This is a real long post. I take hold done a lot of piece of work on Herbalife that should live made world – in addition to I am travelling on several long-haul airplane journeys which gave me fourth dimension to splice it all together. [Now inwards New York via London in addition to the Middle East.]

There are Herbalife groups all around the ground in addition to they reverberate the grapheme of the community they are in.

But I desire to start y'all inwards State of Israel inwards a mostly Arab (though mixed) town. It could live Nazareth (but it isn't). There are mixed clubs throughout Israel. I am assured in that location are non-mixed clubs besides but nosotros take hold non been to them. For illustration in that location are clubs inwards Rahat (the largest Bedouin metropolis inwards Israel).

My colleague - who took the notes from this see - promised the relevant people that he would non reveal their secrets - so I am non going to tell y'all the special town in addition to I take hold changed the call of the people at the club. [The Arab womens' names I take hold chosen are to the best of my cognition appropriate alternatives. If I take hold that fleck of the civilization incorrect I apologise.]

The gild is managed yesteryear Asriyah, who is a belly trip the lite fantastic toe teacher. The members run across every (almost) every eventide in addition to take hold a similar process:

1. Drink the milk shiver (the food) – which costs around 12 shekel.

2. Drink a Herbalife tea.

3. Drink H2O amongst Aloe Vera.

Strangely this monastic say differs from Herbalife clubs inwards countries I take hold visited where the tea or H2O comes first.

This whole repast costs xviii shekel (USD4.70) which is cheap relative to the repast replaced. The gild saves members money. [The repast beingness inexpensive relative to the repast replaced applies inwards most markets I take hold seen but non inwards China.]

During abrupt weight loss a fellow member mightiness take hold 10 of these meals a week, adding some other repast per day. Long fourth dimension customers often drib to 5 repast replacements per calendar week - which is usually sufficient to maintain the weight off.

While they drinkable the aloe water, in that location is a give-and-take “managed” yesteryear Asriyah.

My colleague arrived belatedly (when they were drinking the H2O in addition to joined in). Asriyah asked each fellow member to tell a fleck close himself or herself in addition to their progress.

There was Lubabah – who is religious in addition to works inwards a banking company – she has been a fellow member for 6 months in addition to has lost xviii kg. She brought inwards some other 10 members (her friends), all similar background. Each i lost betwixt 7 – xviii kg, in addition to they also stair out the diameter loss (they total around 100 cm).

Importantly, Asriyah knows all the numbers in addition to is constantly motivating them.

These people come upwards amongst bad habits (they hardly drinkable H2O - in addition to instead drinkable Coca Cola, they eat a lot of carbs in addition to do no sports).

They all take hold fast results amongst (relatively) little exertion (they are non doing the tough sports, just the specific diet in addition to some exercise).

There was also a priest, who lost 12 kg in addition to has claimed that he tried sports, but ended upwards eating pita staff of life amongst chocolate so did non lose weight. He measures weight loss in addition to musculus gain.

There was an Arab adult woman who lost 21 kg, so brought her miss was well.

She told us that she never hears whatever goodness words from her hubby – it is all close serving him in addition to how fatty she was. For the firstly fourth dimension inwards her life she feels “like a i M k dollars” in addition to is much happier.

Asriyah has 5 Ethiopian customers – i lost 27 kg in addition to is getting groovy feedback from her kids, in addition to some other requests from her hubby (she smiled in addition to everyone clapped).

I could go on amongst these – my colleague heard xxx members. The mutual subject was the amazing results, the understanding of proper eating habits which some did non have, in addition to the positive feeling due to the change. The average “duration” of the customers is over 6 months, in addition to some were in that location for 2 years.

Asriyah knows each customer’s information yesteryear heart, in addition to is the motivator – she WhatsApp'ed them a few times a 24-hour interval in addition to asks to present her what they ate – they all “complain” but love her in addition to experience they that at in conclusion someone cares close them.

The adult woman who served my colleague H2O has 8 customers in addition to is “in process” of opening upwards her ain club, but is still beingness “mentored” yesteryear Nuwwarrah (an upline member). The organisation recommends having at to the lowest degree 10 customers before i opens a club. [The organisation inwards this context is the organisation run yesteryear a real senior distributor rather than the fellowship – but of that I could non live sure.]

After this finished (each i got his/her adventure to talk), they all take hold a fitness session – some indoor (the Arab women) in addition to some out inwards the park. Exercise was some variety of belly dancing. It does non aspect besides hard to us, yet i must recollect that some take hold non done ANY workout for years.

It is pretty obvious this is working really well.

(a). The clear results of the computer program – they really lose weight in addition to acquire non-fat.

(b). The emotional back upwards – this is the ground why i needs clubs – for the back upwards – just similar nosotros view running teams. People do this ameliorate inwards a grouping than alone.

(c). Social. They acquire real unopen friends. The atmosphere was real open, in addition to they acquire a adventure to verbalise over their weakness (fat, loss of control) amongst no shame, because everyone has a similar problem.

This is similar the alcoholic groups or parents that run across for youngster treatments (e.g. ADD).

There are other aspects too.

(d). Importance. For some of these people, this is the firstly in addition to only fourth dimension they are “recognized”. Some described a life where no i sees them – they are in that location to serve, are non attractive in addition to take hold real depression self-esteem. It is non like shooting fish in a barrel for “normal” successful people to empathise this aspect – they take it every bit a given, yet fatty people endure from depression esteem from an early historic menstruum – they acquire used to beingness laughed at.

Medical claims

Herbalife distributors are non allowed to create medical claims every bit a affair of fellowship policy - but inwards give-and-take amongst gild members medical claims were made. There are some existent medical improvements that are a upshot of this diet, in addition to the lives of some take hold improved a lot. Diabetic handling was minimized, in addition to many other examples were given.

My colleague was skeptical close the extent of medical claims. Whatever: losing weight (per-se) rather than Herbalife products really does take hold some major effects.

Along the way I take hold met (not at this club) people who claim that Herbalife cures arthritis - in addition to that is clearly faux - but losing xx kg reduces strain on joints.

Remuneration

Asriyah makes around 15K shekels a calendar month on this activity, which agency she tin halt her other piece of work – it is a substantial motivation. However when asked what motivates her, y'all tin view that it is the feeling of doing goodness to others, gaining a large number of friends (she considers ALL members every bit friends) in addition to the contribution to others she has. It was the same response from up-line supervisors. They relish what they do, believe they take hold a groovy exertion in addition to results, gain many friends (“it is the people – that is what nosotros enjoy”) in addition to create a proper living. Some of the up-line supervisors create roughly 100K shekel/month (good coin indeed given their prior circumstances). However they take hold a large number of clubs beneath them.

This is typical

I take hold visited 17 different Herbalife distributors inwards 7 countries including China. There are commonalities: the production is sold yesteryear creating in addition to maintaining a sense of community in addition to results in addition to wellness claims are ubiquitous. Several friends take hold visited clubs inwards still other countries - in addition to reported dorsum similarlu.

There are lots of consumers who take hold built the gild into their lifestyle. Sure they pay to a greater extent than than poly peptide shakes are worth - but they acquire to a greater extent than than poly peptide shakes. They acquire a community, friends in addition to the back upwards needed to acquire results.

This is what the facts on the ground aspect like. They do non deport any resemblance to Mr Ackman's long presentation. There are clubs catering to police clitoris officers inwards Miami, clubs run inwards Asian communities inwards Sydney, clubs which are Moslem social meetings inwards Malaysia, strangely different social-groups inwards PRC [which I volition verbalise over below] in addition to clubs inwards beer-bar-brothels on the beach inwards Kingdom of Cambodia in addition to Thailand where local piteous people sell diet shakes to overweight High German sexpats [no I am non kidding in addition to I volition special i of those afterward inwards this notation too].

But inwards every instance the gild sells existent production inwards an ethical manner.

Herbalife is inwards my sentiment a highly ethical company. This is completely inwards contrast to the received sentiment on Wall Street. It does goodness work organisation inwards a fine mode in addition to it has many years of growth ahead of it. [Incidentally I think the growth is a close certainty besides – in addition to explicate my reasons below.]

It is the stock inwards the portfolio I am most proud to own. It is also the stock close whose long-term prospects I am most bullish.

This was a surprise to me

You larn a lot of things beingness a facts-on-the-ground driven professional person investor. The ground is a complicated topographic point in addition to businesses piece of work inwards ways that y'all do non expect.

However Herbalife has surprised me to a greater extent than than whatever fellowship I take hold studied inwards the in conclusion decade.

When Bill Ackman made his master copy presentation Deal Book.

Mr Ackman's presentations

The Herbalife short-story exploded to the front end page inwards belatedly Dec 2012 when Bill Ackman (Pershing Square Capital) presented a massive small presentation over iii hours. The presentation is still on the cyberspace here:

http://www.visualwebcaster.com/Pershing/91149/event.asp

This was done inwards every bit high a profile way every bit possible.

The Ira Sohn Conference is a charity lawsuit originally inwards New York in addition to heavily Jewish - but at nowadays global in addition to less plainly Jewish. The most famous hedge fund managers inwards the ground give a “best ideas” presentation for an audience that pays many thousands of dollars per seat.

The conference is where David Einhorn presented his famous Lehman presentation (that was widely credited every bit beingness a precipitator of Lehman’s collapse).

Ackman called a “special” Ira Sohn conference (with a $25 i M k donation to the charity) in addition to presented for iii hours on Herbalife.

The essence analysis is that Formula 1 [Herbalife's key poly peptide milk shiver product] is just some other version of commodity protein-powder (just similar many other brands) but they sell at premiums to those other brands. They are commodities every bit per this slide:

Indeed Mr Ackman goes farther - in addition to says that in that location is no existent ground to purchase the product:

But that ultimately (according to Mr Ackman) the ground why Herbalife sells so much production is that it is all close the “business opportunity”. To quote Mr Ackman's conclusion:

Bill Ackman so goes on for close 50 slides sampling huge amounts of “get rich” literature from recruiting distributors which pretty convincingly shows that some distributors create unrealistic claims. This literature does non come upwards from the company, nevertheless many of the distributors making unrealistic claims are senior inwards the chain.

There are some things inwards this presentation that are flat-out-silly. For illustration Shane Dineen (a Texan analyst who seemed to take hold railroad vehicle of the stock for Pershing Square) asked rhetorically at i dot if nosotros knew whether in that location was a unmarried legitimate end-consumer of Herbalife anywhere inwards the world.

This is clearly in addition to patently wrong. But Bill Ackman described Shane Dineen's component subdivision of the presentation every bit beingness the resultant of a year's work.

Shane Dineen's proposition that it is possible that in that location are no legitimate consumers of Herbalife is flat-out-inconsistent amongst the amount of inquiry Bill Ackman has claimed to take hold done. It is dead easy to discovery legitimate consumers - in addition to and they volition proudly present y'all the before in addition to after photos. You may non similar the cult-like conduct of many Herbalife consumers - but many volition sell y'all on the production in addition to they are not distributors. [This is a fellowship where the customers who often take hold non signed a distribution understanding are rabid believers.]

Bluntly - either Pershing Square (Bill Ackman's fund) did non do every bit much piece of work every bit they said or they are trying hard to check into a pre-ordained thesis.

Ackman clearly states that most the sales are internal to the network in addition to that the break-up (which the fellowship made inwards response to David Einhorn) betwixt “real” distributors in addition to “discount purchasers” is phoney. He notes that in that location are easily available Herbalife products online (on Ebay) at a 35 percent discount - in addition to hence it is insane to acquire a distributor for a 25 percent discount.

Essentially Pershing Square argues that it is a pyramid in fact in addition to a pyramid at law.

[The fact that y'all run across plenty of people who acquire distributors for a 25 percent discount is non deemed worthy of attending here. They do it because they are members of a weight loss gild (alcoholics anonymous for fatty people) but every bit Mr Ackman does non view the community he does non view this every bit sane.]

Whatever - Bill Ackman wants to debate in that location is non sufficient existent consumption - inwards other words in that location is an endless chain of recruitment in addition to inventory loading. He quotes FTC guidance on inventory loading inwards this slide:

Bill Ackman also tries to refute the refund assay inwards Amway:

He also has slides that dot out that inwards some countries (e.g. El Salvador) in that location is no render policy. He also finds an affidavit of a client who “threw out” $5000 worth of Herbalife. [There is at nowadays a render policy inwards Republic of El Salvador - but in that location may non take hold been when Mr Ackman wrote his slides.]

Mr Ackman's allegation is that the refund is much less generous than Amway - in addition to that it is almost impossible to claim (too many onerous audit requirements) in addition to so this must live an inventory loading pyramid.

We volition acquire dorsum to the refund rules afterward because the fellowship amended them seemingly inwards response to the Ackman presentation.

An observation on returns in addition to inventory loading

It was on returns I found the firstly clear chink inwards Bill Ackman’s presentation. Herbalife is vast (calculations below but close 6.6 percent of the size of McDonalds globally inwards terms of numbers of meals served). If in that location is really a lot of “inventory loading” in that location must live huge amounts of inventory somewhere looking for a home.

You would aspect to discovery it on Craigs List in addition to Ebay - inwards other words where people sell unwanted production - in addition to if the volumes were every bit Bill Ackman suggests so it would live sold inwards distress on these formats.

It is not. It is almost non-existent on Craigs List in addition to never sold at a abrupt discount. There are lots of sellers on Ebay - but they all sell it amongst a “buy-it-now” cost at a 35 percent discount and they take hold been selling it for years.

If y'all assay to discovery out who the sellers are they volition non tell you.

Here is a typical illustration - the sale of 2 tins of Formula 1 - gratis transportation inwards the USA:

http://www.ebay.com/itm/NEW-2-Herbalife-Formula-1-Shakes-MULTIPLE-FLAVORS-FREE-SHIPPING-/251478333014?pt=LH_DefaultDomain_0&var=&hash=item3a8d46d656

The seller (“Zoomherbal”) has over xi M bits of feedback in addition to has sold this item almost 4000 times. They take hold belike sold xx M Herbalife items. Selling xx plus M items suggests that selling Herbalife products on Ebay is a work organisation for “Zoomherbal”.

“Zoomherbal” is breaching the rules of Herbalife because Herbalife does non similar people selling online every bit it undermines the work organisation of the existing distributors.

The 35 percent discount agency that the distributor is almost for certain a fairly high-level distributor in addition to buys it (say) a 50 percent discount - so they tin do this in addition to create money.

I take hold extensively looked on Ebay (and inwards diverse countries) but I cannot discovery whatever beingness sold inwards distress.

My conclusion: inventory loading does non happen.

The existent response to Bill Ackman

Bill Ackman asked (rhetorically) why y'all would purchase overpriced poly peptide shakes at total cost (or fifty-fifty a 25 percent discount) when cheaper materials is available online in addition to inwards supermarkets.

He does this many times

The reply is obvious. The production is non the poly peptide shake. It is the community back upwards for diet. In other words it is the gild inwards State of Israel amongst the belly-dance fitness instructor, or the cafe (in Queens) or the Dance Club (in Malaysia) or the kicking military camp inwards Sydney or whatever. It is non substantially different to the enquiry every bit to why would I purchase a $10 drinkable at a bar when I tin purchase the same drinkable for http in addition to drinkable it at home? Of course of didactics context matters.

