Deep Dive
Shownotes Transcript
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I'm here and I have the privilege of introducing to you the most fantastic individual that you will probably ever meet in your lives. This man tells you and is a living example of what man can accomplish when he believes in himself. You know, some people that believe in themselves can take a lump of stone and carve a work of art so beautiful that it transforms people's lives.
This man here, Glenn Turner, has carved his work of art from a lump of stone. A stone of disbelief, doubt, and complacency. His work of art is Coscot. I want you to meet the man who created this company from his dream. The sharecropper on his way to harvest the world, the chairman of the board of Coscot Interplanetary Incorporated, Mr. Glenn W. Turner. Glenn W. Turner was born with the deck stacked against him.
He grew up on a tobacco farm in South Carolina in the throes of the Great Depression, and he had a disability, a cleft palate, that in no way, especially during that time period, would serve to make his life any easier. Neither would dropping out of school in the eighth grade, but Glenn Turner did it anyway. He worked on the family farm until he was old enough to venture out to find work of his own. In 1955, Glenn landed a job selling sewing machines for the Monarch Sewing Machine Company, a job which even Glenn Turner admits that he was not very good at.
But Glenn Turner never gave up. And before long, he was closing deals that would have escaped him in the earlier years of his career. Eventually, Turner made the jump from selling sewing machines to selling cosmetics. But the product never really mattered. Glenn Turner had evolved into such an excellent salesman that he could sell you the shirt off your back if he wanted to. And he knew it. Glenn knew that perseverance pays off. He knew that practice makes perfect. And he knew that a positive attitude goes a long way. Glenn Turner had figured out the keys to a successful life.
But more importantly, Glenn Turner had figured out a way to get very, very rich. You get yourself in school and get your attitude right. And you don't never give up! Because when you give up, you are dead. Don't ever give anybody the satisfaction of beating you into the ground. We've been trained once. It's normal for us to not think big. Attracted by the allure of a booming economy, ushered in by the newly built Disney world,
Glenn Turner moved to Florida in the 1960s and borrowed $5,000 from an uncle to launch his own business. Coscott Interplanetary Incorporated. Cosmetics for the communities of tomorrow. Glenn thought the company's name needed to sound futuristic since its products were mink oil based. Mink oil was just becoming trendy at the time. It was the future of cosmetics. And the name similarity to Epcot was no coincidence. But what made Coscott truly revolutionary wasn't its products at all.
No, what made Coscott different, and so lucrative for the man at the top, was the business plan itself. Glen Turner would sell his company's cosmetics directly to distributors, who would then resell them door-to-door. And those distributors could recruit distributors of their own, and split the sale commissions with Glen Turner. And then that third layer of distributors would recruit even more distributors, and so on. Until eventually one giant mink oil pyramid would be formed, with all of the money funneling to the top. Getting people to believe in it was the easy part.
Turner would lure new distributors in with promises of huge commissions. He claimed that it was possible for new distributors to earn up to $100,000 in a single year.
Either that guy's a liar, or he got into the scheme super early. Let's do some math.
According to the New York Attorney General, by the end of 1970, Coscott Interplanetary Incorporated had 1,600 distributors in New York State alone. For each one of those 1,600 distributors to earn $100,000 in a year, another 150,000 distributors would have to be recruited. In order for those 150,000 to make $100,000 a year, it would take another 150 million new recruits. And for those 150 million to make $100,000,
It would take another 8 trillion people, approximately a thousand times more than the Earth's current population. Clearly, this structure wasn't going to work as intended for the people at the bottom. But what structure ever does? Glenn Turner had 300 million reasons to be happy.
That's how much he was worth at 36 years old. Glenn had eight Cadillacs and a Rolls Royce. He owned a half-built four-story castle and was featured on the cover of Life magazine. There were even billboards lining Interstate 4 in Florida that read, "Welcome to Orlando, home of the unstoppable Glenn Turner."
