Is Herbalife a Pyramid/Ponzi Scheme? 17

I have been examining various news stories over the past few days and it is clear that the investigation into Herbalife is now officially underway.  We won't know for some time what will be the result.  Herbalife is not the only Multi-Level Marketing scheme out there, but it is now one of the few MLM's that is under Federal government scrutiny.

     However this turns out, there will be implications for the MLM industry.  In the end, this might be the more important story than if Herbalife is determined to be a pyramid or Ponzi scheme. I don't think this will spell the end of such schemes, but MLM schemes will be viewed with more suspicion if things turn bad for Herbalife.

     One thing is also certain: if Herbalife is determined to be a pyramid or Ponzi scheme, it will be one of the largest and longest-lasting in American history.

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Is Herbalife a Pyramid/Ponzi scheme? 16

In theory, it should be easy for the Government or any investigative authority to demonstrate that Herbalife is a pyramid or Ponzi scheme once they have access to all necessary financial records.  The records would have to show that:

A pyramid scheme is an unsustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public.

or

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator.

      If the financials show one or the other, then it would seem that the Government would have an open and shut case.  Will this happen, however?
     Remember, as we discussed, if Herbalife is determined to be a pyramid or Ponzi scheme, this could threaten the entire framework of Multi-Level Marketing schemes.  I am not saying that if Herbalife is declared to be such a scheme then it must follow that ALL MLM's fall into this category, but it does draw suspicion to the entire framework of MLM's.  Certainly it would make an investor or worker think twice before investing in such a scheme.

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Is Herbalife a Pyramid/Ponzi scheme? 15

Let's begin to wind this down.

      Herbalife is under investigation by various agencies to examine whether it is a pyramid or Ponzi scheme.  If it is found to be such a scheme(s), the entire operation could be shut down, civil and/or criminal charges can be brought against officials of the company and the thousands of people who are Herbalife affiliates can lose their jobs.  The ramifications are not small.  Herbalife is a multi-million dollar company.

     In addition, if Herbalife is found to be a pyramid or Ponzi scheme, the entire concept of Multi-Level Marketing on which the entire Herbalife concept is based can be in for greater scrutiny and other MLM operations could find themselves under the same investigative lens as Herbalife.  This may lead to other MLM operations simply going out of business because the risk to stay with the same business model is too great. 

     As can be seen, it is not easy to answer the question on which this entire thread is based: is Herbalife a pyramid or Ponzi scheme?  Part of the reason for the inability to give a definite yes or no answer is because we would have to review the financials of Herbalife, which is beyond the scope of this thread.  But, there are other reasons as well. 

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Is Herbalife a Pyramid/Ponzi Scheme? 14

Let's continue with this train of thought - what if Herbalife is found to be a Pyramid or Ponzi scheme?  What does this mean for Multi-Level Marketing schemes in general?

     There is no doubt that MLM's are found just about everywhere in contemporary America.  What would happen if such schemes were suddenly declared illegal, or at the very least, suspicious?  Networks such as Avon or various food clubs would find their entire business plans under scrutiny.  The bad publicity alone would drive many of these companies from business.  Investors would have serious thoughts about placing their monies into a business that was under such intense Federal scrutiny.  Certainly, any competent criminal defense attorney would tell their clients to wait until there was a definite Federal decision, one way or another, before investing in an MLM.  If there were a Federal (or comparable) decision that MLM's were Pyramid or Ponzi schemes, any competent criminal defense attorney would certainly tell their clients to stay away from such schemes.  The risk is too great for investment.

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Is Herbalife a Pyramid/Ponzi Scheme? 13

What if Herbalife is a Pyramid/Ponzi scheme?

     If the investigating authorities conclude that Herbalife is such a scheme, then what are the ramifications?

      Will Herbalife be forced to close?  Will the central authority figures in Herbalife face criminal or civil prosecution?  It is too early to begin any type of sweeping or final statemenets on the matter.

     If Herbalife is found to be a Pyramid scheme, it will be one of the largest in history.  Not so much in terms of money as in Bernard Madoff's incredible scheme nor so much in terms of value.  The real issue here will be: will all Multi-Level Marketing schemes now be labeled as Pyramid schemes?  Will this mean the end of MLM schemes?

