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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NOTE: ANY INDIVIDUAL WHO HAS NOT PLED GUILTY TO A CRIME OR WHO HAS NOT BEEN FOUND GUILTY BY A JUDGE OR JURY IS INNOCENT UNTIL PROVEN GUILTY AS PER THE LAWS OF THE UNITED STATES OF AMERICA.

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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.

NOTE: THE INFORMATION IN THIS BLOG IS NOT LEGAL ADVICE NOR IS IT INTENDED TO BE LEGAL ADVICE.  IF THE READER HAS ANY LEGAL QUESTIONS, PLEASE REFER TO AN ATTORNEY.

NOTE: ANY INDIVIDUAL WHO HAS NOT PLED GUILTY TO A CRIME OR WHO HAS NOT BEEN FOUND GUILTY BY A JUDGE OR JURY IS INNOCENT UNTIL PROVEN GUILTY AS PER THE LAWS OF THE UNITED STATES OF AMERICA.

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Is Herbalife a Pyramid/Ponzi Scheme? 8

Let's examine our definition again of a Pyramid/Ponzi scheme to see if Herbalife fits into this category.  A Pyramid/Ponzi scheme makes money not through the sale of products, but rather by the need to constantly get investors into the scheme.  The investors are the only real source of money for these schemes.  Once the investors stop entering the scheme, the entire scheme collapses because there are no more funds.

Here is a story from an anti-Herbalife website which seems convinced that Herbalife is indeed a Pyramid scheme. 

"Herbalife Ltd. (NYSE:HLF) is an unlawful pyramid scheme that relies upon, fosters, promotes, honors, and financially rewards deceptive recruiting businesses operated by its top distributors.  Because there is little genuine retail demand for Herbalife’s overpriced commodity products, in order to generate revenues, the company depends on the endless recruitment of new distributors who purchase large volumes of Herbalife products in the hope that they will climb the Herbalife Sales & Marketing plan and qualify for recruiting rewards.

The only way to recruit unsuspecting victims into a perpetual recruitment scheme like Herbalife is through deception about the (illusory) “business opportunity.”  The senior-most Herbalife distributors have figured this out, and they have developed and continue to develop systems that deceive vast numbers of people who become new Herbalife distributors.  The precise means of deception vary, but the essential deception is the same.

In a court filing on December 18, 2013, in FTC v. Trudeau, the FTC’s economic expert on pyramid schemes, Dr. Peter Vander Nat, submitted a declaration analyzing a pyramid scheme.  In his Declaration, Dr. Vander Nat cites the many cases in which he has served as the FTC’s expert on pyramid schemes, and he notes: “No Court has ever rejected my conclusion that a particular enterprise constituted a pyramid scheme.”  Dr. Vander Nat states:
“A pyramid scheme is a perpetual recruitment chain in which the design of the scheme’s compensation plan dooms the vast majority of participants to financial failure.  The Koscot test – adopted by the federal courts – applies this meaning to ongoing recruitment in the context of multilevel marketing (MLM), focusing on an MLM firm that sells a product or service and pays recruitment rewards that are unrelated to the sale of the product/service to people outside the MLM’s network.”

Herbalife is a pyramid scheme under Dr. Vander Nat’s definition:  (1) the design of its compensation plan “dooms the vast majority of participants to financial failure” and (2) it pays rewards based upon purchases of product by new recruits that are “unrelated to the sale of product/service to people outside the MLM’s network” (as a federal district court judge found in Herbalife v. Ford)."

NOTE: THE INFORMATION IN THIS BLOG IS NOT LEGAL ADVICE NOR IS IT INTENDED TO BE LEGAL ADVICE.  IF THE READER HAS ANY LEGAL QUESTIONS, PLEASE REFER TO AN ATTORNEY.

NOTE: ANY INDIVIDUAL WHO HAS NOT PLED GUILTY TO A CRIME OR WHO HAS NOT BEEN FOUND GUILTY BY A JUDGE OR JURY IS INNOCENT UNTIL PROVEN GUILTY AS PER THE LAWS OF THE UNITED STATES OF AMERICA.

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----------à>>>>>>>>>>>>>>>gene tausk

 

Is Herbalife a Pyramid/Ponzi Scheme? 7

One of the questions we need to address to determine if Herbalife is a Pyramid or Ponzi scheme is this: is the only, viable way to succeed as a Herbalife representative to bring in more associates who work under a principal?  In other words, as discussed, Herbalife uses Multi-Level Marketing ("MLM") as its business model.  A principal has to recruit associates (or, if you prefer, a sales person has to recruit other sales persons) in order to move forward. 

     A MLM is very advantageous to Herbalife because the sales persons are also customers.  Obviously, in an MLM situation, the more people that are "recruited" by Herbalife means that Herbalife has a constant supply not only of new customers, but of salespeople that have to consistently buy the products.  This means that Herbalife, theoretically, has two sources of income - the "buyers" who are in essence lower-level salespeople and the "sellers" who are in essence higher-level salespeople.  The pyramid, or triangle, keeps on moving up - for each "seller" there are multiple "buyers" beneath him and each "buyer" becomes another "seller" who has to recruit new salespeople to work under him.

     But, a real Pyramid or Ponzi scheme will collapse once people stop entering the pyramid.  Remember - a Pyramid or Ponzi scheme is not really selling anything - the entire process revolves around constantly getting new people to continually sign up so that the profits move towards the top.  Once there is a stoppage of fresh blood, the entire scheme will collapse.  Contrast this with a non-Pyramid or non-Ponzi scheme where it does not matter if new people are attracted to the scene because the company or business is actually selling something, whether a good or a service, which people want. 

NOTE: THE INFORMATION IN THIS BLOG IS NOT LEGAL ADVICE NOR IS IT INTENDED TO BE LEGAL ADVICE.  IF THE READER HAS ANY LEGAL QUESTIONS, PLEASE REFER TO AN ATTORNEY.

NOTE: ANY INDIVIDUAL WHO HAS NOT PLED GUILTY TO A CRIME OR WHO HAS NOT BEEN FOUND GUILTY BY A JUDGE OR JURY IS INNOCENT UNTIL PROVEN GUILTY AS PER THE LAWS OF THE UNITED STATES OF AMERICA.

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----------à>>>>>>>>>>>>>>>gene tausk

 

 

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. 

NOTE: THE INFORMATION IN THIS BLOG IS NOT LEGAL ADVICE NOR IS IT INTENDED TO BE LEGAL ADVICE.  IF THE READER HAS ANY LEGAL QUESTIONS, PLEASE REFER TO AN ATTORNEY.

NOTE: ANY INDIVIDUAL WHO HAS NOT PLED GUILTY TO A CRIME OR WHO HAS NOT BEEN FOUND GUILTY BY A JUDGE OR JURY IS INNOCENT UNTIL PROVEN GUILTY AS PER THE LAWS OF THE UNITED STATES OF AMERICA.

                                       

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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. 

NOTE: THE INFORMATION IN THIS BLOG IS NOT LEGAL ADVICE NOR IS IT INTENDED TO BE LEGAL ADVICE.  IF THE READER HAS ANY LEGAL QUESTIONS, PLEASE REFER TO AN ATTORNEY.

 

NOTE: ANY INDIVIDUAL WHO HAS NOT PLED GUILTY TO A CRIME OR WHO HAS NOT BEEN FOUND GUILTY BY A JUDGE OR JURY IS INNOCENT UNTIL PROVEN GUILTY AS PER THE LAWS OF THE UNITED STATES OF AMERICA.

                                             

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----------à>>>>>>>>>>>>>>>gene tausk