As a financial journalist, Twitter is indispensable to me. It's a personal wire service that I customize to suit my appetite for information; an instant way of getting breaking news from multiple perspectives. Plus I follow some pretty clever people who can cram a lot of insight into 140 characters.
So, once a week I curate my favorite tweets and add a little context to help explain an emerging story. Last week's big news was that Herbalife (HLF 1.96%), a multi-level marketing firm (MLM) that sells nutritional products, is now being investigated by the Federal Trade Commission (FTC) over allegations of fraud.
A little background: Herbalife is currently in the midst of a tussle between billionaire money managers Bill Ackman and Carl Icahn. Icahn owns 17% of the company that Ackman accuses of being a pyramid scheme, so it's no wonder that he took offense when Ackman did this:
— Bill Ackman (@aJobCreator) November 5, 2013
Over the next 15 months, Mr. Ackman campaigned heavily to "expose" Herbalife. Now they're under investigation. You do the math.
— The Economist (@EconBizFin) March 13, 2014
For those who don't watch Netflix's House of Cards, it's about a calculating politician who ruthlessly schemes and plots to get his way. And a "put" is a financial position that profits when a stock price declines. (Tangential: Everyone should watch House of Cards. It's amazing.)
Part of the problem is that regulators haven't made it clear at what point a multi-level marketing firm degenerates into a pyramid scheme.
For the past 35 years, MLMs have run amok. Back in 1979, the FTC laid down some basic rules, most importantly that:
- Distributors must sell at least 70% of their product at retail value. Pyramid schemes rely on growing their distributor network, often by selling discount product to new recruits (or using the products themselves) and still counting it as regular sales. When enough distributors behave in that fashion, usually because the firm rewards aggressive recruitment, the business model is no longer built on real sales.
- Distributors should have at least 10 unique customers. The logic behind that is simple -- it's easier to get someone to buy your products than it is to convince them that their lives are better served selling random stuff to their friends.
Ackman clearly stands to profit by slandering Herbalife, but it doesn't mean he's wrong. The company has yet to address some very serious questions.
Memo to @Carl_C_Icahn: What is the ROI for the typical $HLF distributor and how much does that equate on an hourly basis for time invested?
— Sam E. Antar (@SamAntar) March 13, 2014
And on a more human level...
— Sam E. Antar (@SamAntar) March 12, 2014
It's become clear that Mr. Ackman won't be pulling any punches, but Mr. Icahn -- who gained his fame and fortune as an activist investor -- isn't the type to back down from a fight.
— Michael Estevez (@Prevatas) March 14, 2014
An unfinished story...
One can only hope that the FTC will act on the merits of the case. In any case, they should review and update MLM regulations to ensure the protection of bottom-tier distributors. But there's a larger problem at stake.
It took more than a quarter of a million dollars and a very public tête-à-tête between two members of the uber-wealthy just to get the FTC to pay attention. It's almost cliche to say that money -- in the form of lobbying and campaign contributions -- dominates political decision making, but we've rarely had a clearer example than this.