    It certainly would prompt a more careful review of MLM schemes and would also force the purveyors of MLM scheme to seriously wonder if it is worth it to create such schemes.  There probably would issue new laws or regulations concerning such schemes.

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Is Herbalife a Pyramid/Ponzi Scheme? 12

What is the benefit of joining a company like Herbalife?  If Herbalife really is a pyramid scheme, shouldn't the members of Herbalife have been sucked out already?

    Well, historically speaking, pyramid schemes can go on for quite some time before anyone becomes the wiser (look at Bernie Madoff for an example).  But, we need to remember that although Herbalife is accused of being a pyramid or Ponzi scheme, for certain it is a Multi-Level Marketing (MLM) business model.

   The MLM model does have attractions for certain people.  First of all, people who are in an MLM organization are told they are part of a "privileged" group.  Not just anyone can join the MLM network.  MLM's generally have sales meetings which have been called a cross between a revival tent meeting and networking.  More emphasis, however, is placed on psychological "boosts" for the participants rather than actually learning any new sales techniques (why bother when sales can only be made to people within the organization). 

     It has been said that MLM's are more of a cult than a sales group.  Whether this has any truth to it is a thread for another time. 

     Herbalife certainly has its share of "pump you up" meetings and groupthink which, once again, appeal to a certain type of person.  However, this only reinforces the topics we discussed earlier that if Herbalife is to avoid the charge that it is a pyramid or Ponzi scheme, then it must produce evidence to show that its profits do not come from the recruitment of people, but rather from the sales of its products. 

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Is Herbalife a Pyramid/Ponzi scheme? 11

Why is the Government going after Herbalife anyway?  It is not the only MLM scheme around; it may not even be the largest MLM around.  Why Herbalife?

     Well, it can be argued that the Government has its reasons.  But I suspect that one of the reasons Herbalife is on the Government's radar is because of constant stories over the years that Herbalife is simply a pyramid scheme disguised as a business.  Now, once again, Herbalife is hardly the only business to be under suspicion for being a pyramid scheme.  But the accusations against Herbalife have been continuous.

     It has been argued that the easiest way to see if Herbalife is a pyramid scheme is if all the pressure on the company halts the flow of new representatives.  If Herbalife is indeed a pyramid scheme, then like any other pyramid schemes, once the flow of people into the scheme is halted, then the entire operation should dry up.

    

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Is Herbalife a Pyramid/Ponzi Scheme? 10

Will the Government attempt to show that Herbalife pays rewards based on the purchasers of products by new recruits that are unrelated to the sale of a product or service outside of the Multi-Level Marketing (MLM) network?

     How would the Government attempt to do this?

     Well, no one really knows (outside of the Government agents involved in this investigation) exactly how the Government will go about pursuing this investigation.  However, if the Government goes about demonstrating that Herbalife representatives are in a never-ending process of paying rewards only or substantially only by new recruits purchasing products that are unrelated to the MLM network.

     What kind of services or products would these be?  Well, once again this is the responsibility of the government to show that these services/products are unrelated to the MLM network.  But, some examples might be:

1.     Forcing the members of the MLM to attend classes

2.     Forcing the members of the MLM to purchase materials

3.     Forcing the members of the MLM to purchase "trade materials" or "trade products" to be eligible to sell to other parties

4.     Making it mandatory for members of the MLM to sell only to distributors beneath the member.

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Is Herbalife a Pyramid/Ponzi Scheme? 9

If the FTC or other Federal authorities are going to try and demonstrate that Herbalife is a Pyramid or Ponzi scheme, then the prosecutors will obviously have to prove that Herbalife fits the definition of a Pyramid or Ponzi scheme.

But, let's look at the definition of a Pyramid scheme given by Dr. Vander Nat in the previous post: (1) the design of Herbalife dooms the vast majority of participants to financial failure and (2) it pays rewards based upon the purchases of product by new recruits that are unrelated to the sale of a product or service to people outside the network of the Multi-Level Marketing.