At its peak, Glenn W. Turner's business empire employed more than 200,000 employees across 37 different corporations, including a helicopter manufacturing business, a wig company, and a music production company. Turner had also launched his own motivational self-help course called Dare to Dream.
in which he offered empty platitudes to the down-and-out on how to be successful. Deep philosophical thoughts such as, quote, Do it now. Don't put it off until tomorrow. And remember everybody's name.
You can be a millionaire, but it takes training. It takes knowledge. It takes understanding. And these cassettes will give you a detailed plan on how not only to make money, but how to make money with not increasing your income, how to use your money properly. A lot of times we can cut back on our wasteful spending and we can get rich with the difference.
Yep, it's that simple. If you want to be rich, just don't spend your money. No more avocado toast for you. Hilarious advice considering Glenn Turner's Dare to Dream course, which spanned six audio cassettes, costed $5,000. And it, too, was structured as a pyramid scheme, or what is more commonly referred to in disguise these days as a multi-level marketing company, MLMs.
You know, the same kind of boss babe, CEO from home, quote, business opportunity that that unfulfilled lady you went to high school with keeps trying to sell you on Facebook. Hey, hon, are you interested in becoming your own boss? Leave me alone, Susan. I'm joking, but MLMs are no laughing matter. Mary Kay, LuLaRoe, Avon, Amway, Cincy, the list goes on.
There are thousands of these companies in existence today that convince people that the road to riches is paved with one recruited distributor at a time. But the reality is that the vast majority of these distributors are victims that end up alienated from their friends and family, with a garage full of unsold inventory that nobody wants. Not to mention the significant, sometimes devastating financial losses that are incurred. MLMs are predatory, and these distributors, partners, hunbots, whatever you want to call them, are their prey.
Multi-level marketing companies are legal in the United States and other places around the world because, unlike pyramid schemes, which are focused mainly on recruiting distributors, the main focus of MLMs is on selling their products, or so they claim, products that cannot be found in stores. The truth is that pyramid schemes and multi-level marketing companies are almost indistinguishable. Their structures are essentially the same with most of the rewards benefiting the people at the top.
And while Glenn W. Turner did not invent the pyramid scheme, nor the MLM, he was certainly one of the most effective and pioneering voices behind them. Turner would crisscross the country in his private jet, giving motivational speeches and shilling his products in whatever town would have him. He'd walk out on stage wearing a loud suit, a bad toupee, and a bedazzled American flag lapel pin. He'd tell lame jokes and bounce on chairs to impress the crowds. His effective speech was riddled with words like tremendous and fantastic and great.
He would retell his life story for the millionth time and dump his Bible, but had the common decency to stop just short of autographing it. During these seminars, Glenn Turner would preach the power of positivity and the law of attraction. It was kind of like The Secret, but instead of a whisper, it was being yelled at you from across the room by an unashamed huckster. If you don't have the right to your life, you're never going to mount a hill of beans. If you plant beans in the ground, what's going to come up? Peas? Certainly not.
Even at the time, it was obvious to most that Glenn Turner was a con man. He had heard that term so often that he began working it into his pitch. When that accusation inevitably came up in interviews, he'd always throw out a version of this prepared line. Quote, I am indeed a con man, because con means confidence, and that's the product I sell.
This is still a country where a man or woman can still reach the stars if you're willing to stand on your toes just a little bit. Glenn Turner did not stand on his toes to reach to the top. He stood on the heads of other people, and those people eventually realized it. By 1969, there were more than 1,100 lawsuits from former distributors pending against him, and the Federal Trade Commission and Securities and Exchange Commission filed lawsuits of their own.
in desperate need of help. Turner hired criminal lawyer F. Lee Bailey, who would later famously defend O.J. Simpson at his murder trial. Bailey brought in accountants and other business experts to help Glenn Turner reorganize and restructure his company. The plan was to de-emphasize the distributorship aspect of the business and focus on the retail aspect instead. Turner and Bailey became so close that the lawyer even appeared in person at several of Glenn's rallies, as well as in the film promoting Coscott.