The production Herbalife sells is the MLM - it is the community. It is the club. Not acknowledging that is the fundamental mistake inwards Mr Ackman’s presentation.

Indeed when he analyses the production every bit a "commodity" he misses the point. Someone i time asked me if what Herbalife sold was hugs. Yes, in addition to inwards some cases literally. I suspect it is the biggest hug seller inwards the world. When I aspect the distributors acquire genuine friends amongst their customers. They tending close their customers. That is the powerfulness in addition to enthusiasm that this fellowship provides.

Lead selling scams

One novel thing inwards Ackman’s Herbalife presentation (and where the taint against Herbalife is hard to create go away) is the prevalence of lead sellers inwards the network. Here Mr Ackman is on stronger ground.

The most offensive of these was a guy yesteryear the call of Shawn Dahl who had a work organisation called “Income at home”. As the inventory loading thesis (which was the master copy essence short-thesis) disappeared the stories close Shawn Dahl grew louder.

There is a reasonable press story hither (probably sourced from people associated amongst Bill Ackman):

http://www.theverge.com/2013/3/27/4099100/income-at-home-herbalife-scamworld-biz-opp

Dahl belike sent over 2 billion scam emails inwards the 2010-2012 - y'all were told close a adult woman who earned 7-10 M per calendar month working from home. At my hedge fund nosotros take hold a few electronic mail accounts nosotros collect scam emails inwards (for the ground of finding stocks to short). We saw hundreds of “work from home” emails.

The emails in addition to the firstly click did non topographic point Herbalife - but I assemble that is where they led you. To acquire into the work organisation chance y'all needed to purchase leads, websites in addition to other services from Dahl. The amounts of coin fleeced yesteryear people who purchased these services were large in addition to it was non hard to discovery people who had been wound yesteryear the atomic number 82 sellers.

There were numerous stories inwards the press close the harm caused yesteryear atomic number 82 sellers in addition to in that location were iii large atomic number 82 sellers inwards the organization. The iii large alleged atomic number 82 sellers were Shawn Dahl, John Peterson in addition to Doran Andry.

Two of those (Dahl, Peterson) were highly active. Doran Andry was a atomic number 82 seller dorsum inwards Mark Hughes 24-hour interval - in addition to was in addition to remains a real senior distributor (Chairmans Club) until this day. However he was successfully sued for fraud yesteryear some wound distributors a decade agone in addition to settled. To my cognition he has non sold leads since. [All Ackman examples involving Doran Andry are over a decade old.]

Herbalife implemented a dominion alter inwards March 2013 (about iii months after the Ackman presentation) such that anyone who sold leads was disqualified every bit a Herbalife distributor in addition to lost their downline. Dahl in addition to Peterson severed links amongst the company. Doran Andry remains soundless (but still presumably collects checks from his downline). Dahl went to Nutrie some other MLM (not real successfully it seems) in addition to y'all tin discovery his twitter feed here:

https://twitter.com/shawndahl

John Peterson shot himself inwards the roof of the oral fissure (to a surprising amount of press coverage).

When the fellowship banned atomic number 82 sellers it said that it would take hold a depression single-digit negative effect on sales. You can’t view it inwards the sales numbers during the next iii quarters. However sales take hold been weak at nowadays for iii quarters in addition to some shorts take hold blamed the weak sales on this change. [I do non think so - in addition to I take hold a demonstrable explanation of the weak sales below.]

The rules for Herbalife clubs

In Pershing Square's presentation much is made on the seemingly perverse rules for setting upwards Herbalife clubs in addition to how dowdy they all seem. Here are photos he has of clubs (and which do non seem unfair for clubs inwards depression income areas).

My experience is that inwards poorer areas clubs aspect similar this. In richer areas they tin aspect to a greater extent than similar this i (which is inwards Delaware in addition to online).

But inwards both cases in that location is no signage in addition to the operate of the gild is disguised.

Ackman indicates the next in addition to seems to signal that (a) it is alone consistent amongst the rules of Herbalife in addition to (b) that it is nefarious:

The fellowship has been fairly clear why it is similar that. The explanation is that for a MLM it is of import for distributors to protect the 2nd sale.

Avon (famously) opened stores (under Andrea Jung every bit CEO) in addition to it was a disaster. The number is that if a adult woman knocking on doors gets a adult woman to purchase Avon she volition probable acquire a farther sale out of it later. Indeed the task of an Avon lady is to build upwards a volume of repeat customers - in addition to the task of a Herbalife distributor is similarly to build upwards a volume of repeat customers.

Alas if the client tin purchase it from a store that undermines the direct selling model. [You can't acquire a 2nd sale if the client tin easily go elsewhere.]

To protect the work organisation of their distributors the fellowship prohibits anyone from opening a store that is identifiable every bit a Herbalife store (except to people inwards plenty know to recognise the colours), or to sell it online (which is why the Ebay people I take hold approached are evasive).

That said - the store rules take hold been a source of short-conspiracy thesis ever since. The rules are clearly to protect the work organisation of existing distributors but if y'all do non empathise the underlying work organisation rationalle the rules aspect perverse. The fellowship has - inwards my observation - made consistent moves alone to protect the work organisation of existing distributors – in addition to many seemingly perverse fellowship moves tin live understood only inwards that context.

Bill Ackman’s afterward presentations

Bill Ackman has followed upwards his master copy presentations amongst several more.

One is a documentary interviewing several Herbalife victims. It turns out that every victim was a victim of Shawn Dahl in addition to the coin they lost substantially went to Shawn Dahl rather than to Herbalife. Shawn Dahl's downline was (at most) a depression single-digit percent of Herbalife.

Another is a study arguing Herbalife’s (fast growing) work organisation inwards PRC is illegal nether Chinese law.

This is an expanse where I experience quite qualified to comment. In PRC I visited iii Herbalife distributors, 2 inwards Beijing without permission from the fellowship in addition to without giving the fellowship advance notice in addition to i inwards Dongguan amongst guidance from the company. I travelled amongst a translator quite adept inwards the relevant Chinese rules (the translator had previously spent some fourth dimension sceptically researching Nu Skin's rather dodgy PRC operations). [My PRC notes are below.]

Full refunds in addition to the alter inwards short-thesis from “it's a pyramid inwards fact” to “it's a pyramid at law”

The response to the master copy short-thesis was to (a) ban lead-sellers every bit discussed, in addition to (b) implement the “gold standard” for refunds which offers a total 100 percent refund including postage for all sellers on unopened production in addition to for opened starter kits. The refund rules are inwards the top of all boxes sold yesteryear Herbalife in addition to inwards the U.S.A. are sent inwards English linguistic communication in addition to Spanish.

This was to testify that inventory loading did non come about in addition to it could non live a pyramid inwards the sense originally described yesteryear Bill Ackman.

There take hold been some quibbles close this refund. It does non include stamp paid yesteryear the client inwards receiving the production in addition to several people take hold tried to debate that this is a major turn a profit centre for the company. [This stamp is non paid inwards a large proportion of non-American-non-Chinese sales - every bit these are land sales - discussed below.] However y'all count it though the refund is to a greater extent than generous than required nether the Amway safe-harbour provision - in addition to the evidence is that it is honoured scrupulously on the ground.

As a resultant in that location was a alter inwards the short-thesis from it's a pyramid inwards fact (proven yesteryear inventory loading in addition to having to recruit to a greater extent than victims to purchase to a greater extent than inventory) to it's a pyramid at law because all the customers are insiders - that is members of the gild - in addition to that all sales are to people who are legally signed upwards every bit distributors.

In other words Bill Ackman retreated to David Einhorn’s master copy (and poisonous) questions.

The fellowship has ever denied that a bulk of sales are to people who take hold signed upwards every bit a distributor but (until real recently) they did non give definitive information in addition to fifty-fifty that information came from a commissioned survey in addition to non from their ain distributors. As stated compliance amongst distributor rules close how the distributors should written report sales to external customers is sparse (in component subdivision because many of the distributors are illiterate).

The fellowship press release that gave the critical information out is here:

http://ir.herbalife.com/releasedetail.cfm?ReleaseID=861186

The release is several years belatedly in addition to vague - in addition to every bit stated the source of the information was Herbalife-sponsored surveys of its U.S. customers in addition to Members that were undertaken yesteryear the marketplace inquiry firms Lieberman Research Worldwide in addition to The Nielsen Company, B.V. This looked rather sparse in addition to the fact they needed to rely on third-party inquiry information rather than their ain extensive (Oracle) based scheme tells y'all that compliance yesteryear their distributors is far from total. [In visiting diverse distributors I tin assure y'all I take hold seen the full-range from utter compliance to total disregard of the seventy percent rule.]

Whatever, the seventy percent dominion at nowadays looks similar it is unnecessary because the BurnLounge instance made it clear that the enquiry was really whether the purchases are not simply incidental to the work organisation opportunity.

How large is Herbalife yesteryear sales - in addition to comparisons to numbers of members

When Herbalife quotes its quarterly numbers it quotes them inwards dollars in addition to also inwards “volume points”. Volume points are how status (hence commission) inwards the Herbalife construction is determined. All products (except the work organisation starter kit) take hold a sure number of volume points attached in addition to that number is independent of the cost of the production or which solid ground it is sold in. [The work organisation starter kit has no volume points attached because payment to the upline for selling work organisation starter kits would clearly live a “recruiting reward” every bit per the above-mentioned Koscot case.]

A tin of Formula 1 is the same number of “volume points” inwards every solid ground inwards the world.

I did the calculation inwards the 2nd quarter of 2014. Volume points take hold shrunk somewhat since so (and I volition explicate why below). But this gives a reasonable scale for the business.

Global volume points were 1.43 billion for the quarter. This is the highest charge per unit of measurement ever - but annualizes at 5.72 billion.

32 percent of sales are Formula 1 [a number that comes from the Bill Ackman slide above].

This suggests that annual Formula 1 sales are 1.83 billion volume points (annualised).

These are 750 gram tins of Formula 1 [the tin comes inwards 2 sizes - the other beingness 550 grams].

The tins stand upwards for 32.75 volume points (as per this linked brochure).

The suggested repast (and the ones that I take hold been served inwards clubs) is a 25 gram scoop of Formula 1 blended amongst skim milk. [If y'all do non desire to utilization milk utilization to a greater extent than Formula 1 but sense of savour is compromised.]

This suggests that a tin contains xxx “meals” or plenty for a month. [This is consistent amongst Herbalife user blogs…]

It is non quite a repast equals a volume dot - but a repast is 1.08 volume points.

That suggests that annual Formula 1 meals sold is close 1.7 billion or 4.6 i M k per day.

That is an astounding number. McDonalds famously serves close seventy i M k meals per 24-hour interval - so it is 6.6% the size of McDonalds inwards terms of meals served. Moreover in that location are 3.7 i M k distributors but only 340 M sales leaders.

If ALL the distributors had i repast per 24-hour interval every 24-hour interval of the year so y'all still would non work organisation human relationship for volume.

Moreover many distributors are lapsed or take hold real depression volumes. So inwards monastic say for it to live bulk sold to Herbalife distributors [and hence live a “pyramid at law” in that location take hold to live a vast number of distributors who swallow multiple meals per 24-hour interval of Herbalife. Alternatively they must take hold enormous stockpiles inwards their garages.]

Distributors who allegedly swallow multiple meals a day

The calculation I create higher upwards – showing that to live a pyramid most the distributors demand to swallow multiple meals a 24-hour interval has – to some extent – acquire the small case.

Indeed, this is what Bill Ackman alleged inwards i of his afterward presentations that focuses on “Club 100”. I think implausibly the short-selling crowd came upwards amongst the thought that the distributors were consuming vii plus meals per day.

Club 100 - an introduction

There is a variety of prissy (and rather glitzy) video close clubs lay out yesteryear the fellowship - in addition to it turns out that close one-half the clubs are Club 100 members [visible inwards logos on the wall in addition to the like]. Club 100 is clearly a large thing.

https://www.youtube.com/watch?v=sPkruX-fMb4

They also take hold preparation programs, in addition to it is through the preparation programs that shorts take hold alleged that people eat upwards to vii Herbalife meals a 24-hour interval for reasons alone concerned amongst the work organisation opportunity. These preparation programs take hold acquire the agency yesteryear which shorts think Herbalife fails on the assay defined inwards the Burn Lounge case.

I am non making this up.

You demand only aspect at a SeekingAlpha article yesteryear Christine Richards. Christine Richards is a erstwhile journalist who worked for a hedge-fund-research store called The Indago Group. She is also the hagiographer of Bill Ackman. Richard has since left the Indago to start her ain theatre (Orion Research). By repute (though I suspect it is non true) it was her who planted the Einhorn questions.

Here is the Christine Richard article (which had a surprisingly negative effect on the stock). I quote it nearly inwards total because it is the entirety of Bill Ackman’s novel thesis (and the at nowadays 650 comments on the article tell y'all the ardour at amongst which all this materials is debated):

Herbalife: Who's Consuming All Those Shakes? And Why...

Summary

On the ground investigative inquiry into Herbalife's nutrition clubs suggests they're non what they seem.
Club 100's quota scheme raises questions close the truthful nature of milk shiver consumption.
The motivation for sales inwards an MLM matters per recent rulings; that could live a element inwards considering Herbalife's business.

What's the truth behind Herbalife's Nutrition Club business? If y'all read I said this:

I am utterly convinced yesteryear everything inwards Bill Ackman’s presentation except the in conclusion conclusion – that Herbalife’s stock volition collapse. I took a long topographic point on Christmas Eve. I suspect that Herbalife is so profitable in addition to so powerful they volition view Mr Ackman’s laid on off – in addition to the easiest way to do that is to purchase dorsum stock (and create the stock go up). Mr Ackman has given them the incentive to render their huge (but tainted) profits to shareholders (and I computer program to live a recipient shareholder).

Much to my shame I fifty-fifty got on CNBC in addition to called administration "scumbags".

If y'all had told me that a work organisation whose work organisation model was persuading people to sell diet shakes in addition to other potions to their friends at roughly 1.3-1.5 times fair retail cost was an ethical, high character work organisation I would take hold told y'all that y'all were insane.

I had preconceptions driven yesteryear ideology. An ideology that mightiness live described every bit ivory-tower liberal.

But I don't tending what your ideological preconceptions tell you. If the facts on the ground tell y'all that y'all are incorrect so y'all are wrong. And it doesn't affair who y'all are either. You could live Warren Buffett, David Einhorn, Bill Ackman or my woman parent (all of whom are usually right) but if the facts on the ground disagree amongst your ideologically driven preconceptions so y'all are wrong.

Bill Ackman's thesis is utterly incorrect - in addition to the morality that surrounds his thesis is also misguided.

This is a long post nevertheless to go through all of his arguments inwards detail. I guess it is the footing of a volume on the Herbalife saga. Someone volition write that volume (it won't live me) but whilst the number is still alive I desire to write the firstly draft of history.

The Herbalife debate thus far

The Herbalife debate comes almost alone from the presentations of i man: Bill Ackman. Mr Ackman has made 4 iii threescore minutes presentations - in addition to the story has changed somewhat over those presentations.

However before whatever Ackman presentation in that location was a unmarried laid of poisonous questions yesteryear David Einhorn on a Herbalife conference call.

Here is the transcript - but it takes some explaining to empathise why these questions were so poisonous:

"Einhorn Question: How much of the sales that you’d create inwards terms of in conclusion sales are sold exterior the network in addition to how much are consumed within the distributor base?

