Herbalife - Bostick Class Action Settlement (Preliminary)

Hi, everyone there. Kevin thompson here, Mlm, Attorney and managing partner at thompson, burton. And there's some pretty significant news happening today. In the network marketing industry. Herbalife tentatively settled its class action case with bostic. So the bostic case was filed in April of 2013. It was filed five months after Bill ackman did his initial presentation. Where he shorted herbalife stock. These lawyers struck when the iron was hot. Good for them, I guess. Depends on who you are. But the case has sort of been looming over herbalife for a long time. And nobody really knew how it was going to shake out. And how it was going to impact the company. Amway settled a class action case, I think it was 2012, which was also filed in the central district of california. And that case cost them. It was a significant sum of money. Forgive me for the lack of precision there. It's in one of the earlier articles that I've written about that settlement. But it was. It was a big number. So nobody really knew what to expect. Regarding how herbalife was going to settle this case. It actually settled for a lot less Than what I thought it would cost to settle for. It settled for $15 million cash, essentially. And there's a lot to learn from it. First, in this memorandum that was published. Where they're proposing the settlement terms, Plaintiff's counsel is very careful. To be respectful of the other side. He's be respectful of herbalife's arguments. And so, while the plaintiffs in that case had some good arguments. That herbalife was allegedly a pyramid scheme, they also acknowledge that herbalife had good arguments Refuting those allegations. So it's interesting to read the memorandum. Literally, if you have time, just read the first 15 pages. It's a quick read. And then after that, it gets a little bit technical. Regarding the settlement terms. How is this relevant for the industry in general? I think if you look at some of the corporate reforms. That herbalife has to make As a result of this settlement, It'll give you a good sense as far as things that companies can do. To be more responsible. So I've got a bunch of these written down. I'm just going to kind of go through these pretty quick. And actually, all of these changes herbalife is already doing, They've been doing it in response to ackman's attacks. They're sort of trying to get ahead of the curve, Grow up, so to speak, for lack of a better way of putting it. So corporate reforms, here they are. Discourage people from going into debt. That's a field thing that involves compliance, education, Teaching the field what not to do. Apparently, that happened. Cover shipping charges for return products. Herbalife is obligated, by way of the settlement, to cover those charges. They're already doing that. They've been doing that, I think, for close to a year, maybe longer. Prohibit the selling of leads. This is something that was unique to herbalife. Where they allowed field leaders. To promote lead generating services. And apparently those services weren't very good. People would pay money for the leads. But they didn't really turn into good prospects for sales or for recruits. Herbalife stopped this, I think, a year ago. That's part of the settlement term. They have to prohibit purchasing product. As a condition to participating in the pay plan. Again, I'm not sure if herbalife actually ever did that. But I always advise every single client. You can never require people to buy a product or service. In order to participate in the pay plan. Because here's the thing, Regulars want to make sure. That people are buying product for the right reasons. They're buying product for value, not to participate in a pay plan. And if you are literally requiring people to buy sort of as the gateway to get into the pay plan, it's going to be easy to argue that, well, people are buying to qualify, period. So you always want to make that optional. In theory, people need to be able to join a plan. And ascend to the highest ranks. Without recruiting a single person. In theory. Now, of course, you have a lot of pay plans. Where they require you to develop certain leaders, which means you have to recruit some people. But that can't be the emphasis of the program. They are. The other thing that herbalife has to do. Is they have to require training. For people to operate nutrition clubs. That's something they're already doing. Nutrition clubs for the uninformed. It's or it's unique to herbalife. In that people can operate their own retail establishment equivalent. Where they can host prospective customers, or recruits, or prospects, whatever you want to call them. Where people can get together, sample the shakes, Compare their results, do before and after pictures, all that stuff. It's kind of a culture building thing. Ackman has pointed out that some of these nutrition clubs. Are exploited or exploitative. Where that they're misleading prospects. About the viability of the opportunity. And it's all false and misleading and fraudulent. That's something that ackman seized on in his last presentation about three months ago. So herbalife is required to train these people. Before they're allowed to operate these clubs. Number six, kind of a no brainer. They have to maintain enforcement over these policies. They can't turn a blind eye to it. Number seven, which is interesting, which is an important takeaway, I think, for every company out there in the industry. They have to require that all applicants acknowledge that they've seen the income disclosure statement. Herbalife calls it something different, Like a statement of average earnings, Et cetera, et cetera. And that this statement, it cannot just include the average earnings of people that have made money, because there's a lot of people in the program that haven't made any money. And so when you factor in those people, the average obviously goes down. So herbalife has to disclose the average earnings. Based on every single person in their business. Now, they've been doing this since 2012. What's very interesting