It's unclear if Bailey was paid for his time, but his appearances did earn him an indictment, along with Turner and eight others, by a federal grand jury in Orlando on conspiracy and mail fraud charges in 1973. After a nine-month trial which featured over 200 witnesses, 1,500 pieces of evidence, and 20,000 pages of testimony, the jury was unable to agree on a verdict. The charges against F. Lee Bailey were eventually dropped, but Glenn Turner pleaded guilty two years later to a single charge of violating securities laws.
The 12 felony charges were dropped, and Turner was given probation. Glenn Turner might have avoided prison, but the damage had been done. He had spent almost all of his money on legal fees and other expenses. Coscott Interplanetary Incorporated went bankrupt, and Glenn Turner had not learned his lesson. In 1987, after a few failed attempts at running for public office, Turner dusted off his ugly suits and returned to the business he knew best.
He was able to generate $15 million from his believers using another illegal pyramid scheme disguised as a motivational program. And again, it all came tumbling down. And this time there was no way to avoid jail time. Glenn Turner was sentenced to seven years in prison and was released after serving five with only $100 to his name. But like usual, Glenn put a positive spin on his circumstances. In the early 2000s, surviving a five-year prison stay was listed on his website as an accomplishment.
a website that existed to sell motivational tapes and books and health products. It was the same old song and dance, and he's still doing that to this day. Although Glenn Turner came crashing back down to earth in disgrace, his legacy will live on forever. Turner's 1975 court case with the FTC established a four-part litmus test to determine if a business qualifies as a pyramid scheme. Since that day, the Coscott test has been referenced in every case of suspected pyramid schemes.
the majority of which rise and fall in a few short years. However, there are a few multi-level marketing companies that have stood the test of time, including a weight management program called Herbalife, which has been accused of being the best managed pyramid scheme in the history of the world. A global multi-level marketing company and its visionary leader are criticized for endangering consumer health and exploiting the poor in its quest to change the nutritional habits of the world. On this episode of Swindled...
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It makes you not be able to eat, it makes you not be able to sleep, and from several years of using this particular drug, she ended up having to use sleeping pills to be able to go to sleep at night. And from several years of doing that, she secretly, behind doctors' backs, started getting her prescriptions filled, and she started seeing three and four and five doctors to keep her habit up. And when I was 18 years old, she died from an overdose.
Joanne Hughes had tried every fad diet in the book. She was desperate to lose the 30 or so extra pounds that had plagued her body ever since giving birth. She wanted to lose those feelings of disgust and self-hatred that she experienced every time she looked in the mirror. But nothing ever seemed to work.
In hopes that she would be given the latest and greatest miracle pill, Joanne went to see a doctor who prescribed her Dexamil, an amphetamine and barbiturate combination with counteracting effects designed to treat depression and anxiety without the agitation. Appetite suppression, thus weight loss, was just one of its many side effects. Joanne's son Mark Hughes remembers watching his mother's mental and physical health deteriorate as a result of taking the drug.
He watched Joanne struggle with dependency and addiction to the point where her weight was the least of her problems. Mark received the news that his mother had died of an accidental overdose while he was away at a private school for troubled teenagers. Mark had drug issues of his own, which led to him dropping out of school in the ninth grade. He had spent most of his troubled childhood living with his grandparents, but he remained extremely close to his mother and sympathized with her lifelong battle.
Hughes points to the premature death of his mother and his time at the alternative school as the catalyst in turning his life around. Watching his mother waste away as a result of an unhealthy approach to weight loss inspired Mark to invent a new, safer, more natural diet program that did not rely on controlled substances. Even though he had zero training, education, or experience as a nutritionist or dietitian, Mark Hughes had attended a symposium on Chinese herbs once.
And he had sold diet products and exercise equipment for two multi-level marketing companies that had recently collapsed. The perfect basis for what was to come. Herbalife knows feeling and looking healthy depends on many things. That's why you need Herbalife for your nutrition. That's why you need Herbalife for your hair. That's why you need Herbalife for your skin.