HLF Answer: So, David, nosotros take hold a 70% custom dominion which is basically says that 70% of all products sold to consumers or really swallow my distributors for their ain personal use. So plainly what we’ve seen amongst nutrition clubs is that nosotros at nowadays take hold visibility for the firstly fourth dimension to our customers. We know that nosotros reported on this telephone phone for the firstly fourth dimension the number of commercial clubs around the world, which is inwards excessive of 30,000, so that has given us feasibility to the tremendous amount of products that are beingness sold straight to the consumers in addition to nosotros view that every bit a growing tendency inwards our business.

Einhorn: So, what is the percent that really sold to consumers that are non distributors?

HLF: So, nosotros don't take hold an exact percent David because nosotros don't take hold visibility to that even of detail.

Einhorn: Do y'all take hold an approximation?

HLF: So good i time to a greater extent than going dorsum to our 70%, where nosotros believe is that it is that 70% or potentially inwards excess of that.

Einhorn: Okay. What is the incentive for supervisor to sign somebody upwards to acquire a distributor every bit opposed to – if they’re just going to swallow for themselves every bit opposed to just selling them the production for the markup. How does the distributor – how does the supervisor come upwards out better?

HLF: Sure. So, I think in that location are 2 reasons for that. So, nosotros know from our work organisation today that many of our futurity supervisors in addition to work organisation builders come upwards inwards every bit customers in addition to so they acquire distributors. So, the do goodness from a supervisor is the powerfulness for greater memory of that customer/distributor because they are at nowadays earning a 25% discount. The 2nd number is that it preserves linage. So obviously, if I sign y'all upwards David every bit a distributor, my hope in addition to my expectation is that based on the tremendous production resultant that you’re going to attain that you’ll take hold friends in addition to families go to y'all in addition to say, gosh David y'all aspect great, what do y'all want. You’re going to respond to them, I’m on Herbalife, in addition to that volition encourage y'all to say, wow possibly this is a work organisation chance I could live interested in. So, the do goodness for me every bit your supervisor is one, the discount that y'all would acquire in addition to that for my greater likelihood of retaining, it was a permanent client in addition to secondly, the hope that at some stage, y'all volition create upwards one's take heed to do the work organisation in addition to so that y'all are already inwards my lineage in addition to is component subdivision of my group.

Einhorn: Right. But just trying to empathise this clearly, if I sell to a customer, I bought it - I'm a supervisor, I purchase at a 50% discount, I sell to a customer, I create 50 points, if he pays the total price. If he signs upwards amongst a distributor in addition to buys it himself, he gets a 25% discount in addition to I acquire vii points every bit a royalty. Is that how it works?

HLF: No, y'all would acquire the other 25%.

Einhorn: I volition acquire 20% plus the 7%.

HLF: So, unless you're on royalty, y'all would simply (inaudible) inwards the difference. So, y'all are inwards a 50% discount, y'all are selling at a 25% discount, in addition to so the divergence betwixt the 2 is your turn a profit on that sale.

Einhorn: Right, so if he signs upwards amongst a distributor in addition to buys it for himself from Herbalife, I still acquire the 25%.

HLF: That is correct.

Einhorn: OK. Good. One in conclusion question, when y'all had your previous 10-K, y'all disclosed iii groups of distributors at the low-end. You called 29% self consumers, 57% little retailers, in addition to 14% potential sales leaders in addition to so that disclosure did non repeat inwards the subsequent 10-K. So, I got 2 questions, firstly of all how do y'all rail that in addition to how do y'all characterize in addition to know which ones are which? And second, why did y'all halt disclosing that inwards the in conclusion 10-K? Is that something that y'all stopped tracking or just stopped disclosing?

HLF: Hi, this is John. The criteria for grouping distributors into different classes was based off of their volume purchases in addition to nosotros are making assumptions that people below of sure volume. While doing the business, they were buying soft consumption in addition to I don’t recollect the exact amounts, but I tin acquire it to y'all after the call, every bit how nosotros delineated betwixt the iii classes. And i the ground that nosotros took out of the 10k is a alter inwards CFO from which to me I didn’t view it is valuable information to the work organisation or to the investors. However, nosotros tin easily render the exact same breakout going frontward if y'all would similar [indiscernible] into our investors. Again, I don’t recollect the exact delineation betwixt the iii classes, but I tin for certain acquire it to you. Our objective is to live completely transparent, so."

There is a ground this questioning is so poisonous. In Queens (where Mr Einhorn went to see clubs) it is almost impossible to discovery someone inwards a gild who has non signed a distribution agreement.

When y'all inquire them why they signed a distribution understanding they volition tell y'all it is so they tin acquire the production at a 25 percent discount when they swallow it at dwelling (mostly rarely). Most of it is consumed inwards the club. That said – my quick aspect around Queens suggested that just close everyone has signed a distribution agreement. [This is non truthful inwards other parts of the ground – but every bit far every bit I know Mr Einhorn had non visited clubs exterior the 5 boroughs of New York.]

And in that location are courtroom cases on what defines a “pyramid scheme”. And if y'all take the court-cases decided before the Einhorn questions literally it turns out to live real hard for Herbalife.

A instance has been decided since (the appeal on Burn Lounge) which makes life considerably easier for Herbalife. However that conclusion post-dated the Einhorn questions.

When Einhorn asked his enquiry much MLM law hinged on 2 1970s cases on what constitutes a legal or illegal multi-level marketing scheme. The FTC tried to unopen Koscot Interplanatory (an MLM selling cosmetics) in addition to Amway. They succeeded on the erstwhile in addition to lost on the latter. The Amway dominion created prophylactic harbours through which the entire MLM manufacture tries to operate [or inwards some cases inwards my view cosmetically pretends to operate].

The basic facts of Koscot aspect similar a pyramid/ponzi to a casual observer:

1. The sales soul - called a "beauty advisor" puchases products from her sponsor (who may live a supervisor or director) at a xl percent discount, for sale to the consuming public. The beauty advisor receives a refund bonus from her sponsor each month, based on the total retail volume ordered during the month. Entrant qualifies yesteryear investing $10 for a starter kit.

2. The supervisor purchases products from the fellowship at a 55 percent discount for distribution to his beauty advisors in addition to direct sales to the consuming public. The supervisor receives a special committee for each novel supervisor monastic say he creates, $500 or 25 percent of the $2000 paid for the initial order. An entrant qualifies every bit a supervisor inwards whatever i of these ways:

a. By investing $2000 immediately;

b. By purchasing $5400 inwards Koscot cosmetics (at retail value) from his sponsor;

c. By selling a portion of the required $5400 volume through his organisation in addition to purchasing the remainder inwards i lump sum.

3. The managing director purchases products from the fellowship at a 65 percent discount for distribution to his direct distributors (supervisors in addition to beauty advisors) in addition to for direct sales to the consuming public. The managing director is entitled to a 10 percent special committee on all of his supervisor's purchases. He receives $500 for each supervisor monastic say that he sells. The managing director sponsoring a novel managing director is also entitled to a 65 percent committee ($1,950) on the $3,000 additional inventory which the novel managing director is required to purchase. An entrant qualifies every bit a managing director by: a) becoming a supervisor, purchasing the additional $3000 managing director inventory in addition to selling a novel supervisor monastic say inwards monastic say to supersede himself inwards his sponsoring director's organization; or b) yesteryear initially investing $5000 in addition to becoming known every bit an apprentice managing director until he fulfills all the necessary aforementioned requirements.

These positions are described to a greater extent than fully to the prospective investors at 'Opportunity Meeting' held weekly inwards diverse locations across the country. At such a meeting, a film is shown in addition to speeches are made which concentrate upon the unlimited potential to earn large sums of coin inwards a relatively small fourth dimension yesteryear recruiting others into the Koscot program. In most instances, the chance coming together volition closely follow the script provided yesteryear respondents every bit found inwards the distributor's preparation manual. This coming together is run inwards such a mode every bit to excite those attending in addition to to have them into making an emotional conclusion to invest inwards the program.

It would live pretty hard non to determine this was a pyramid. Indeed the courtroom suggested this was “inherently deceptive in addition to fraudulent” in addition to the Federal Trade Commission [the relevant regime body] has the powerfulness to regulate “deceptive” in addition to “unfair” practices - thus giving the FTC powerfulness to unopen Koscot. This has been taken ever since every bit giving the FTC considerable powerfulness to regulate multi-level marketing.

Amway nevertheless got off. The Wikipedia page on the Amway instance is here:

http://en.wikipedia.org/wiki/In_re_Amway_Corp.

And to quote:

Amway has avoided the abuses of pyramid schemes by:

not requiring an entry ("headhunting") fee;
making production sales a precondition to receiving the performance bonus;
requiring the buying dorsum of excessive inventory; and
requiring that products live sold to retail consumers.

The administrative law judge also found that "Amway is non inwards work organisation to sell distributorships in addition to is non a pyramid distribution scheme."

In the sentiment subdivision of the ruling the Commissioner stated:

Two other Amway rules serve to preclude inventory loading in addition to encourage the sale of Amway products to consumers. The "70 percent rule" provides that "[every] distributor must sell at wholesale and/or retail at to the lowest degree 70% of the total amount of products he bought during a given calendar month inwards monastic say to have the Performance Bonus due on all products bought…." This dominion prevents the accumulation of inventory at whatever level. The "10 customer" dominion states that "[i]n monastic say to obtain the right to earn Performance Bonuses on the volume of products sold yesteryear him to his sponsored distributors during a given month, a sponsoring distributor must create non less than i sale at retail to each of 10 different customers that calendar month in addition to make proof of such sales to his sponsor in addition to Direct Distributor." This dominion makes retail selling an essential component subdivision of beingness a distributor. The ALJ found that the buyback rule, the 70-percent rule, in addition to the ten-customer dominion are enforced, in addition to that they serve to preclude inventory loading in addition to encourage retailing.

—— 93 F.T.C. 618: Opinion, page 716

Essentially if y'all sell washing pulverization to someone in addition to they swallow some if themselves that is okay (internal consumption is okay) but when the consumer is consuming it all internally (and it is a lot) it is goodness prima-facie evidence they were stuck amongst it in addition to hence a pyramid.

The court/judgements wanted to piece of work out the divergence betwixt forced in addition to unforced internal consumption in addition to came upwards amongst this seventy percent rule. If seventy percent of the production is sold external to the network it must live real. The Amway instance also required buy-back of excess inventory (although it allowed it to live bought dorsum amongst a discount-restocking fee) in addition to it required in that location live a number of external customers who were identified.

Herbalife clubs inwards Queens do non plainly run across this criteria. They piece of work yesteryear beingness alcoholics anonymous for fatty Hispanic people. You go in that location and it is the social back upwards network that gets y'all to stick to the diet. Almost everyone “signs up” every bit a distributor. Almost all sales are thus internal to the network.

However my casual observation suggests that many sales are existent sales. People who are signed upwards every bit distributors (but amongst no intention of selling stuff) regularly come upwards inwards in addition to purchase production from other distributors.

Some of the clubs I visited asked for my call when I bought shakes - in addition to the gild manager explained that he took it because in that location was a “ten client rule” but compliance amongst this was the exception rather than the norm - in addition to many of the gild managers were belike illiterate - so compliance was impossible. [Running a Herbalife club, sometimes successfully, is a task taken yesteryear to a greater extent than than a few illiterate Hispanics.]

If the Herbalife clubs inwards Queens were your guide (and they were for much of the New York Hedge Fund community) so even though the consumption was existent consumption yesteryear repeat customers so Herbalife had a work amongst the Amway prophylactic harbour. Consumption was primarily internal.

There is evidence that the Queens clubs were unusual. I take hold seen clubs where almost all the consumption is yesteryear people who are non members. In PRC almost all consumption is yesteryear people who take hold non signed upwards every bit distributors (and the distributor qualification is hard). But the Queens clubs were visible inwards New York - in addition to they are a real mutual cast of club.

The whole number of the seventy percent dominion in addition to the Queens clubs was made irrelevant yesteryear the Federal Court conclusion inwards the BurnLounge case.

BurnLounge

BurnLounge was a pyramid scheme selling music burning services in addition to unopen yesteryear the FTC. Much (probably the vast majority) of the consumption was internal - in addition to hence an appeals courtroom got do create upwards one's take heed on internal consumption issues during the entire in addition to intense Herbalife debate.

Here is the Deal Book.

Mr Ackman's presentations

http://www.visualwebcaster.com/Pershing/91149/event.asp

This was done inwards every bit high a profile way every bit possible.

The conference is where David Einhorn presented his famous Lehman presentation (that was widely credited every bit beingness a precipitator of Lehman’s collapse).

Ackman called a “special” Ira Sohn conference (with a $25 i M k donation to the charity) in addition to presented for iii hours on Herbalife.

Indeed Mr Ackman goes farther - in addition to says that in that location is no existent ground to purchase the product:

But that ultimately (according to Mr Ackman) the ground why Herbalife sells so much production is that it is all close the “business opportunity”. To quote Mr Ackman's conclusion:

This is clearly in addition to patently wrong. But Bill Ackman described Shane Dineen's component subdivision of the presentation every bit beingness the resultant of a year's work.

Bluntly - either Pershing Square (Bill Ackman's fund) did non do every bit much piece of work every bit they said or they are trying hard to check into a pre-ordained thesis.

Essentially Pershing Square argues that it is a pyramid in fact in addition to a pyramid at law.

Bill Ackman also tries to refute the refund assay inwards Amway:

We volition acquire dorsum to the refund rules afterward because the fellowship amended them seemingly inwards response to the Ackman presentation.

An observation on returns in addition to inventory loading

If y'all assay to discovery out who the sellers are they volition non tell you.

Here is a typical illustration - the sale of 2 tins of Formula 1 - gratis transportation inwards the USA:

http://www.ebay.com/itm/NEW-2-Herbalife-Formula-1-Shakes-MULTIPLE-FLAVORS-FREE-SHIPPING-/251478333014?pt=LH_DefaultDomain_0&var=&hash=item3a8d46d656

“Zoomherbal” is breaching the rules of Herbalife because Herbalife does non similar people selling online every bit it undermines the work organisation of the existing distributors.

I take hold extensively looked on Ebay (and inwards diverse countries) but I cannot discovery whatever beingness sold inwards distress.

My conclusion: inventory loading does non happen.

The existent response to Bill Ackman

He does this many times

The production Herbalife sells is the MLM - it is the community. It is the club. Not acknowledging that is the fundamental mistake inwards Mr Ackman’s presentation.

Lead selling scams

There is a reasonable press story hither (probably sourced from people associated amongst Bill Ackman):

http://www.theverge.com/2013/3/27/4099100/income-at-home-herbalife-scamworld-biz-opp

https://twitter.com/shawndahl

John Peterson shot himself inwards the roof of the oral fissure (to a surprising amount of press coverage).

The rules for Herbalife clubs

My experience is that inwards poorer areas clubs aspect similar this. In richer areas they tin aspect to a greater extent than similar this i (which is inwards Delaware in addition to online).

But inwards both cases in that location is no signage in addition to the operate of the gild is disguised.

Ackman indicates the next in addition to seems to signal that (a) it is alone consistent amongst the rules of Herbalife in addition to (b) that it is nefarious:

The fellowship has been fairly clear why it is similar that. The explanation is that for a MLM it is of import for distributors to protect the 2nd sale.

