I’m not sure if Pershing Square’s Bill Ackman will win in his quest to bring down multi-level marketing giant Herbalife Ltd. (NYSE:HLF). Given the recent rally, activist investor Carl Icahn might be successful in forcing the “mother of all short squeezes.” Neither result would surprise me.
But, regardless of what ultimately happens to shares of Herbalife Ltd. (NYSE:HLF), the MLM business is itself fundamentally flawed. Is there another business model (not just a business, but the entire model) that has received as much scrutiny as MLM?
Given the fine line MLM businesses must walk to stay on the right side of the law, I’m not sure why anyone would invest in a company like Herbalife Ltd. (NYSE:HLF), or for that matter, other MLMs such as USANA Health Sciences, Inc. (NYSE:USNA) and Nu Skin Enterprises, Inc. (NYSE:NUS).
Criticisms of MLM
MLM critics are easy to find. These are not investors, but common people, running literally dozens of sites around the web dedicated to exposing the questionable practices of MLM companies. Their motivations appear to stem from a genuine concern for the apparent victims of the MLM system.
PyramidSchemeAlert defines its purpose as educating consumers to “[reduce] the number of illegal and de facto pyramid schemes and victims.” An article on the site published January 2012 (long before Ackman got involved) noted that a Belgian court had ruled that Herbalife Ltd. (NYSE:HLF) was an illegal pyramid scheme:
After years of delay in the Belgian courts, a ruling was finally gained: It concludes that Herbalife is exactly what the consumer group claimed it is, an illegal pyramid scheme based on “endless chain” recruiting. Such a plan dooms the vast majority to losses, by its design and deception…The court revealed that Herbalife plays a shell game, depending on whether it is reporting to the SEC and shareholders, arguing to the court, or recruiting consumers, in which sometimes the salespeople are described as “direct sellers” or “distributors” and at other times as “customers.”
PyramidSchemeAlert has also been critical of Nu Skin, and more broadly, the entire concept of MLM.
The Vegas performers and social commentators Penn & Teller have also publicly attacked MLM. In an episode of their now-defunct Showtime series, the comedians laid out the case against the business model (the entirety of the episode has been uploaded to Youtube, and is worth watching if for nothing other than its entertainment value; be warned, it does contain some graphic language).
In their 30-minute takedown of MLM (in which they euphemistically refer all MLMs as pyramid schemes), Penn & Teller don’t focus on any publicly traded MLMs in particular, although they do mention Herbalife Ltd. (NYSE:HLF) by name.