Herbalife is for all of you. Mark Hughes began selling the first Herbalife products out of the trunk of his car in February of 1980. The program was simple. According to Hughes, dieters could lose up to 30 pounds a month by replacing two meals a day with an Herbalife protein shake and a dozen herbal supplements, which would, quote, burn excess calories and naturally cleanse the digestive system. Hughes and a small team of salespeople would go from door to door preaching the gospel of Herbalife.
They would point to the big white button fastened to their chests that contained the company's Dr. Seuss-ian slogan, "Lose weight now, ask me how." And little by little the company began to grow. At the end of the first month in business, Mark Hughes, the 23-year-old entrepreneur, had earned over $23,000.
By the end of the first year, more than $2 million worth of Herbalife products had been sold. Hey, we got the best company in the world. We are the ones. We got the products. We got the leadership. We are the most unbelievable people. We're simply the best. Okay, let's calm down. Have a little humility, will you, Mark? By 1982, Herbalife might not have been the best company in the world yet, but it did continue to expand at an astounding rate.
Its inventory, which now included multiple nutritional and personal care products, was moved from the trunk of its founder's car to a warehouse in Beverly Hills. The company took out multi-page advertisements in almost every magazine on the rack, and it bought large blocks of time on cable channels like the USA Network to broadcast infomercials that included testimonials from people who had experienced success using the products.
The infomercials were hosted by founder Mark Hughes, who would appear on screen as the kind of presenter that would demand a crowd repeat "Good morning" if he wasn't satisfied with the enthusiasm of the first response. Hughes would relate his personal life to his company's purpose and share anecdotes of success and perseverance to convince you that Herbalife could improve your health and wealth. That's right, if you joined the Herbalife family, not only would you become thinner, you would become rich. You follow what I say?
Write this down. You're gonna make a minimum of $50,000 this year. That's the least amount of money that you're gonna make. The second year, you'll make $125,000, and that's the least amount of money that you're gonna make. That's because not only is Herbalife a nutritional supplement company, it is a multi-level marketing company.
Its products cannot be found in stores. Instead, Herbalife sells its products in bulk at a discounted rate to independent distributors who then resell them for a profit. And those independent distributors are able to earn even more money by recruiting other distributors to work underneath them. Recruit enough distributors who recruit distributors of their own and you become eligible for even larger product discounts as well as the opportunity to earn royalties on purchases made by your recruits.
The sky's the limit. You're limited in how much money that you can make because there's only so many hours in the day. But if you have two people that are doing this with you, you can literally make twice as much money. If you have a hundred people doing this, you can do a hundred times the amount of making money. And if you have thousands and thousands of people doing this, it will be unbelievable. That chain of distributors is called a downline.
And at Herbalife, it consists of nine different levels. The bottom levels, which consist of the most people, including all of the eager new recruits, are not eligible for royalties and make all of their money from product sales. The highest levels, including the top tier, called the President's Team, earn most of their income from their downline of distributors. Not a bad gig if you can get it, but the truth is only a small fraction of Herbalife distributors will ever reach those higher levels. But don't let that stop you.
It's really up to you. How much you're going to believe in these products, how much you're going to believe in the marketing plan, how much you're going to go out and talk to people, how consistently you're going to go out and talk to people, because you can all get there. Because let me tell you something, I've seen them all get there. It's just unbelievable. I've seen them get there in six months, I've seen them get there in two years, and I've seen them get there in 17 years. Does it make any difference?
No. Okay? You can become a president's team. The only thing that separates you from not getting on the president's team is one thing. Write this down. Giving. Giving up. Would it be so bad to wait 17 years to get on the president's team? No. So after all the stuff that you got to do, the biggest thing after that is all you've got to do is not quit. You've got to stay. And you've got to do it over and over and over again.
over and over again and then sometimes when you get sick and tired of doing this Okay, your spouse is beating up on you and she's saying you're gonna go out there again try to sell some of that stuff Okay, and your negative old relatives are still going at you and saying man you still doing that herbal life thing When are you gonna grow up and do a big man's job?