Alas if the client tin purchase it from a store that undermines the direct selling model. [You can't acquire a 2nd sale if the client tin easily go elsewhere.]

Bill Ackman’s afterward presentations

Bill Ackman has followed upwards his master copy presentations amongst several more.

Another is a study arguing Herbalife’s (fast growing) work organisation inwards PRC is illegal nether Chinese law.

Full refunds in addition to the alter inwards short-thesis from “it's a pyramid inwards fact” to “it's a pyramid at law”

This was to testify that inventory loading did non come about in addition to it could non live a pyramid inwards the sense originally described yesteryear Bill Ackman.

In other words Bill Ackman retreated to David Einhorn’s master copy (and poisonous) questions.

The fellowship press release that gave the critical information out is here:

http://ir.herbalife.com/releasedetail.cfm?ReleaseID=861186

How large is Herbalife yesteryear sales - in addition to comparisons to numbers of members

A tin of Formula 1 is the same number of “volume points” inwards every solid ground inwards the world.

I did the calculation inwards the 2nd quarter of 2014. Volume points take hold shrunk somewhat since so (and I volition explicate why below). But this gives a reasonable scale for the business.

Global volume points were 1.43 billion for the quarter. This is the highest charge per unit of measurement ever - but annualizes at 5.72 billion.

32 percent of sales are Formula 1 [a number that comes from the Bill Ackman slide above].

This suggests that annual Formula 1 sales are 1.83 billion volume points (annualised).

These are 750 gram tins of Formula 1 [the tin comes inwards 2 sizes - the other beingness 550 grams].

The tins stand upwards for 32.75 volume points (as per this linked brochure).

This suggests that a tin contains xxx “meals” or plenty for a month. [This is consistent amongst Herbalife user blogs…]

It is non quite a repast equals a volume dot - but a repast is 1.08 volume points.

That suggests that annual Formula 1 meals sold is close 1.7 billion or 4.6 i M k per day.

If ALL the distributors had i repast per 24-hour interval every 24-hour interval of the year so y'all still would non work organisation human relationship for volume.

Distributors who allegedly swallow multiple meals a day

The calculation I create higher upwards – showing that to live a pyramid most the distributors demand to swallow multiple meals a 24-hour interval has – to some extent – acquire the small case.

Club 100 - an introduction

https://www.youtube.com/watch?v=sPkruX-fMb4

I am non making this up.

Herbalife: Who's Consuming All Those Shakes? And Why...

Summary

On the ground investigative inquiry into Herbalife's nutrition clubs suggests they're non what they seem.
Club 100's quota scheme raises questions close the truthful nature of milk shiver consumption.
The motivation for sales inwards an MLM matters per recent rulings; that could live a element inwards considering Herbalife's business.

What's the truth behind Herbalife's Nutrition Club business? If y'all read thisrecent Reuters article, based on interviews the reporters did amongst people they encountered at 10 Nutrition Clubs, y'all belike came away believing these Clubs are a forcefulness for goodness inwards the Hispanic community. I think the reporters were deceived yesteryear what they saw in addition to heard, in addition to I base of operations this declaration on several years of researching these Clubs, non just inwards the U.S. in addition to Puerto Rico, but Mexico, Colombia, Venezuela in addition to Brazil. Walk into an Herbalife Nutrition Club in addition to y'all acquire into into a charade created yesteryear an elaborate in addition to cynical "training" scheme that turns distributors in addition to their household unit of measurement members in addition to friends into conscripted consumers. Let me explicate how I came to that conclusion.

I started visiting Herbalife Nutrition Clubs inwards 2011 every bit component subdivision of a projection on behalf of a number of hedge fund managers who were trying to determine whether Herbalife Ltd. (NYSE:HLF) was a legitimate work organisation or, every bit some critics alleged, a pyramid scheme: an unsustainable in addition to illegal work organisation model inwards which participants create coin primarily yesteryear enrolling novel participants inwards the business.

To assist reply this question, I decided to take a unopen aspect at Herbalife's Nutrition Club network, which was (and still is) fueling the company's growth. These Clubs, which serve unmarried portions of the company's products such every bit its Formula One poly peptide shake, were pop amongst a surprising demographic inwards the U.S.: Hispanic immigrants inwards low-income neighborhoods.

I started my inquiry yesteryear visiting the Corona neighborhood of Queens, mapping out the Clubs surrounding Junction Boulevard in addition to Roosevelt Avenue. Many were hidden away inwards undesirable retail locations, downwards alleys in addition to inwards the basement even of strip malls, amongst shabby looking storefronts in addition to interiors hidden yesteryear dark-green curtains. Influenza A virus subtype H5N1 handful, however, were to a greater extent than prominent in addition to had signs (in Spanish) that expressed boundless optimism: "A Beautiful Life," "A Better World," etc. But i thing I knew for sure was that in that location were far besides many of these Clubs to create whatever economical sense: I found 26 within a few blocks of the Junction Boulevard subway stop.

Shortly after, I started visiting Nutrition Clubs amongst hedge fund clients. Herbalife was nether no special scrutiny then, which was a goodness thing, because nosotros for certain didn't blend inwards at the largely Ecuadorean-run Clubs nosotros were visiting: a middle-aged white woman, amongst a notebook in addition to a printed Google map of the neighborhood, in addition to a hedge fund analyst, invariably "dressed down" inwards baseball game cap in addition to extraordinarily expensive loafers. [John's note: baseball game cap in addition to loafers sounds real similar David Einhorn but I take hold been told that it belike is not.] We stood out similar 2 Jehovah's Witnesses canvassing the neighborhood - in addition to that was before nosotros opened our mouths. On i of my firstly visits amongst an analyst, I warned him that my high schoolhouse Castilian was a fleck rusty in addition to asked if he spoke any. Alas, he replied that he had studied Latin inwards school.

During our visits, nosotros identified ourselves every bit analysts seeking to ameliorate empathise the operations of this publicly traded company. I think most people suspected nosotros were from Herbalife's compliance department, checking to view whether they were next the company's endless in addition to often bizarre rules: no Herbalife signs visible from the street, all doors in addition to windows covered to preclude visibility into the Club, no "Open" or "Closed" signs, no selling total containers of products, etc. (These rules solitary raised serious doubts inwards my take heed close how a distributor could hope to succeed.)

The people nosotros met inwards the Clubs were without exception friendly in addition to tolerant of the communication barrier. They believed Herbalife was transforming their lives from paid-under-the-table kitchen assist in addition to construction workers into full-fledged achievers of the American Dream. They talked close Nutrition Clubs every bit a route to the prestigious in addition to lucrative Herbalife "President's Team." I left every Club I visited hoping that somehow this work organisation would piece of work out for them.

Many people dismiss the harm done yesteryear pyramid schemes, downplaying it amongst comparisons to companies that sell us things that aren't real goodness for us: cigarettes in addition to liquor, fast nutrient in addition to lottery tickets, etc. But this is a spurious comparison. Nobody who smokes thinks it's goodness for them in addition to nobody who buys a lottery ticket thinks the odds are inwards their favor.

Meanwhile, deceptive work organisation opportunities reshape lives around lies, making deep inroads into a person's psyche, changing whom they interact amongst in addition to whom they unopen out, how they pass their waking hours, in addition to how they dream close in addition to build for their future. Robert Fitzpatrick, an adept inwards analyzing work organisation chance fraud, had concluded that Herbalife's work organisation was based on deception long before I began my research. He summed it upwards inwards an electronic mail he sent me: "Herbalife has entered the textile of Main Street. It has tampered amongst the souls of millions of people."

So, what was Herbalife doing amongst these souls inwards this hardworking, immigrant community inwards Queens? Was it delivering on its hope of a ameliorate life for the people who attended in addition to ran these Clubs? If so, in that location was something extraordinary at piece of work here: a fellowship that had found a way to engage those at the bottom of the economical ladder, people confronted amongst daily hardships most Americans tin only imagine, in addition to through its products in addition to work organisation chance was steering them toward ameliorate wellness in addition to fiscal security.

For some, Herbalife clearly hadn't delivered on this promise, every bit evidenced yesteryear the dozens of shuttered or moribund Nutrition Clubs I saw, testaments to someone's failed dream - in addition to to my suspicion that these Clubs were a topographic point for disillusioned (and broke) Herbalife distributors to dump the production they'd been forced to purchase inwards their pursuit of the "business opportunity."

But I also found active Clubs in addition to watched every bit people came through the door, handed over $5, in addition to drank servings of the products. I watched Club operators tape each person's call in addition to proudly explicate that these customers came each in addition to every 24-hour interval - they were oft described every bit "socios" (the Castilian word for partner) inwards this grand Herbalife vision of wellness in addition to fiscal freedom. Yet, in that location was ever a hint of staging to these interactions. More than i time I asked a soul visiting a Club if he or she worked in that location or was an Herbalife distributor, in addition to the answer, from a soul amongst a limited English linguistic communication vocabulary, was jarring: "No. I just come upwards hither to consume." Consume?

One morn I visited a number of Clubs amongst a well-known hedge fund manager -- a positive sign that involvement inwards our inquiry was trickling upward. Hedge fund types tend to live wellness in addition to trunk witting in addition to spell most were curious to see the products, they baulked at really consuming them. "You tin never live besides careful close what y'all lay into your body." This meant that when the host's dorsum was turned, I oft switched the cups in addition to ended upwards drinking both servings. But, on this day, my companion was 100% into the research; he gamely consumed at every gild in addition to complimented the host on the preparation. Among the Clubs nosotros visited was i enthusiastically staffed yesteryear a hubby in addition to married adult woman team, who phoned their high school-age boy to come upwards in addition to translate. All iii were distributors in addition to had lay the household unit of measurement savings, plus coin borrowed from relatives, into the Club.

On our in conclusion stop, nosotros climbed a creaky flying of stairs to the 2nd flooring where -- expecting to discovery a locked door or a deserted Club -- nosotros entered a tiny room inwards which close a dozen men inwards bulky hoodies in addition to heavy piece of work boots sat silently on folding chairs, eyes fixed straight ahead, Formula One shakes inwards hand. These men were vaguely familiar, the faces i glimpses hauling debris out of buildings undergoing renovations, bussing dishes inwards the kitchens of restaurants, in addition to flying through treacherous Manhattan traffic on rickety bicycles, delivering food. They for certain weren't overweight in addition to didn't appear to take hold the luxury of the fourth dimension or coin required to swallow expensive nutritional shakes inwards a Club. But nevertheless, hither they were, doing what Herbalife claimed so many inwards the Hispanic community loved to do: assemble inwards a social setting to relish goodness nutrition.

The host had a vivid - though slightly bemused - grin for us. Everyone else could take hold been waiting for a bus; oblivious to a cartoon blasting inwards Castilian on an overhead TV, the men ignored i some other in addition to avoided optic contact amongst us.

With every topographic point taken, nosotros had to stand, drinking our 3rd Formula One shake, Aloe Water in addition to Herbal Tea of the morning, a goodness xl to 50 fluid ounces each into our research. Influenza A virus subtype H5N1 few minutes later, inwards search of the bathroom, nosotros were directed into a large adjoining room where, the host explained, the grouping held regular preparation meetings. It was empty, lights out, but he assured us that it filled upwards twice a calendar week amongst all of the distributors inwards the neighborhood who were learning the business.

On our way dorsum downwards the stairs, I asked my companion if he thought people were really in that location because they wanted to drinkable a Formula One shake.

"No."

So what were they doing?

Herbalife claims that Nutrition Club visitors are genuine customers seeking ameliorate wellness in addition to are drawn to the Clubs because they lack the economical resources to purchase an entire container of Formula One, so instead they're paying a few dollars a 24-hour interval to swallow unmarried portions of the products. These consumers testify that Herbalife is non a pyramid scheme, according to the company, because, after all, if the sales inwards Nutrition Clubs are to existent customers, so the commissions Herbalife pays on the purchase of those products to the distributors operating the Clubs are linked primarily to retail sales, non to recruitment in addition to qualification.

Were these men grudgingly consuming shakes inwards a tiny Club inwards Queens examples of the customers that proved Herbalife was non a pyramid scheme?

The reply only became clear later, when I was hired full-time to study Herbalife yesteryear some other hedge fund manager, Bill Ackman, whom I met every bit a reporter roofing his small topographic point on a bond insurance fellowship called MBIA. That was a seven-year story, in addition to y'all tin read a volume close it here. MBIA, which insured bonds backed yesteryear risky mortgages in addition to magically turned them into triple-A-rated securities inwards the run-up to the 2008 credit crisis, was a fellowship that, similar Herbalife, i mightiness debate was inwards the too-good-to-be-true business.

Soon after I began piece of work for Ackman, I came across the firstly "Club 100" Nutrition Club on the Internet. The group, also known yesteryear its Castilian call "Club Cien," appeared to create upwards a vast network of Herbalife Nutrition Clubs inwards the Hispanic community inwards the U.S. in addition to across Latin America. I found a Yahoo message board used yesteryear Club 100 members inwards Venezuela describing the rules for visiting an Herbalife Nutrition Club.

Rules for customers?

I ran parts of the text through Google Translate in addition to out spilled a cryptic in addition to clunky description of how a soul visiting a Club is supposed to act:

"AVOID MAJOR GROUPS OF 5 PEOPLE BY CLUB TO VISIT."

"AVOID THE USE OF UNAUTHORIZED PHOTO CAMERAS."

"AVOID TALKING TO CONSUMERS CLUB, UNLESS YOU ASK THE HOST."

"CAN BE VIEWED ONLY CLUBS THAT ARE 25 AND MORE ACTIVE IN THE SYSTEM CERTIFICATION WITH SEALS."

"REMEMBER THE RULE: ALWAYS GOOD ATTITUDE: SILENT, KIND, ASSIGN CONSUMERS CHAIRS. IF TESTIMONY TO HELP AND GIVE WHAT YOU ASK, SEEK TO AVOID SPECIFIC PRODUCTS OR FLAVORS , WITH QUESTIONS TO AVOID HOST STOP OR WHILE STUDENTS ARE RESPONDING TO CONSUMERS."

It was stunning.

Since when are existent customers told to remain soundless in addition to instructed non to inquire for sure flavors? But, if the people visiting Nutrition Clubs weren't existent customers, who were they?

To discovery out, nosotros hired freelance reporters in addition to private investigators to see Club 100 Clubs inwards major cities inwards the U.S. in addition to Puerto Rico, so inwards Mexico, Colombia, Venezuela in addition to Brazil. There was a groovy bargain of secrecy surrounding Club 100's work organisation methods. We were often told that only those who signed upwards amongst Herbalife through Club 100 were allowed to know how the computer program operated. Even those already enrolled inwards the grouping were kept inwards the nighttime close much of its functioning in addition to were told they would live informed close the side yesteryear side stage only after completing the electrical current phase. We signed upwards in addition to joined Club 100 agreeing to do precisely what nosotros were told was necessary to succeed. Our investigators uncovered a work organisation that turns those seeking to opened upwards Nutrition Clubs - along amongst household unit of measurement members in addition to friends helping them pursue their dream - into conscripted consumers yesteryear forcing aspiring Club owners through a serial of tasks: touring Clubs in addition to paying to swallow at each one, working for gratis inwards an upline distributor's Club spell beingness required to swallow on the job, in addition to practicing making hundreds of shakes, which household unit of measurement members are required to purchase in addition to consume. Trainees also are required to create a story or testimonial close the benefits of the products on their wellness in addition to to tell this story numerous times to potential recruits inwards monastic say to graduate. Only those who consummate all these tasks, which are tracked in addition to verified yesteryear upline distributors on an official form, are certified to opened upwards their ain Clubs.

