compelling statistic. 30 plus percent of all drop ships go to retail customers. That's a separate issue. The 70% rule gets bastard. Bastardized because there's no historical framework. Back in the day with amway platinums, then, they were called directs. Bought inventory for their entire downline, which means everybody beneath them. That was not a direct. So they bought a lot of inventory for their whole organization. And those directs, because they were called directs because product was shipped directly to them. Those directs would then distribute product to their organization. Out of all that inventory, 70% had to move. Well, who did it move to? It moved to the downline, it moved to distributors. So even back in the amway case, internal consumption was contemplated. The idea of paying commissions on internal consumption was validated. Amway survived, they're legal and they're doing great today. So be careful here. Bottom line, all this is an investigation, in my opinion, and I'm not just looking at this with rose colored glass as being a pollyanna optimist. It's unpleasant to go through investigations. But this gives herbalife an opportunity to vindicate itself. Sorry about that. I gotta turn you off every time somebody walks by. This gives herbalife an opportunity to put the issue to bed. Ackman can maintain a short position for years. Now, if the ftc investigates. And there is no enforcement action within a year. I've had a client in the past Deal with a subpoena for two years From a regulatory body. And to this date, there has not been a decision about what to do with the company. So these things can take time. But if the ftc gets what they ask for via the subpoena, which they will, and they decide to move on, Then ackman's done. In my opinion, that's what's going to happen. The ftc does not have a case against herbalife. The law, as it's written today, as it has been interpreted. Herbalife is a perfectly legal and legitimate model. Now, what I think should happen. The ftc should take this data, Meet internally with whoever. And come up with some guidelines for the entire industry. They should use this as an opportunity to crack open the skull of a really big company. Get the data, they can see the behaviors in the field. They can really look at this closely. And they can let this information Drive themselves internally. To create some standards for the rest of the industry. Filing a lawsuit. First of all, they're going to lose because the law is not in their favor. As made evident by that article that I referenced earlier. Written by vandernett, the ftc's chief economist. The law is freaking complicated. And it has evolved over 30 or 40 years. It is not clear they do not have the bullets to put down herbalife. So I digress. The ftc should use this as an opportunity to learn and to publish some guidelines. Now, what should those guidelines look like? That's a really big discussion for another day. But I do want to say this. I called this five years ago. So, yes, I'm patting myself on the back. The first thing I did when I started my practice, I wrote an ebook titled, Saving the network marketing industry by defining the gray. This underbelly of the industry is getting bigger. Companies are out there selling bullshit products. Thousand dollar lemonades. Everybody's trying to outdo each other. With respect to their pay plans and how much they can tap into new participants when they enroll. You got people charging two thousand dollar buy ins for inventory immediately upon enrollment. And if they buy the inventory, they get additional sweeteners in the pay plan. It's getting crazy out there. So that gray we need to shrink it. We need to help the marketplace, consumers, that's you guys, Distinguish between good companies from bad companies. All these fly by night, crazy opportunities, Easy money, done for you. Systems, forget about it. Focus on product. Start selling product. If it's not a product that you believe in, get out of the company. So internally, we've got to improve. Externally, I think we're going to improve Whether we like it or not. When the ftc publishes some guidelines. Again, I don't think they're going to sue herbalife. That being said, I'm throwing a lot at you, But I got on a tangent. What will the guidelines look like? If the ftc publishes guidelines? I think they're going to increase the disclosure requirements. So that the success and failure rates of distributors will. Will be readily known when new people enroll. I also think my opinion, and I'd be okay with this. That the ftc is going to restrict companies. From requiring production to qualify for bonuses. Essentially eliminating the auto ship requirement. So I understand. Auto ships, that's the lifeblood of a lot of companies out there. Where people, if they're not on auto ship, they don't qualify for commissions. I think the ftc, by way of their guidelines, this is my prediction, they're gonna do away with it so well, I can't really edit this thing. All that being said, a lot going on. You guys take care. Keep your heads on straight. Don't panic. The news, bloomberg, cnbc. Maybe one day they'll have some people. That know what they're talking about on their shows. But in the meantime, I think this represents a good opportunity. For herbalife to put this issue to bed. Ackman's desperate, Absolutely desperate. And the herbalife distributors keep performing. Surprisingly so. Keep getting it done. You guys take care of.