And you go out and do it over and over and over and over. And I promise you, if you want to, you can get onto the president's team. Being on the president's team definitely had its perks, but not as many as being the founder. In 1982, Mark Hughes married a former Swedish beauty queen and paid $7 million for a Bel Air mansion that had belonged to country music star Kenny Rogers. Life was good until it wasn't.
even though Herbalife was the fastest growing private company in America in 1985, with revenues over $400 million and a brand new high-rise office building in Los Angeles. 1985 was by far the worst year of the company's existence. The California Attorney General sued Herbalife for making false and misleading claims about the efficacy of its products. In some of its marketing materials, Herbalife had claimed that its herbal solutions could help cure everything from cancer to herpes, blatantly false information.
The state also took issue with the fact that Herbalife's energy-boosting formula did not mention on its label that it contained caffeine. The Food and Drug Administration had also received a flurry of complaints from people who had been using Herbalife's products. They described bouts of nausea, diarrhea, headaches, and constipation. When the customers had called Herbalife to complain, they were told those symptoms were normal and not to worry because it was just the body ridding itself of its toxins.
In reality, it was probably symptoms from the ingestion of mandrake and poke root, both of which are poisonous, and both of which could be found in certain Herbalife products at the time. There's going to be a whole lot more articles that are going to come out about this company, and they're not all going to be positive. Some are going to be very, very negative, okay? They're going to take some bad shots at us. They're going to say some things are wrong with our products. They're going to say some things are wrong with some of the ingredients.
Finally, not only did the California Attorney General allege that Herbalife's products were medically useless and potentially dangerous, the lawsuit contended that Herbalife's sales structure was an illegal pyramid scheme. I think that the criticism comes when you have so many people doing well, it's subject to question. How can everybody be doing this well? And I think the same thing is true with the money.
In addition to the lawsuit, the United States Senate had opened an investigation into Herbalife for many of the same reasons and had requested Mark Hughes along with nutritional health experts to testify on Capitol Hill. The hearings also included testimony from a handful of Herbalife victims, victims such as Bernard Lehman, an elderly man who was told by an Herbalife representative to stick his unsold inventory up his ass after he called to complain about how slow it was moving.
There was also the testimony from Cynthia Lee, who claimed that she watched her husband, a former professional football player, deteriorate right in front of her eyes and die in a matter of months after he started taking Herbalife. Mark Hughes, with his white button pinned to a suit, defended his company feverishly on the national stage. He put on a show. He had to. Everything was at stake, and nothing was off limits.
The newfound attention brought even more negative press. A 1985 article in Inc. magazine called Herbalife a, quote, fad diet, and its leader a, quote, honey-tongued spellbinder, and a tanned and blow-dried California swashbuckler
Forbes magazine called Hughes a firebrand preacher, none of which should be misconstrued as compliments. Herbalife agreed to settle the lawsuit with the state of California by paying $850,000 in civil penalties and fees. And Mark Hughes publicly declared victory by telling everyone that would listen that Herbalife's products had been ruled safe. He never admitted to any wrongdoing, but his company did discontinue the sale of two of its products. I'm pleased to announce that after a year and a half,
Mark Hughes might have won the war, but there were plenty of casualties.
More than 800 of them, to be exact. Cells had plummeted, which led to Herbalife laying off almost half of its workforce. The company was on the ropes. It appeared to be following in the footsteps of MLM ghosts of decades past. Its fate inevitable. But something inside of Mark Hughes told him to keep going. He couldn't quit. He had to practice what he preached. He had to fight back. For himself. For the Herbalife family. For his mother.
Since sales in the United States had stalled, the company began to focus on markets overseas where there are fewer regulations and more naive consumers. Herbalife rebranded itself to Herbalife International and became a publicly traded company on the Nasdaq. It spent the next decade and a half expanding to countries like Japan, Russia, Mexico, Spain, and others. By 1996, international sales accounted for hundreds of millions of dollars, more than 70% of the company's total sales. Herbalife was officially back in business.