The promised rewards are enticing. Those who follow Club 100's rules are told they volition attain the President's Team where they tin aspect to earn hundreds of thousands of dollars a twelvemonth for the ease of their lives. Herbalife's ain information suggests that fewer than 1-in-10,000 distributors volition attain the President's Team - but these nearly impossible odds are rarely if ever disclosed to recruits.

Instead, Herbalife trainers (i.e. recruiters) play on desperation in addition to disappointment. In the U.S. nosotros recorded preparation sessions where messages similar the next were directed at undocumented workers for whom the American Dream had proved elusive:

"If y'all take it (the certification course), you'll acquire goodness consequences. If y'all acquire out it, I don't know how life volition go for you, because how long take hold y'all been inwards this country? 10? 15? xx years? Another 5, 10 or xx years volition go yesteryear in addition to you'll go on inwards the same spot. Because if inwards some other 5 or 10 years y'all haven't achieved what y'all expected inwards this country, you're non going to attain it."

On July 22, 2014, every bit component subdivision of Bill Ackman's presentation on Herbalife entitled "The Big Lie," I detailed our findings close Club 100. While investors appear to take hold mostly ignored our findings - on the company's 2nd quarter earnings conference telephone phone a few days later, non a unmarried analyst asked close Club 100 - I believe it is key to understanding the grapheme of Herbalife's business, and, ultimately to forecasting the company's fate.

Herbalife aggressively sells its "business opportunity" - but requires lots of coerced consuming to access it. Our team's months of inquiry inwards the U.S., Puerto Rico, Mexico, Republic of Colombia in addition to Venezuela showed that a distributor diligently attempting the certification procedure - the firstly stair inwards Club 100's complex in addition to secretive computer program - would swallow or exertion other people to swallow close 632 shakes over a three-month period. Here's how:

Trainees are expected to piece of work out of an upline distributor's Club. As component subdivision of this unpaid internship, they are expected to swallow every bit often every bit twice a 24-hour interval - AM in addition to PM shifts.	180 Shakes Consumed
Trainees are required to go on tours of 8 Nutrition Clubs in addition to to pay for in addition to swallow at each Club.	8 Shakes Consumed
Trainees are often expected to swallow at classes in addition to other mandatory events. Let's assume a trainee attends iii weekly events for 12 weeks.	36 Shakes Consumed
Trainees are required to create 100 shakes every bit component subdivision of the mandatory milk shiver preparation requirement. Distributors are probable to offering gratis samples (which they pay for) or cajole friends in addition to household unit of measurement members to come upwards into the Club to pay for in addition to swallow these do shakes.	100 Shakes Consumed
Trainees are required to take a assay proving they tin invite i paying consumer into a Club every one-half threescore minutes for 4 hours	8 Shakes Consumed
Trainees are expected to recruit 10 individuals who volition human activity every bit regular attendees of an upline distributor's Club for i month.	300 Shakes Consumed
Total Shakes Consumed	632*

*The actual numbers vary quite a fleck because in that location is plenty of room for trainers to impose inconsistent in addition to repetitive requirements, but I believe these estimates are realistic.

That averages out to vii shakes every unmarried 24-hour interval for every unmarried recruit (632 / ninety days), which adds upwards to millions of shakes annually! Again, if all this consumption was legitimate, Herbalife would live a reputable in addition to impressive business. But it's non - it's component subdivision of a nefarious computer program to convey low-income distributors (and their friends in addition to family) into Clubs to portion the cost of admission to this deceptively promoted American Dream.

Some claim that the motivation of these customers doesn't affair - consumption is consumption. But the courts in addition to regulators view it differently.

Since the starting fourth dimension of this Wall Street battle, the Direct Selling Association, which represents Herbalife in addition to other MLMs, has pointed reporters in addition to analysts interested inwards evaluating whether Herbalife is a pyramid scheme to a 2004 advisory alphabetic character issued yesteryear the FTC on the enquiry of distributor consumption, which states: "Much has been made of the personal, or internal, consumption number inwards recent years. In fact, the amount of internal consumption inwards whatever multi-level compensation work organisation does non determine whether or non the FTC volition consider the computer program a pyramid scheme."

Herbalife has leaned heavily on this alphabetic character and, inwards fact, the fellowship at nowadays calls its distributors "members."

Yet, on June 2, 2014, an appeals panel upheld a conclusion that BurnLounge, an MLM that sold downloadable music, was a pyramid scheme. BurnLounge had appealed an before ruling, inwards part, yesteryear citing the 2004 alphabetic character in addition to arguing that its distributors should live considered customers. The courtroom rejected the declaration in addition to pointed dorsum to the 2004 letter, stressing that the relevant passage on internal consumption must live read inwards its entirety: "The critical enquiry for the FTC is whether the revenues that primarily back upwards the commissions paid to all participants are generated from purchases of goods in addition to services that are not simply incidental to the purchase of the right to participate inwards a money-making venture."

In other words, motivation does, inwards fact, matter. Regulators in addition to courts desire to know why people are consuming a product. Are they consuming it because they similar it in addition to would select it over other products based on price, quality, brand, the overall experience, etc.? Or, is the existent motivation behind the purchase of a production "the right to participate inwards a money-making venture"?

The Club 100 scheme is fiendishly clever. It ensnares countless people all over the ground inwards Herbalife's web, drains them of their fourth dimension in addition to coin and, best of all (from Herbalife's dot of view), results inwards a groovy bargain of consumption of Herbalife's products, which makes it much harder for regulators to discovery in addition to unopen downwards this sophisticated pyramid scheme. Finally, it is clear why nosotros don't view real much Herbalife production stacked inwards garages or dumped on eBay, in addition to why so footling is returned to the company. Most of the production is indeed consumed, but not, every bit Herbalife would take hold y'all believe, yesteryear existent customers but rather yesteryear those pursuing quotas established yesteryear the company's top distributors for people they deceive into pursuing a faux hope of the American Dream.

Shut out yesteryear linguistic communication in addition to cultural barriers, yesteryear suspicion that nosotros were compliance officers or immigration officials posing every bit Wall Street researchers, and, most importantly, yesteryear a scheme that created its ain illusion, it would live iii years before I understood it. Now, thinking dorsum on that morn inwards Queens, I empathise why the men crowded into that second-story Nutrition Club inwards Queens appeared to live such unconvincing customers - it's because they weren't existent customers. Instead, they were spending coin they couldn't spare to drinkable a milk shiver they belike didn't similar to lose fatty they didn't take hold inwards monastic say to pursue (or assist a friend or household unit of measurement fellow member pursue) a "certification" for a "business opportunity" that doesn't be for the overwhelming bulk of people. They weren't customers inwards whatever traditional sense of the word; rather, they were paying the cost of admission to a fraudulently promoted business, i milk shiver at a time.

Christine Richard is the President of Orion Research LLC, which does investigative inquiry for investors. She is a erstwhile reporter amongst Bloomberg News in addition to Dow Jones in addition to the writer of Confidence Game: How Bill Ackman Called Wall Street's Bluff (Wiley, 2010). Pershing Square Capital Management, which has a small topographic point on Herbalife, is a client of Orion Research LLC.

Disclosure: The writer has no positions inwards whatever stocks mentioned, in addition to no plans to initiate whatever positions within the side yesteryear side 72 hours. The writer wrote this article themselves, in addition to it expresses their ain opinions. The writer has no work organisation human relationship amongst whatever fellowship whose stock is mentioned inwards this article.

Additional disclosure: The writer does non take positions inwards companies she researches. Pershing Square Capital Management, which has a small topographic point on Herbalife, is a client of Orion Research LLC.

The thought that in that location are a huge number of people paying to drinkable 5-7 plus poly peptide shakes a 24-hour interval is - inwards my sentiment - ludicrous. I challenge y'all to do that (as y'all would almost for certain throw up). It is also deeply contrary to what I saw on the ground. I saw existent in addition to regular consumers.

I don't know how to react here... Christine Richard can't speak their language, wants to ignore what they tell her when asked directly, pass iii years researching in addition to came to the conclusion that literally millions of people drinkable plenty Herbalife shakes to throw upwards on a daily footing because they take hold been fooled into believing it is a route to prosperity.

The illusion hither – in addition to it has been repeated to me yesteryear other shorts – is that in that location is a fraud hither that has taken inwards millions of people who are uneducated but nosotros – white-middle-class liberals – tin view right through it no affair what these people say.

It is the line of someone who sees facts-on-the-ground that differ from their thesis in addition to distorts those facts to come upwards up amongst a novel thesis.

One Latino correspondent inwards Miami was so offended yesteryear this he started sending me pictures of clubs inwards Little Havana. Here goes.

The gild inwards enquiry is run yesteryear the guy on the left’s married adult woman [i.e. the married adult woman of the senior policeman]. The gild has close 280 visitors a 24-hour interval (which makes it an acceptable business) close xl of whom are uniformed cops. The gild also has a cycling grouping associated amongst it. Ray [the guy on the right] told me it was an option to the policeman’s sedentary amongst doughnuts diet.

This - amongst existent consumer doing a milk shiver a 24-hour interval - is the model on the ground. It is a repeated pattern, like shooting fish in a barrel to find.

Clubs amongst middle cast customers are rarer – but they are by in addition to large pretty nice.

Clubs alone inwards poverty struck neighbourhoods reverberate their community. The clubs inwards Queens are a fairly gruesome affair. You demand close threescore visitors a 24-hour interval to create minimum wage in addition to the clubs acquire 50-70. You tin easily discovery people who piece of work long hours for less than minimum wage.

When y'all verbalise to these people they think it ameliorate than working inwards a fast-food joint. They socialize amongst their friends, they think they are doing well, often they take hold immature kids playing inwards the dorsum of the club. The to a greater extent than middle cast the expanse the larger the clubs tend to live (but some clubs inwards Malaysia are huge). The gild higher upwards (with the police) is apparently 240-280 visitors a 24-hour interval - which winds upwards beingness far ameliorate than minimum wage. The cops believe inwards the work organisation chance - without stating that they volition acquire rich from it. However every bit most hedge fund types take hold visited only Queens (if they take hold visited any) they view only the gruesome.

Clubs inwards China

Multi-level marketing schemes inwards PRC are illegal. Direct selling organisations are not. The differences are subtle [is Avon a direct seller, or a multi-level marketer?]. But the source of the divergence is non subtle. In PRC hierarchical structures involving lots of people non nether the direct command of the Party are illegal. Strangely Bill Ackman's PRC presentation presented the Chinese MLM laws every bit close consumer protection whereas they are close Party protection. [If consumer protection were so of import why are most Chinese correctly convinced their nutrient chain is compromised?]

Anyway I visited Herbalife distributors inwards Beijing without permission from the company, sent my notes - including some concerns - to the fellowship in addition to some large shareholders - in addition to so amongst permission of the fellowship went to see distributors inwards Dongguan (in the Pearl River Delta). The Dongguan see was on the same 24-hour interval every bit my see to Hanergy inwards Heyuan. [Deal Book.

Mr Ackman's presentations

http://www.visualwebcaster.com/Pershing/91149/event.asp

This was done inwards every bit high a profile way every bit possible.

The conference is where David Einhorn presented his famous Lehman presentation (that was widely credited every bit beingness a precipitator of Lehman’s collapse).

Ackman called a “special” Ira Sohn conference (with a $25 i M k donation to the charity) in addition to presented for iii hours on Herbalife.

Indeed Mr Ackman goes farther - in addition to says that in that location is no existent ground to purchase the product:

But that ultimately (according to Mr Ackman) the ground why Herbalife sells so much production is that it is all close the “business opportunity”. To quote Mr Ackman's conclusion:

This is clearly in addition to patently wrong. But Bill Ackman described Shane Dineen's component subdivision of the presentation every bit beingness the resultant of a year's work.

Bluntly - either Pershing Square (Bill Ackman's fund) did non do every bit much piece of work every bit they said or they are trying hard to check into a pre-ordained thesis.

Essentially Pershing Square argues that it is a pyramid in fact in addition to a pyramid at law.

Bill Ackman also tries to refute the refund assay inwards Amway:

We volition acquire dorsum to the refund rules afterward because the fellowship amended them seemingly inwards response to the Ackman presentation.

An observation on returns in addition to inventory loading

If y'all assay to discovery out who the sellers are they volition non tell you.

Here is a typical illustration - the sale of 2 tins of Formula 1 - gratis transportation inwards the USA:

http://www.ebay.com/itm/NEW-2-Herbalife-Formula-1-Shakes-MULTIPLE-FLAVORS-FREE-SHIPPING-/251478333014?pt=LH_DefaultDomain_0&var=&hash=item3a8d46d656

“Zoomherbal” is breaching the rules of Herbalife because Herbalife does non similar people selling online every bit it undermines the work organisation of the existing distributors.

I take hold extensively looked on Ebay (and inwards diverse countries) but I cannot discovery whatever beingness sold inwards distress.

My conclusion: inventory loading does non happen.

The existent response to Bill Ackman

He does this many times

The production Herbalife sells is the MLM - it is the community. It is the club. Not acknowledging that is the fundamental mistake inwards Mr Ackman’s presentation.

Lead selling scams

There is a reasonable press story hither (probably sourced from people associated amongst Bill Ackman):

http://www.theverge.com/2013/3/27/4099100/income-at-home-herbalife-scamworld-biz-opp

https://twitter.com/shawndahl

John Peterson shot himself inwards the roof of the oral fissure (to a surprising amount of press coverage).

The rules for Herbalife clubs

My experience is that inwards poorer areas clubs aspect similar this. In richer areas they tin aspect to a greater extent than similar this i (which is inwards Delaware in addition to online).

But inwards both cases in that location is no signage in addition to the operate of the gild is disguised.

Ackman indicates the next in addition to seems to signal that (a) it is alone consistent amongst the rules of Herbalife in addition to (b) that it is nefarious:

The fellowship has been fairly clear why it is similar that. The explanation is that for a MLM it is of import for distributors to protect the 2nd sale.

Alas if the client tin purchase it from a store that undermines the direct selling model. [You can't acquire a 2nd sale if the client tin easily go elsewhere.]

Bill Ackman’s afterward presentations

Bill Ackman has followed upwards his master copy presentations amongst several more.

Another is a study arguing Herbalife’s (fast growing) work organisation inwards PRC is illegal nether Chinese law.

Full refunds in addition to the alter inwards short-thesis from “it's a pyramid inwards fact” to “it's a pyramid at law”

This was to testify that inventory loading did non come about in addition to it could non live a pyramid inwards the sense originally described yesteryear Bill Ackman.

In other words Bill Ackman retreated to David Einhorn’s master copy (and poisonous) questions.

The fellowship press release that gave the critical information out is here:

http://ir.herbalife.com/releasedetail.cfm?ReleaseID=861186

How large is Herbalife yesteryear sales - in addition to comparisons to numbers of members

A tin of Formula 1 is the same number of “volume points” inwards every solid ground inwards the world.

I did the calculation inwards the 2nd quarter of 2014. Volume points take hold shrunk somewhat since so (and I volition explicate why below). But this gives a reasonable scale for the business.