Is this the definition of a Pyramid scheme?  It is not the traditional definition: A pyramid scheme is an unsustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public.


But, if it is true that Herbalife pays rewards based on the purchases of products by new recruits that are unrelated to the sale of a product or service outside the MLM network, then it could be argued that Herbalife resembles a Pyramid scheme.

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Is Herbalife a Pyramid/Ponzi Scheme? 6

As we discussed, Herbalife is a company that uses Multi-Level Marketing ("MLM") to sell products.  Basically, an individual will need to recruit other people who work under him to sell products.  In return, these underlings need to recruit people of their own to sell products.

     It's a never-ending recruitment process.  In other words, more people need to enter into this chain of salespeople for profits to be generated.  Or, in other words, if you look at the bottom of this recruitment chain and go up, it looks suspiciously like a triangle.  Or a pyramid.

     Controversy regarding MLM schemes is nothing new.  Many people and organizations consider MLM's nothing more than a scam and they are even featured in the Skeptic's Dictionary as nothing more than an unsustainable fraud.  The Skeptic's Dictionary states: Multi-level marketing is system of marketing which puts more emphasis upon the recruiting of distributors than on the selling of products. As such, it is intrinsically flawed.

     Why use MLM at all?   Why is there a need for it in the 21st century when everything and anything is available on the internet?  Why is it that people need to be recruited in addition to the slae of the products?
 
     Answering the above questions is beyond the scope of this current thread.  However, as stated, it is beyond question that Herbalife is an MLM company.  This does not automatically mean that Herbalife is running a Pyramid or Ponzi scheme but it does draw attention to their marketing practices not to mention the business model of Herbalife. 

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Is Herbalife a Pyramid/Ponzi Scheme? 5

So - Herbalife is being investigated to see if it is a Pyramid/Ponzi scheme.

     Well - is it?  As we talk about Herbalife, we need to understand that we are getting into the murky world of Multi-Level Marketing (MLM) which many people feel is a scam and fraud in and of itself.  However, MLM's are not illegal, but they do tread into areas which are problematic.

    If you read the previous posts on MLM's, then you realize the concept is simple - an individual is responsible for recruiting other individuals (called "operatives") who operate beneath the individual.  The operatives can only purchase from the individual and the operatives are responsible, in turn, for recruiting OTHER operatives who work beneath them so the operatives will become an individual responsible for other operatives.  Instead of selling directly to a customer, therefore, MLM's work on the premise that people must be recruited into the MLM program so they can begin to sell to other people.

     It seems like a complicated way to go about selling products.  Further, it seems strange to have such a system in the first place.

     This rather strange and complicated system of selling products is what has troubled MLM's for years and Herbalife is no exception.  The basic question asked is: why does a company need to recruit people instead of just selling products?

   A cursory examination of this system can lead to the conclusion that it may fall into being a Pyramid or Ponzi scheme. 

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Is Herbalife a Pyramid/Ponzi Scheme? 4

OK - we have reviewed the definitions.

     Herbalife is under investigation by Federal authorities as being a possible Pyramid/Ponzi scheme.  As we discussed, a pyramid scheme is a form of fraud in which participants are promised payments or services primarily for enrolling people into the scheme, rather than supplying any real investment or sale of products or services.  A Ponzi scheme is a form of fraud where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator. 

     Both a pyramid scheme and a Ponzi scheme rely on getting new members or players into the scheme.  Without new members, the scheme will collapse because no real products or services are being sold for profit.

     Herbalife is accused of possibly being such a scheme because it relies on multi-level marketing to sell its products.  It should be stated at this point that Herbalife is far from being the only company that uses multi-level marketing; many other companies use this type of sales practice.  However, Herbalife's actions and complaints against the company have attracted attention and now it appears that an actual investigation is underway.

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Is Herbalife a Pyramid/Ponzi Scheme? 3

Before we begin our discussion, once again I think it is appropriate for another definition, in this case a definition of "multi level marketing" since this is Herbalife's distribution scheme.

Once again, courtesy of Wikipdedia:

http://en.wikipedia.org/wiki/Multi-level_marketing

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