here, this is one of the things that was in favor of herbalife. Where the plaintiff's attorneys sort of tip their hats to herbalife. The argument made by the plaintiff Was that if prospects were fully informed. About the low average earnings, that they never would join. And as it turns out, Herbalife has been providing this data For a two year period. And it hasn't impacted their enrollments at all. So the idea of more disclosure Will lead to less activity. The plaintiffs got that wrong. Where, in fact, being more honest, more transparent, it didn't kill growth, which should be encouraging for companies that need to do this. It's not bad for business to disclose average earnings, Even if those averages are low. Because, candidly, people pursuing a business opportunity. Are looking to make money in the endeavor. They understand that it takes work. Intuitively, they understand that success takes work, that it's not easy, that the average person does nothing. I think intuitively, they get that. So if you provide that disclosure, it's not going to kill your business. And the final thing is a bit nebulous. They say that the agreements need to be less nebulous, Less confusing, so new participants can quickly research Whether or not it's an opportunity for them. So what does this mean Relative to herbalife's investigation by the government? The ftc issued a subpoena to herbalife about a year ago, which came soon after senator markey, I think he's a senator out of massachusetts, Wrote them a letter calling on them to investigate. How does this impact that investigation? I don't think it impacts it much. I have maintained a thesis since January of 2013. That the federal government doesn't have the bullets to really put down herbalife. Herbalife is not a pyramid scheme, as per the current rules that we have in place. Now, I have Also said that this is a good opportunity for the ftc to start a conversation about ways to make the industry better. Ways to help consumers distinguish good from bad. Suing companies and hoping that it shakes out in their favor. It's not the best way to carve out the law. It needs to be more deliberate. Will herbalife be fined or punished? Look, I mean, bill ackman has spent $50 million investigating the company. The federal government is probing herbalife. The they're going to find something. I'm not sitting here drinking kool aid, Thinking that herbalife is a perfect company. I don't think there's a single company on wall street, by the way, that's perfect. I think if you dig deep, you're going to find something. Will they be punished for some of the transgressions that they allowed in the past, Such as these lead generation systems, such as nutrition clubs? Probably. What will that cost? I'm not sure. But anything short of michael johnson's head and a platter. He's the CEO of herbalife. Anything short of his head and a platter, and I think herbalife is going to be positioned to do very well long term. His head is not going to end up in a platter. I don't think the ftc is going to sue to have herbalife shut down. So at some point between now and the ftc's decision, we just need to wait. So, with that being said, the settlement is important. Because it's just one more doom cloud that has been lifted. And it's been lifted in favor of herbalife. So they're taking care of their issues one issue at a time. The one that lingers is the federal investigation. Again, they're going to continue to do their work. They're going to do their due diligence. That being said, this herbalife is. I'm sorry. The settlement is preliminary, and the court has to approve it. To ensure that the class is fairly represented, that the settlement is fair. In the amway case, the initial settlement was rejected. And they had to go back to the drawing table. And beef up the cash for the class. Here again, it's $15 million. Which includes product refunds for people that are holding inventory longer than a year. And for people that loaded up on inventory, they spent more than $750. They're going to be able to get some relief. If they bought the inventory to participate in the business opportunity. I found that interesting, how they're going to distinguish. People pursuing the opportunity. Versus people looking to save money. I'm not sure how they're going to distinguish those two. But like I was saying, that the settlement has to be approved by the court. And apparently, lolak, which is an organization for latin american citizens, they're going to oppose the settlement. And say that it's not large enough. To cover the losses sustained in the community. With that being said, I actually sent them a question via twitter. I have not gotten a response back. The leader of lolac is brent wilkes. In ackman's last presentation, he had alluded to he has learned more about the latin american community. And that he intends on supporting organizations. That help latin americans. By way of his earnings from this herbalife bet. He said that. And I immediately thought to myself, I wonder if that's why lolac is really anti herbalife right now. If there's something in it for them. If there's a communication between agman, where he said, look, if I win, I've got to give it to charity. I'll give it to you guys. I don't have any information. It's all speculation right now. I did ask the question. We'll see if I get a response. But I do think that's a question worth exploring. You have to follow the money in these things. To really get to the heart of what's driving the motivation. So we'll see, you know, will the settlement hold? Will it be approved? Will it be opposed by different people? The bottom line is, it's a big deal for herbalife to get this thing behind them. And for existing companies in the industry. Look at the changes herbalife has made and get ahead of the curve. Because I think this is what the regulators are going to expect in the future. It's especially true regarding that income disclosure statement rule. Where new prospects have to acknowledge that they've read it and they understand it. So, hey, guys, that's the deal. A lot of information. Take care.