Global volume points were 1.43 billion for the quarter. This is the highest charge per unit of measurement ever - but annualizes at 5.72 billion.

32 percent of sales are Formula 1 [a number that comes from the Bill Ackman slide above].

This suggests that annual Formula 1 sales are 1.83 billion volume points (annualised).

These are 750 gram tins of Formula 1 [the tin comes inwards 2 sizes - the other beingness 550 grams].

The tins stand upwards for 32.75 volume points (as per this linked brochure).

This suggests that a tin contains xxx “meals” or plenty for a month. [This is consistent amongst Herbalife user blogs…]

It is non quite a repast equals a volume dot - but a repast is 1.08 volume points.

That suggests that annual Formula 1 meals sold is close 1.7 billion or 4.6 i M k per day.

If ALL the distributors had i repast per 24-hour interval every 24-hour interval of the year so y'all still would non work organisation human relationship for volume.

Distributors who allegedly swallow multiple meals a day

The calculation I create higher upwards – showing that to live a pyramid most the distributors demand to swallow multiple meals a 24-hour interval has – to some extent – acquire the small case.

Club 100 - an introduction

https://www.youtube.com/watch?v=sPkruX-fMb4

I am non making this up.

Herbalife: Who's Consuming All Those Shakes? And Why...

Summary

On the ground investigative inquiry into Herbalife's nutrition clubs suggests they're non what they seem.
Club 100's quota scheme raises questions close the truthful nature of milk shiver consumption.
The motivation for sales inwards an MLM matters per recent rulings; that could live a element inwards considering Herbalife's business.

What's the truth behind Herbalife's Nutrition Club business? If y'all read Link.]

The distributors I was taken to inwards Dongguan were peculiarly successful (the most successful inwards the area) but apart from that the features were mostly unchanged betwixt Beijing in addition to the South.

Here are my contemporaneous notes of my trip to 2 distributors inwards outer Beijing.

(a). The cost dot for a Herbalife diet computer program is a close 2X America. This fits amongst my observation that everything is overpriced inwards PRC in addition to the currency is just apartment incorrect - but it is variety of disconcerting.

In America Herbalife meals are cheaper than the meals they replace. Influenza A virus subtype H5N1 $5 halt at a gild to drinkable all iii (aloe drink, tea, shake) is cheaper than getting equivalently total at Burger King. That is emphatically non truthful inwards PRC - where the meals are possibly 5X every bit expensive every bit the meals they supersede in addition to if y'all are middle income white-collar inwards Beijing so the expense of a 2 repast per 24-hour interval replacement diet is large compared to income. And if y'all are bluish neckband working cast inwards Beijing it is 100 percent of income. This agency that the production is non for the working cast inwards PRC in addition to it limits its size.

I should notation that this was the thing close the Beijing stores I found most upsetting. In American every bit inwards State of Israel in addition to inwards most other markets Herbalife is cheaper than the repast it replaces. Bill Ackman (falsely) describes it every bit expensive in addition to ripping off the poor. But Herbalife clubs - rather than a gym in addition to personal trainer - are the way the piteous acquire inwards shape. And it is a real inexpensive way.

Pricing inwards PRC limits that market. Herbalife is necessarily a middle income product.

(b). The 2nd observation is that the clubs are quite different from the Mexico/USA clubs fifty-fifty though the people in that location thought the model came from Mexico. In the Mexico/USA clubs y'all walk through the door in addition to drinkable "all three". It is a sit-around-and-chat model. The clubs are pseudo cafes - but y'all swap java for diet products. In this instance none of the iii clubs would sell me a unmarried shake. Indeed it was real hard to acquire them to sell me anything at all. What they wanted to do - in addition to it seems to live criterion - is that they stair out your fatty in addition to other trunk measurements (standard electro-conductivity scales) in addition to so lay y'all on a diet plan. The diet computer program is 7 days - but they so assay to renew y'all for ninety days in addition to so - presumably at a lower intensity - for a longer fourth dimension thereafter.

Here - for the tape - is a photograph of me getting measured upwards for a diet computer program (which y'all mightiness unkindly notation that I need).

And this is the gild which really says Nutrition Club inwards English... [This gild is close xv kilometres from key Beijing.]

China is still a daily consumption model - but in that location was less direct oversight of the daily consumption. The thought of buying a cannister of diet milk shiver was sort of unusual to them. I did so though in addition to I paid total retail - 550gram cannister for 329 Yuan (52 USD). This is a $26 retail cost normally. And they were deeply reluctant to sell it to me.

(c). Both clubs were good appointed. The call Herbalife did non appear on the door (as per usual) in addition to the staff were flat-out goodness looking. Young, groovy good dressed. This is contrast amongst the Hispanic clubs inwards New York where the owners are usually poverty struck yesteryear New York standards. These people would non aspect out of topographic point inwards middle cast Sydney - in addition to indeed would live considered goodness looking.

(d). We asked how many customers they had. Both said xl – in addition to at the fourth dimension I was non sure I believed them. [I should notation that xl turns out to live a magic number – in addition to I belike do believe them inwards retrospect.] In the fourth dimension nosotros were in that location (Sunday, goodness weather) a pair of customers came through both shops but did non halt around.

(e). There was almost no inventory at the stores. They told us that the ordering procedure is that the customers take hold a number - in addition to they monastic say online. The production is delivered direct to the client in addition to the fellowship has a warehouse inwards the major cities so it is side yesteryear side 24-hour interval delivery. The lack of inventory is variety of of import because if this is the model it is 100% prophylactic against beingness called a pyramid nether U.S.A. law (as the sales are clearly to goal customers in addition to in that location is no inventory loading...)

I cannot stress how of import this is. There is no inventory anywhere inwards the chain that is non a fellowship owned warehouse inwards China. The fellowship is completely immune to a pyramid allegation inwards PRC - in addition to if this were the model inwards the U.S.A. in that location would live no possible allegation either. The Ackman assertion that the entire global work organisation is a pyramid is falsified yesteryear this fact. The fastest growing component subdivision of it has no pyramid features at all.

(f). At i stage nosotros asked how much y'all [the distributor] got when a client placed an monastic say - in addition to it seemed to live betwixt xv in addition to xxx percent of the sale. [They showed us a remuneration scale I did non empathise - but strangely all the distributor cuts seemed below the US. For instance they told us the cheapest a distributor tin purchase it is 30% discount - but exterior PRC a sales leader tin purchase it at a 50% discount.

We afterward discovered that the direct selling rules inwards PRC boundary the retail margin to xxx percent - but everywhere exterior PRC the retailers doing serious volume (i.e. greater than close $4000 worth per year) purchase the production at a 50 percent discount. The fellowship does a few things which seem to circumvent this dominion - in addition to it pays other commissions for "activities".

The 2nd gild nosotros saw was inwards a Greenland development. Greenland is a peculiarly delusional listed Chinese belongings developer.

The edifice was 5 years old in addition to belike close one-half vacant. The downstairs was never tenanted in addition to was falling apart. Here are few photos.

First the building...

This was a typical downstairs tenancy.

Like most heavily vacant buildings inwards PRC doors featured heavy duty wheel locks. [I take hold seen hundreds of such locks...]

But in that location was an occupied subdivision in addition to the "club" was inwards a little room on the 5th floor. Again in that location was limited signage on the door - but your adventure of finding this gild from the street was roughly zero.

Still in that location were customers who visited whilst I was there.

However this was a non a gild where people sat downwards in addition to had shakes in addition to chatted. Instead the gild clearly organised exercise activities. For illustration it took people hiking inwards the hills exterior Beijing. In PRC this is an alone saleable proposition... in that location are no hiking clubs inwards Beijing - in addition to clubs per-se are real hard to organise within Party structures.

There were pictures of activities on the walls. The Dongguan gild I went to had pictures of going to the beach - which looked real attractive in addition to was close seventy km away. Influenza A virus subtype H5N1 autobus would live hired. The fellowship paid for these activities (supplementing the xxx percent retail committee that was paid) in addition to senior distributors are paid more. You could - if y'all were aggressive close it - construe these payments every bit breaking the direct selling law inwards China. But I do non think that would live the right interpretation.

The organisation is extremely strict on how these activities are organised - because I think they are the principal selling dot - but they are also the dot at which the gild gets together large numbers of people (and hence runs the jeopardy of offending the Party). The Dongguan gild (and the administration inwards Dongguan who I met) told me they had to ensure that all activities were limited to xl people - a number which did non appall the Party. It was clear that whatever in addition to all rules close gathering of people were the rules they were most keen to observe.

Strangely both Beijing clubs nosotros visited claimed they had xl members. xl members was a number that was repeated inwards Donnguan - in addition to seems to live the boundary of the number that y'all tin take on i of your activities. We did the maths in addition to amongst xl members y'all create quite a goodness living inwards PRC relative the alternatives available. [The people who ran the 2nd gild had previously been pilus clippers in addition to talked close life amongst scissors.]

The Dongguan gild differed from the Beijing clubs inwards a pair of respects. Firstly it was to a greater extent than successful - in addition to the soul claimed close 130 members - but told us that he never organised a grouping of to a greater extent than than 40. [It was the most successful gild around in addition to the fellowship chose it for us.] Moreover it used to live inwards a cafe - so it had a bar at which people could in addition to did sit down around drinking shakes. This is non similar clubs inwards other countries though - the number of people who drank shakes in that location would never take hold exceeded one-half a dozen. The shakes were mostly drunkard at home. The possessor told us the bar was non installed yesteryear him but the previous tenant at the shop.

The gild nevertheless would take hold deliveries on behalf of its customers - in addition to these were placed inwards lockers at the club. The customer's call was written on them. The distributor held no inventory.

Here are the lockers...

And here, within the locker is client production amongst their call on it. This production was opened - in addition to the client came inwards irregularly in addition to had a milk shiver amongst the possessor and/or some friends.

As a summary - the work organisation inwards PRC is non inwards the long-run every bit attractive every bit the work organisation inwards say State of Israel - because it is much harder to render the social aspect in addition to a sense of community inwards a solid ground where large gatherings tend to enhance the ire of authorities. But the marketplace is huge (there are millions of overweight people - the victims of having 4 grandparents per grandkid). And in that location is plenty of growth left.

Alas it is also - because it is relatively expensive - non a production for the real piteous inwards China. This belike eliminates one-half or to a greater extent than of the potential marketplace inwards China.

The remuneration structure

One of the to a greater extent than controversial things close Herbalife is the remuneration construction which makes a few distributors real rich in addition to tin remunerate a distributor downwards an endless chain of recruits. In other words if Influenza A virus subtype H5N1 recruits B recruits C recruits D recruits E all the way downwards to Z it is almost inconceiveable that Influenza A virus subtype H5N1 has anything to do amongst Z - but Influenza A virus subtype H5N1 is (sometimes) entitled to a proportion of purchases yesteryear Z or fifty-fifty purchases yesteryear Z's customers.

The endless remuneration scheme is tied to get-rich claims yesteryear some distributors in addition to is argued yesteryear Ackman in addition to his supporters to live evidence that this is a pyramid scheme designed to enrich the people at the real top.

Alas - in addition to I take hold proved comprehensively - the key Ackman researchers did non empathise the remuneration scheme.

I posed a enquiry in addition to gave people close 10 days to reply it. This was the question.

Imagine y'all were the real firstly Herbalife distributor in addition to y'all recruited iii people in addition to they - eventually in addition to through their downline - recruited the millions of people who at nowadays swallow and/or distribute Herbalife.

And also presume y'all did null else for the ease of your career. You just sat in that location in addition to collected the "recruitment rewards" or the "royalty checks".

Roughly how large would your income live now? And from how many levels would y'all live collecting your income?

Surprisingly nobody except some distributors who read my weblog got the answer. [The distributors were fast in addition to accurate.] Cristine Richards - Ackman's key researcher - was Deal Book.

Mr Ackman's presentations

http://www.visualwebcaster.com/Pershing/91149/event.asp

This was done inwards every bit high a profile way every bit possible.

The conference is where David Einhorn presented his famous Lehman presentation (that was widely credited every bit beingness a precipitator of Lehman’s collapse).

Ackman called a “special” Ira Sohn conference (with a $25 i M k donation to the charity) in addition to presented for iii hours on Herbalife.

Indeed Mr Ackman goes farther - in addition to says that in that location is no existent ground to purchase the product:

But that ultimately (according to Mr Ackman) the ground why Herbalife sells so much production is that it is all close the “business opportunity”. To quote Mr Ackman's conclusion:

This is clearly in addition to patently wrong. But Bill Ackman described Shane Dineen's component subdivision of the presentation every bit beingness the resultant of a year's work.

Bluntly - either Pershing Square (Bill Ackman's fund) did non do every bit much piece of work every bit they said or they are trying hard to check into a pre-ordained thesis.

Essentially Pershing Square argues that it is a pyramid in fact in addition to a pyramid at law.

Bill Ackman also tries to refute the refund assay inwards Amway:

We volition acquire dorsum to the refund rules afterward because the fellowship amended them seemingly inwards response to the Ackman presentation.

An observation on returns in addition to inventory loading

If y'all assay to discovery out who the sellers are they volition non tell you.

Here is a typical illustration - the sale of 2 tins of Formula 1 - gratis transportation inwards the USA:

http://www.ebay.com/itm/NEW-2-Herbalife-Formula-1-Shakes-MULTIPLE-FLAVORS-FREE-SHIPPING-/251478333014?pt=LH_DefaultDomain_0&var=&hash=item3a8d46d656

“Zoomherbal” is breaching the rules of Herbalife because Herbalife does non similar people selling online every bit it undermines the work organisation of the existing distributors.

I take hold extensively looked on Ebay (and inwards diverse countries) but I cannot discovery whatever beingness sold inwards distress.

My conclusion: inventory loading does non happen.

The existent response to Bill Ackman

He does this many times

The production Herbalife sells is the MLM - it is the community. It is the club. Not acknowledging that is the fundamental mistake inwards Mr Ackman’s presentation.

Lead selling scams

There is a reasonable press story hither (probably sourced from people associated amongst Bill Ackman):

http://www.theverge.com/2013/3/27/4099100/income-at-home-herbalife-scamworld-biz-opp

https://twitter.com/shawndahl

John Peterson shot himself inwards the roof of the oral fissure (to a surprising amount of press coverage).

The rules for Herbalife clubs

My experience is that inwards poorer areas clubs aspect similar this. In richer areas they tin aspect to a greater extent than similar this i (which is inwards Delaware in addition to online).

But inwards both cases in that location is no signage in addition to the operate of the gild is disguised.

Ackman indicates the next in addition to seems to signal that (a) it is alone consistent amongst the rules of Herbalife in addition to (b) that it is nefarious:

The fellowship has been fairly clear why it is similar that. The explanation is that for a MLM it is of import for distributors to protect the 2nd sale.

Alas if the client tin purchase it from a store that undermines the direct selling model. [You can't acquire a 2nd sale if the client tin easily go elsewhere.]

Bill Ackman’s afterward presentations

Bill Ackman has followed upwards his master copy presentations amongst several more.

Another is a study arguing Herbalife’s (fast growing) work organisation inwards PRC is illegal nether Chinese law.

Full refunds in addition to the alter inwards short-thesis from “it's a pyramid inwards fact” to “it's a pyramid at law”

This was to testify that inventory loading did non come about in addition to it could non live a pyramid inwards the sense originally described yesteryear Bill Ackman.

