Ed. note: This is a new weekly column by Elie Mystal, Managing Editor of Above the Law Redline, wrapping up the week that was in law and finance. Elie is not a practicing attorney, and anything he says that you listen to can and will be used against you.
Issue #1: The law has to protect idiots. That’s just what we do in a polite society. The SEC is now taking a look at online “direct sales” pyramid schemes. From the Wall Street Journal:
Direct-sales is more popular than ever: A record 16.8 million Americans—representing about one in every seven U.S. households—worked in the industry last year, most for companies that employ networks of people paid both for selling products and for recruiting new distributors, according to the Direct Selling Association. The group estimates the industry, which includes well-known public companies such as Avon Products Inc. and Nu Skin Enterprises Inc., racked up sales of almost $33 billion last year, up 3.3% from 2012…
Regulators say the industry is being exploited by Web-savvy con artists who are in fact running pyramid schemes—a fraud where the new money comes mostly from attracting new recruits, rather than legitimate product sales. Once the supply of recruits runs out, the scheme collapses, leaving most of its members nursing losses.
This is all happening because of Herbalife. But it’s been exceedingly difficult to label Herbalife a “scam” in a legally actionable way. Going after “direct sales” seems like the SEC is trying to scoop up some of the low-hanging fruit out there as its Herbalfe investigation rolls on.
And that’s good news for the people dumb enough to get mixed up with some of these companies. A person’s desire to make money quickly often exceeds his mental capacity for self-preservation.
But I’ll just point out that there’s another way to go: “Sorry you lost all of your money by being a sucker in a Ponzi scheme. Here’s a social safety net to cushion the blow.” Read more »
Uncle Carl is loving the totally legitimate diet-shake company’s $266 million share buyback. Bill Ackman hasn’t weighed in on the racist pyramid scheme’s move, but it is safe to say he’s not impressed. Read more »
This week was looking like one that Bill Ackman would want to forget. It began with a New York Times article that read like something Herbalife CEO Michael Johnson and Carl Icahn might have collaborated on. It continued with yesterday’s $300 million Fannie Mae/Freddie Mac hiccup. Even Ackman’s latest presentation on what he very sincerely hopes is a pyramid scheme, accusing Herbalife of breaking Chinese laws, failed to either lift his spirit or dent its stock price. But this has definitely accomplished the latter, and almost certainly the former. Read more »
An important truism in the financial markets is that there’s no such thing as a “toxic asset,” tout court; everything is toxic/dangerous/Bad at some (high) price and attractive/safe/Good at some other (much lower) price and there’s a wide area in between where things mostly live and you fight about their pricing. You can apply that insight to junk bonds or CLOs or really any number of things, and you should, but today it’s sort of fun to apply it to Herbalife. As far as I can tell the argument over Herbalife goes something like this:
Herbalife opponents: Herbalife is a horrible pyramid scheme that preys on disenfranchised, mostly poor and minority people and convinces them to part with their life savings through misleading advertising and high-pressure sales techniques. Herbalife supporters: True! And … ? Opponents: And therefore it will be shut down by the FTC and the stock will go to zero. Supporters: That’s … wow, that’s just hopelessly naive. I’m gonna go buy some HLF.
Today CNBC’s Herb Greenberg has a good statement of the “horrible pyramid scheme” case, which of course has been most memorably taken up by Bill Ackman, who is betting a billion dollars on “shut down by the FTC and go to zero.” And last week Bronte Capital’s John Hempton gave the classic statement of the “hopelessly naive” case.1 As one Herbalife shareholder put it when I asked if he thinks HLF is a pyramid scheme, “in the colloquial sense, yes; in the legal sense, no.”2
That’s what some local Charlotte TV station is alleging, claiming that Donna Lewis has been working as a sales rep for FHTM, “a multi-level marketer recently fined as a pyramid scheme.” The wife of KL doesn’t deny working for the company but takes offense to the notion that anything illegal is going down. “It is truly not a pyramid,” Lewis said. “It’s helping people in this horrible economy make a living.” Read more »