In other words Bill Ackman retreated to David Einhorn’s master copy (and poisonous) questions.

The fellowship press release that gave the critical information out is here:

http://ir.herbalife.com/releasedetail.cfm?ReleaseID=861186

How large is Herbalife yesteryear sales - in addition to comparisons to numbers of members

A tin of Formula 1 is the same number of “volume points” inwards every solid ground inwards the world.

I did the calculation inwards the 2nd quarter of 2014. Volume points take hold shrunk somewhat since so (and I volition explicate why below). But this gives a reasonable scale for the business.

Global volume points were 1.43 billion for the quarter. This is the highest charge per unit of measurement ever - but annualizes at 5.72 billion.

32 percent of sales are Formula 1 [a number that comes from the Bill Ackman slide above].

This suggests that annual Formula 1 sales are 1.83 billion volume points (annualised).

These are 750 gram tins of Formula 1 [the tin comes inwards 2 sizes - the other beingness 550 grams].

The tins stand upwards for 32.75 volume points (as per this linked brochure).

This suggests that a tin contains xxx “meals” or plenty for a month. [This is consistent amongst Herbalife user blogs…]

It is non quite a repast equals a volume dot - but a repast is 1.08 volume points.

That suggests that annual Formula 1 meals sold is close 1.7 billion or 4.6 i M k per day.

If ALL the distributors had i repast per 24-hour interval every 24-hour interval of the year so y'all still would non work organisation human relationship for volume.

Distributors who allegedly swallow multiple meals a day

The calculation I create higher upwards – showing that to live a pyramid most the distributors demand to swallow multiple meals a 24-hour interval has – to some extent – acquire the small case.

Club 100 - an introduction

https://www.youtube.com/watch?v=sPkruX-fMb4

I am non making this up.

Herbalife: Who's Consuming All Those Shakes? And Why...

Summary

On the ground investigative inquiry into Herbalife's nutrition clubs suggests they're non what they seem.
Club 100's quota scheme raises questions close the truthful nature of milk shiver consumption.
The motivation for sales inwards an MLM matters per recent rulings; that could live a element inwards considering Herbalife's business.

What's the truth behind Herbalife's Nutrition Club business? If y'all read comprehensively wrong. Here is the reply I gave:

If y'all are a base of operations even distributor y'all purchase the production at a discount of upwards to 42 percent. You sell it at retail. You create a margin.

At some dot y'all acquire a sales leader. Influenza A virus subtype H5N1 sales leader is entitled to purchase it at upwards to 50 percent discount. You tin NEVER purchase the production at a higher discount than 50 percent.

But the sales leader is entitled to a royalty. The royalty is paid iii levels deep. Influenza A virus subtype H5N1 recruits B recruits C recruits D recruits E so Influenza A virus subtype H5N1 is entitled to 5% of BCD but non E's sales. B is entititled to 5% of CDE sales. That way xv percent to a greater extent than is paid out.

This y'all are ever entitled to - iii levels deep.

After that in that location is a "production bonus". These are upwards to 7% of sales based on your level. However if someone inwards your down-line earns 2% production bonus so y'all are only entitled to 5%. And when your down-line is long in addition to successful plenty the entire 7% volition live earned below you. You volition live blocked in addition to have no income.

After that in addition to if y'all are senior plenty y'all may have the Mark Hughes Bonus - typically 1% of all sales paid infinitely deep inwards the sales structure. However if someone inwards the Chairman's Club is below y'all (and this happens) so y'all acquire blocked on that too. So y'all volition have no Mark Hughes bonus.

The soul I depict could never live inwards the Chairman's Club (to do that y'all demand 5 people below y'all to create a sure level) but someone who was real early in addition to has done almost no recruiting volition almost alone live blocked on the Chairman's Club every bit well.

So lets calculate the answer...

They do no sales - so they acquire no retail discount.

They take hold people iii levels below them - so they have 5% of their production - but their immediate network is either senior in addition to doing few sales or sclerotic). This is the only income they acquire - in addition to it is 5% of iii levels.

They are unequivocally blocked on the "production bonus" so they acquire null in that location and

They are non Chairman's Club or higher upwards because they recruited only iii people - in addition to if the recruited to a greater extent than they would live blocked for most of it anyway just because the real early guys take hold all been blocked out unless they kept growing their network.

So all they acquire is 5% of iii levels downwards - which is probable to live trivial - belike less than $5000 a year.

Note the 50% plus the 15% plus the 7% plus the 1% is the famous 73% payout ratio. It all gets paid - just non to the foundation recruiter. In fact it gets paid to people they recruited, people who worked hard to build networks in addition to create to a greater extent than sales.

It is worth examining how y'all qualify for the senior levels inwards the sales structure.

To acquire a sales leader y'all demand to sell 4000 volume points (roughly $4000 worth at retail) inwards a year. After that y'all acquire entitled to organizational volume - volume from your three-sales-leader deep downline.

If a regular client replaces 400 meals a twelvemonth in addition to consumes 600 volume points so y'all should live able to do this on close 7 regular customers.

To remain a sales leader y'all demand to requalify every February.

There are close 350,000 sales leaders globally in addition to a footling over one-half requalify. The average sales leader does many times the required volume. [The number of sales leaders beingness recruited is currently falling but the memory charge per unit of measurement for sales leaders is rising. The reasons for this tendency are discussed below.]

To create Presidents Team in addition to live entitled to production bonus is fairly unproblematic - but it looks awful hard to do. You demand to acquire 200,0000 volume points per calendar month for iii consecutive months inwards your "organization" - that is iii sales leaders deep. In other words iii layers deep y'all demand to live replacing somewhat over 100,000 meals per calendar month - in addition to that would require say 2000 people on a regular diet.

This could non live done yesteryear inventory loading because y'all demand to do it for iii consecutive months. The fact that anyone qualifies every bit a President's squad fellow member suggests the essence Ackman thesis is wrong. However in that location are betwixt 1-4 qualifications globally per month. Quite a few people take hold met this - in addition to people are edifice novel in addition to sustained organisations fairly regularly.

There are many dans inwards the Presidents Team - in addition to to attain the highest dan (and acquire the maximum production bonus) y'all demand to live doing 1 i M k volume points per calendar month inwards your organisation.

To acquire Chairmans' Club y'all demand 5 split Presidents' Team members below y'all (I am non sure what even of the Presidents' Team they demand to be). This can't live done without bringing huge preparation in addition to infrastructure to your Presidents' Team aspirants. It seems extraordinarily hard to qualify every bit a Chairmans' Club fellow member but most years 1-2 people create it. When I take hold met these people they are every bit organised in addition to competent every bit the senior sales staff at say Oracle. There is a high even of professionalism required to do this.

There is i even higher upwards that - so rare it is almost theoretical. That is "Founders Circle". To acquire Founders Circle y'all demand 10 Presidents' Team members of the highest dan inwards 10 alone split downlines below you. To my cognition only 4 people take hold ever achieved this. If in that location is a novel ascension i time a decade I would live surprised.

The remuneration scheme is - inwards my sentiment - a piece of work of genius. The senior staff take hold to build huge organisations below them in addition to do huge amounts of mentoring to succeed. And so they take hold to go on to do it or their income tails off to null fairly rapidly. If they do non maintain working their downline eventually has people rising to their even and they are blocked from receiving income. Herbalife senior positions are a golden-treadmill - where people current of air upwards working huge hours to maintain their network in addition to to create sure they are non blocked.

The compensation computer program in addition to the powerfulness to know - this is a perfect stock to research

To create this compensation computer program piece of work the fellowship has in addition to requires a real comprehensive (Oracle) figurer system. Moreover distributors take hold access to their component subdivision of the scheme - so if y'all are a Presidents' Club fellow member y'all tin view everything inwards your downline. You tin view how much they are ordering, their address, the repeat orders, who they take hold recruited. Everything.

This is a necessary component subdivision of running a Presidents' gild organization. The senior distributor sees a sales leader whose sales are rapidly increasing they tin discovery out why - in addition to spread the goodness word. If a sales leader's sales are dropping off y'all tin telephone phone inwards for some mentoring. This is all done yesteryear a typical Presidents' Club member.

The Presidents' Club fellow member volition also tell y'all accurately what is happening inwards their downline. They are non fellowship insiders - they are independent contractors. And they volition tell y'all how hard they piece of work in addition to how many people are inwards their downline in addition to what gets people to sell in addition to what does non because they are keen to recruit y'all in addition to acquire y'all to do the same.

If y'all verbalise to vi or vii independent senior distributors y'all tin acquire a real accurate thought of what is going on inwards the fellowship inwards existent time.

This is a fellowship where what would unremarkably live "inside information" is legally in addition to freely available for anyone who wants to verbalise amongst a bunch of distributors. It is the rare instance of a fellowship inwards which y'all truly tin know the of import details of sales in addition to profits.

It rewards work. It is amazing to me that most of Wall Street has taken some involvement inwards the Herbalife debate but real few people take hold done this sort of detailed work.

When I verbalise below (and I volition verbalise below) close what is going on amongst sales in addition to the alter inwards the marketing computer program - it is an expanse inwards which I tin know. I may live "speculating" but it is real informed speculation. I take hold talked amongst plenty distributors to know the basic trends. These distributors do non encompass the whole fellowship (I am non that good connected) but they encompass a broad sample. For the minute all I am going to say is that this looks similar a fantastic stock in addition to close to acquire rapidly better.

Models of Herbalife distributors

Herbalife distributors vary according to the civilization they are in. It could non live whatever other way – this is a distributed sales model where local entrepreneurs piece of work out what works inwards their community.

The model Wall Street is most familiar amongst is the “cafe-style” distributorship inwards Queens. These are real poorly equipped by in addition to large – often poorly lit in addition to decorated. They reverberate what it is similar living every bit minimum wage workers inwards greater New York (for an affluent Wall-Streeter they are grim).

The (relatively grim) Queens clubs nevertheless are far from the only model.

The PRC model that I saw at all iii distributors I visited inwards PRC was i where y'all had a fitness assessment, weight loss goals in addition to the production was sent to y'all at dwelling for consumption. The only meetings were grouping outings limited to xl people. The xl soul boundary was driven yesteryear Party rules which Herbalife complies with.

The Arab model (which I assemble is repeated inwards Abu Dhabi in addition to a few other places) is a group-hug model. The gild is held inwards someone's real inexpensive infinite but includes grouping give-and-take in addition to grouping exercise. [There are clubs inwards Abu Dhabi – but I did non acquire to see them when I passed through. It has acquire a hobby to see clubs inwards unusual locations.]

One of the strangest models I know exists on the coast of Thailand in addition to Cambodia. I advert it only because Bill Ackman made a large thing inwards i of his presentations close how Herbalife had gone to Kingdom of Cambodia in addition to hence was “targeting” the poorest people inwards the world. This has also acquire part of the SeekingAlpha hitting pieces. It amazes me nevertheless that Pershing Square has strong views on Herbalife inwards Kingdom of Cambodia without going to look.

So let's aspect for him. These clubs on the coast of Thailand in addition to Kingdom of Cambodia be inwards the major sex-tourism destinations – places where men go in addition to drinkable beer nether the shade of some awning in addition to are fawned on yesteryear younger women who desire them to purchase “lady-drinks” from which they acquire a commission. They volition also go dwelling amongst client if they pay a “bar-fine”.

Venues that are “beer bars” inwards the afternoon are sometimes Herbalife clubs inwards the morning, amongst older women running the club. The customers are overweight High German in addition to Australian expats [sexpats inwards the jargon]. You tin discovery some of these clubs online consummate amongst before-and-after photos of formerly fatty Europeans sexpats. I won't do it for y'all – but just selection your sex-tourism hotspot in addition to google it amongst the words “nutrition club”. I only enhance this so bluntly because it is a clear in addition to unequivocal topographic point where Bill Ackman was wrong. There are existent customers. And they are non the poorest people inwards the world. [Besides, when the community that Herbalife is inwards is a sex-tourism community why should y'all live surprised that some entrepreneurial local distributor has targeted sexual practice tourists?]

There are Herbalife clubs attached to Yoga studios. Think middle-aged housewives wanting to lose some weight in addition to acquire some flexibility. They purchase a footling milk shiver every bit well. More by in addition to large in that location are large fitness clubs which sell Herbalife. Influenza A virus subtype H5N1 fairly goodness illustration is inwards Sydney – it is called 24FitClub. The model hither is often that in that location is a gratis fitness coming together inwards a commons (usually on a Dominicus morning). The fitness events also sign people upwards every bit Herbalife customers – in addition to when y'all pay for Herbalife y'all are paying for the fitness lawsuit and the commodity shake. This clearly answers the short-seller enquiry every bit to why people pay to a greater extent than than marketplace for a commodity. [It is that they are non buying a commodity.]

Some of these clubs – peculiarly inwards Malaysia – are real large indeed (a M members has been quoted to me inwards i instance). There are clubs that run across inwards the commons that take hold hundreds of members – in addition to they also run across for fitness dances inwards gymnasiums (rented for the occasion). This works real good inwards places where women (Muslim) take hold a social restriction on dancing in addition to the distinction betwixt dancing in addition to fitness exercises is blurred. They acquire Muslim dating clubs. [There are videos of such clubs on YouTube if y'all are interested.]

In every i of these cases poly peptide shakes are beingness sold amongst “community” in addition to in every instance existent customers exist. These clubs are a direct reply to the Ackman enquiry – asked many times – every bit to why would anyone purchase overpriced poly peptide shakes at total cost (or fifty-fifty a 25 percent discount) when cheaper materials is available online in addition to inwards supermarkets? The answer: y'all acquire to a greater extent than when y'all purchase it from a distributor.

Lead-sellers

As noted above, in that location is i dot where Bill Ackman seems to take hold some legitimate points – the erstwhile presence of lead-sellers inwards Herbalife's distributor base. In almost every multi-level marketing computer program in that location are people who volition sell “tools” to assist y'all topographic point customers. These tools are usually something similar a listing of leads for people who take hold responded positively to a piece of work from dwelling work organisation chance or the like. The “lead sellers” invariably sell the same atomic number 82 many times.

Herbalife offers a refund on their products. As noted, the refund is at nowadays far-in-excess of Amway safe-harbour requirements. It has been increased to a total refund including postage.

Alas lead-sellers do non offering a refund.

Some people take hold paid $20 per lead. The coin doesn't go to Herbalife – it goes to the lead-seller. There are plenty of examples of people who take hold been ripped off yesteryear lead-sellers at all MLMs. Indeed given the defences inwards the Amway safe-harbour (which is a ninety percent refund) the principal way y'all tin lose substantial coin inwards a “goods” MLM is to lead-sellers. [Note that BurnLounge – which has been found to live a pyramid – sold music burning services – in addition to it is real hard to debate that these are non consumed when delivered in addition to refunds were non offered.]

Fairly early inwards the Herbalife saga (early 2013) the fellowship banned whatever lead-sellers from the organisation. [You were fired every bit a distributor if y'all were found to live selling leads.] I take hold non tested this hypothesis yesteryear finding someone who sells leads in addition to seeing if they acquire fired – but Shawn Dahl in addition to other lead-sellers left Herbalife. The fellowship announced at the fourth dimension that it would take hold a “low-single-digit negative effect on sales”. Truly if y'all aspect through the quarterly sales y'all can't view it. This was the firstly (of many) changes inwards the distribution rules that take hold had a negative – albeit temporary – effect on sales growth.

I take hold visited many Herbalife distributors – in addition to I cannot discovery “victims”. One Hispanic President's Club fellow member I spoke to said he knew no Hispanic “victims”. His customers ran communities – rather than beingness solo-operators who thought they could just sell materials from home.

Field sales (and Mexico)

Go dorsum to the 1970s when the Amway conclusion was made. Payments over the telephone were hard – non everyone had a credit card. Deliveries of little parcels to millions of private customers were impossible. These were the days before Amazon in addition to ubiquitous packet delivery.

In those days – in addition to it is the surround that permeates the Amway conclusion – the distributors took real large deliveries (half a garage full) in addition to they inwards plough made deliveries to their customers in addition to fifty-fifty little distributors. Most goal sales were made “in the field”.

This of course of didactics left the possibility that the distributor would live left amongst a huge amount of inventory in addition to could really only create coin yesteryear persuading other people to similarly take a huge amount of inventory. It was inwards to this surround that the Amway safe-harbour rules were designed. Provided the fellowship could convince that in that location were existent customers (the seventy percent external rule) in addition to that y'all could non acquire stuck amongst inventory (a ninety percent refund rule) so y'all were prophylactic against a pyramid accusation.

The 1970s conditions no longer be inwards America. UPS in addition to credit cards are ubiquitous in addition to it is alone possible to create deliveries straight to goal customers (as they do inwards China) in addition to also to take hold little payments from goal customers.

Until real lately in that location were non widely available payment mechanisms inwards many developing countries. [Smart-phones take hold to some extent changed that.] To this 24-hour interval accurate in addition to timely delivery of little parcels is non available.

Many of Herbalife's distributors still alive inwards countries amongst hard delivery systems – in addition to a few years agone Herbalife had never made a direct sale to to a greater extent than than a i M k of its distributors. Instead these distributors simply purchased from other distributors. Sales from other distributors are called “field sales”.

A land sale is a legitimate way of distributing production inwards countries amongst piteous distribution networks – in addition to indeed they were i time mutual inwards the USA.

However they come upwards amongst several difficulties for Herbalife. I volition illustrate yesteryear example.

One difficulty is that land sales create it relatively like shooting fish in a barrel to subvert the distributor networks... Cristine Richard inwards her article close “field sales” quotes a work from several years agone inwards Mexico.

What was happening is, inwards markets or inwards states where nosotros did non take hold distribution points, real entrepreneurial distributors were driving a pickup truck to a distribution center, picking upwards production in addition to so selling to people that were non inwards their organization. (Bank of America Securities Consumer Conference, March 12, 2009)

This agency existent client were buying existent production but they were doing it inwards a way that circumvents the criterion distributor network. Herbalife goes to extraordinary extents to protect distributor businesses (for illustration it volition non allow online sales). The operate of this (as described above) is to protect a distributor's “second sale”. Herbalife volition ban distributors for behaving similar this – in addition to this disrupts sales in addition to selling. If in that location were no land sales this would non happen.

More importantly land sales tin live used to game the advertisement rules at Herbalife. To acquire a Chairman's Club fellow member y'all demand to acquire 5 distributors below y'all of a sure even of President's Club. This matters because when y'all do so y'all block the Chairman's Club fellow member higher upwards y'all for component subdivision of the royalty – in addition to so getting a 5th President's Club fellow member below y'all matters.

To game sales just shift-them around a footling – in addition to do some compensation of the soul y'all shifted from. It is tricky but tin live done inwards a field-sales surround whereas it cannot live done inwards a direct delivery environment.

There was an incident inwards Argentine Republic a few years agone where this happened. There was an ascension to the Chairman's Club (thus shifting around considerable royalty entitlement) in addition to this ascension was disputed in addition to so reversed. To say this caused ructions inwards the distributor network is understating it. People did non trust each other whatever more. [I assemble from discussions that this was non the only such incident – but I cannot vouch for others...]

There is a in conclusion work amongst land sales – in addition to this is peculiarly evident inwards Mexico. If all the sales are land sales Herbalife has far less command of in addition to ownership over its network than is desirable. In United Mexican States in that location are iii senior distributors who take hold built a network of distributors that cross the country. This network of distributors tin do same-day deliveries to most of United Mexican States – which is darn useful – but alas comes at a cost to the fellowship which is that they take hold ceded most the powerfulness to the distributors. Herbalife does non take hold a personal dot of contact amongst their customers.

Importantly the widespread availability of payment networks inwards the developing ground (via smart-phones) has allowed Herbalife to create this – getting much to a greater extent than detailed information on its network in addition to gaining command over its distribution. This is a substantial strengthening of Herbalife's work organisation – but it comes at some small term cost. The small term costs (described inwards to a greater extent than special below) are evident inwards the accounts for the in conclusion few quarters.

Other dominion changes

Whereas the dominion alter banning lead-sellers did non take hold an appreciable effect on sales, other dominion changes have. They are – inwards my well-supported view – the ground why sales take hold been weak at the moment.

The rule-changes are superficially a response to Ackman. Specifically the fellowship has insisted that multiple orders are placed (over time) to qualify every bit a sales leader (the key distribution level).

In the yesteryear y'all could qualify for a sales leader amongst a unmarried large monastic say of 4000 volume points (about $4000) or amongst several orders (totalling 5000 volume points) placed over a year. The large monastic say was called a “success builder order” in addition to was a key exhibit inwards the claim that the fellowship was a pyramid scheme. After all – encouraging people to purchase large amounts that they can't sell is a key characteristic of pyramid schemes in addition to is the characteristic that the Amway rules were designed to ameliorate.

Recently the fellowship changed this so that the only way that y'all could qualify every bit a sales leader was amongst multiple orders spread over some time. If y'all can't sell the firstly monastic say of say $1000 so it is unlikely y'all volition live stupid plenty to create some other $1000 order.

No pyramid scheme would create this alter – but Herbalife has rolled it out over the world. They started inwards Russian Federation in addition to some parts of Eastern Europe in addition to the Middle East (test markets) but take hold at nowadays rolled this out globally. [The Club inwards State of Israel described at the starting fourth dimension of this post operated nether the novel rules.]

This dominion alter is a very effective defense forcefulness to the Ackman claims – a pyramid scheme simply would non do this. And when talking the fellowship presents this every bit i of the reasons why the scheme needs to live rolled out.

However I think this is only component subdivision of the story.

The 2nd component subdivision of the story is that involves cleaning upwards land sales. You cannot enforce a multiple-order dominion if the orders are land sales in addition to the upline distributors just fulfil the order. They could – of course of didactics – take a unmarried monastic say in addition to acquire into it inwards the figurer scheme every bit multiple orders.

So the fellowship made a real of import alter – i that volition alter the nature of the fellowship for decades. It at nowadays insists that orders to qualify every bit a sales leader (the key distributor level) are placed amongst the fellowship straight – in addition to non via land sales.

In the the States this is almost no change. In United Mexican States it is huge. For the firstly fourth dimension Herbalife volition take hold a direct human relationship amongst all of their key distributors.

Making it piece of work nevertheless is hard. The fellowship needs to acquire their ain delivery network upwards to the criterion of the warehouse network owned yesteryear the senior Mexican distributors. They take hold had to rapidly acquire something similar 1200 fellowship controlled in addition to fellowship stocked distribution points inwards Mexico. They did this effectively in addition to quickly. [This is a fellowship that really tin execute – it is – on the ground – i of the best administration teams I take hold ever seen.]

This dramatically strengthens their business.

However it has real notable negative short-term effects on sales. For a start slower firstly orders just – good – slowed downwards sales. There is no surprise there. This effect was visible inwards every jurisdiction in addition to inwards jurisdictions where it was trialled some fourth dimension agone [notably Eastern Europe] sales take hold bounced back.

How do I know they take hold bounced back?

Well some distributors inwards those areas take hold shared their information amongst me. This is i of those things close researching this stock. Because the distributors are independent contractors amongst goodness information y'all tin acquire real accurate information from them. You tin know.

Importantly the displace away from land sales – peculiarly inwards United Mexican States - take hold resulted inwards the upline distributors destocking their warehouses in addition to the fellowship stocking their own. This volition resultant inwards temporarily lower sales (as the distributors destock) in addition to a permanent increment inwards inventory (as the fellowship warehouses acquire filled). Cash flow effects are negative and it was these cash flow effects that were most visible during the 4th quarter of 2014. After those results were released the shorts (including Bill Ackman) were crowing close falling cash flow. [See this SeekingAlpha article for an example.]

The existent sales effect of the dominion change

Herbalife's senior distributors don't just sit down around in addition to assemble their checks. If they did they would shortly acquire blocked inwards the distribution chain. They are active sales people edifice distribution chains. In United Mexican States that meant many things including edifice warehouses.

However the principal thing that senior distributors do is they mentor downline distributors. If y'all pass whatever fourth dimension amongst a senior distributor y'all volition view this inwards action.

When they acquire a novel sales leader in that location is a lot of preparation involved. It is – frankly – a waste materials of their fourth dimension if the novel sales leader drops out quickly. If the novel sales leader seeks a refund of production it is doubly a waste materials of their fourth dimension every bit they do non acquire paid at all.

The key determinant of upline income is how many of their downline builds communities around them – how many build sustainable (albeit often small) businesses.

When y'all verbalise to distributors y'all discovery that their key determinant of success is a memory rate. Most people who bring together Herbalife drib out. Most sales leaders neglect to build successful businesses. [This is truthful for all diet products – I do non think Herbalife is unusual here.]

But I take hold seen senior distributors for whom over ninety percent of sales are to repeat customers. There are enormous numbers of novel customers – but the total sales to novel customers do non add together upwards to much. It is the retained customers that work organisation human relationship for almost everything.

The distributors amongst repeating work organisation are valuable in addition to the essence of their income. New customers are only really worth something to the extent they make repeat business.

Now hither is the rub. In the markets Herbalife tested amongst the requirement for slow qualification every bit a sales leader the memory charge per unit of measurement was higher. Quite a fleck higher. And the upline distributors spent much to a greater extent than of their (limited) fourth dimension preparation people who were successfully edifice repeat businesses. And this had a sort of snowball effect on sales. The firstly effect of the dominion alter was that sales fell.

After that they grew. And so they started to grow at an accelerating rate. Distributors qualified nether the novel dominion are (a) much to a greater extent than probable to make repeated sales in addition to (b) much to a greater extent than probable to recruit people who inwards plough make repeat sales. The distributors are profoundly happy amongst the dominion alter – in addition to they are seeing their income rise. The income-to-effort ratio is also changing favourably.

How do I know? Well distributors take hold the data. I said that above.

This is simply wonderful every bit a shareholder or potential shareholder. There is currently some weakness inwards Herbalife sales. Herbalife has guided for increasing sales inwards the 2nd one-half of this year. If the trends hither follow the assay markets those increases are in-the-bag. Better – if the trends follow the assay markets so non only volition sales in addition to earnings accelerate, they volition accelerate at an accelerating rate.

Herbalife i time exceeded earnings expectations for 21 straight quarters. Although the Ackman/Einhorn hiccup was inwards the middle of this – by in addition to large this was a real goodness fourth dimension for Herbalife shareholders.

Here is the trick. If the assay markets are a guide (and I believe they are) so that tape volition live repeated, but this fourth dimension the earnings volition accelerate. Big numbers are possible. I don't think anyone other than the wildest bulls aspect accelerating growth from hither – but that is a distinct possibility.

Summary

At something unopen to 20,000 words that is long enough. I volition live getting off the airplane shortly anyway. So hither is a goodness topographic point to finish.

What nosotros take hold nevertheless is a short-case built on arguments that do non check the facts-on-the-ground.

On the ground this is an ethical fellowship that does goodness things in addition to builds huge in addition to sustaining communities around its products.

Moreover it is doing rational things that are short-term earnings negative but volition strengthen the work organisation in addition to laid the fellowship upwards for non only growing earnings but accelerating underlying sales (and hence earnings) over the side yesteryear side few years.

Management is focussed on shareholders. Their execution is fantabulous (see the build out inwards Mexico).

And in that location is a xxx plus percent small involvement inwards the stock.

And the starting price-earnings ratio is minor – considerably nether the marketplace average.

There isn't a ameliorate stock inwards my portfolio. It volition eventually go good over $200 [even without short-covering]. The stock is indecently inexpensive now. And the fellowship is of the highest quality.

John

PS. There has been 2 amendments to this post.

In the master copy I suggested that the biography that Ms. Richard wrote of Bill Ackman in addition to his MBIA small was a "paid" biography. I take hold been reliably informed yesteryear someone amongst links to the publisher that it was not. The proposition has been removed.

The 2nd amendment is that the soul who asserted to me that Cristine Richard planted the David Einhorn enquiry is less than sure close this in addition to I take hold mostly removed the assertion.

--

Finally a few people take hold questioned why I called David Einhorn's questions "poisonous". Well at a trivial even an instant in addition to substantial drib inwards the stock cost suggested many people agreed.

But to a greater extent than by in addition to large (a) the fellowship answered them real badly in addition to (b) I am non sure in that location was whatever way they could reply them well. In that sense they were - at to the lowest degree to world perceptions of the fellowship "poisonous". Once asked world perception was going to change.

The questions were non unfair though. "When did y'all halt beating your wife?" is the classic unfair enquiry because it pre-assumes the nasty facts. David did non pre-assume the nasty fact inwards that way. But I think they did pre-assume an interpretation of the law - an interpretation since made irrelevant yesteryear BurnLounge.

J

--

One to a greater extent than correction - Anthony Powell, non Peterson was the distributor who left over lead-selling - along amongst Shawn Dahl.

Economist and Investment

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Herbalife - The (Very) Long Post

An observation on returns in addition to inventory loading

The existent response to Bill Ackman

Lead selling scams

The rules for Herbalife clubs

Full refunds in addition to the alter inwards short-thesis from “it's a pyramid inwards fact” to “it's a pyramid at law”

How large is Herbalife yesteryear sales - in addition to comparisons to numbers of members

Herbalife: Who's Consuming All Those Shakes? And Why...

Summary

An observation on returns in addition to inventory loading

The existent response to Bill Ackman

Lead selling scams

The rules for Herbalife clubs

Full refunds in addition to the alter inwards short-thesis from “it's a pyramid inwards fact” to “it's a pyramid at law”

How large is Herbalife yesteryear sales - in addition to comparisons to numbers of members

Herbalife: Who's Consuming All Those Shakes? And Why...

Summary

An observation on returns in addition to inventory loading

The existent response to Bill Ackman

Lead selling scams

The rules for Herbalife clubs

Full refunds in addition to the alter inwards short-thesis from “it's a pyramid inwards fact” to “it's a pyramid at law”

How large is Herbalife yesteryear sales - in addition to comparisons to numbers of members

Herbalife: Who's Consuming All Those Shakes? And Why...

Summary

An observation on returns in addition to inventory loading

The existent response to Bill Ackman

Lead selling scams

The rules for Herbalife clubs

Full refunds in addition to the alter inwards short-thesis from “it's a pyramid inwards fact” to “it's a pyramid at law”

How large is Herbalife yesteryear sales - in addition to comparisons to numbers of members

Herbalife: Who's Consuming All Those Shakes? And Why...

Summary

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