But the course of the company changed dramatically on the evening of May 21st, 2000. Mark Hughes, now 44 years old, was out with his family celebrating his grandmother's 87th birthday. After the party, he returned home to his Malibu mansion, crawled into bed, went to sleep, and never woke up. Autopsy results revealed that Mark Hughes had a lethal combination of alcohol and antidepressants in his blood.
The Herbalife founder had accidentally overdosed, just like his mother, leaving behind a son of his own, his fourth wife, $100 million worth of real estate, and a nearly billion-dollar global company with no direction. Support for Swindled comes from SimpliSafe.com.
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Hello, I'm Michael Johnson, Chairman and Chief Executive Officer of Herbalife. Michael O. Johnson was in the 17th year at the Walt Disney Company when he received the offer to be the new CEO of Herbalife International. At first he was hesitant to accept because he knew very little about the company, but the more he thought about it, the more it made sense. Michael Johnson is an avid endurance athlete. He was passionate about running, swimming, cycling, exercise, and nutrition.
He rode his bike 30 miles to work every single day. Herbalife was his chance to combine those personal interests with his professional life. Johnson accepted the job in 2003. The first order of business was to repair the company's reputation, which had been tarnished by allegations of health issues and scams. In a sense, Michael Johnson wanted to make Herbalife seem a little less shady. He established a nutrition advisory board that included a Nobel Prize-winning scientist.
He appointed former Surgeon General Richard Carmona to the company's board of directors for even more credibility, and he awarded a grant to the University of California, Los Angeles to build a cellular and molecular nutrition laboratory, which was named after Herbalife founder, Mark Hughes.
In 2005, after an initial public offering on the New York Stock Exchange that raised $1.3 billion, and after doubling the company's sales in less than a year, Michael Johnson was voted CEO of the Year by readers of the Wall Street Journal with 55% of the vote, more than doubling the votes of Steve Jobs, who came in second place with only 15%. Herbalife had become a highly regarded, legitimate company, and outside of America, Herbalife had become a household name.
largely due in part to lucrative sponsorships that were offered to sporting teams and star athletes such as Cristiano Ronaldo and Lionel Messi. Herbalife also sponsored TV stars like Daniel Armstrong from The Only Way Is Essex, a hit British reality show that, judging by its description, is probably completely insufferable. As legitimate as the brand had become, Herbalife was still very much a multi-level marketing company.
Although the distributors for the company had continued to evolve as well, creating new concepts to grow their downlines and new business models to sell their products. One of these new business models was developed by a distributor in Mexico who leased an unmarked commercial space and charged $5 at the door. Those who paid the admission fee were served a shake, an aloe drink, and a tea, all prepared by the store owner, who would also keep track of the customer's weight loss progress.
These nutrition clubs, as they became known, were a way to build community and were psychologically beneficial to those who were encouraged by tying their weight management goals to a social dynamic. Critics of the company disagreed. They accused the nutrition clubs of being nothing more than a way to recruit low-income distributors who could not afford the expensive cost of an Herbalife startup kit. Instead, it was death by a thousand shakes, five dollars at a time, bleeding them dry.
According to Herbalife, as of today there are more than 90,000 of these nutrition clubs worldwide. The vast majority of them are found in Central and South America because Herbalife has become extremely popular in Latino communities. In fact, in 2009, more than 60% of Herbalife's distributors in the United States were Latino.
Why is that, Mr. Johnson? We're a Latino company because Latinos came to Herbalife, not because Herbalife sought them out. We're producing our materials in Spanish. We are making sure that we have meetings in Spanish. The company has roots in a very familial style, and that's very Latino. We call it the Herbalife family, and we're not ashamed of that. We're very proud of that. The Latino, the blood, if you will, it's in this company, and it feels great.
By 2011, Herbalife had experienced vast international growth. It had a presence in over 88 countries at that point, with worldwide sales totaling almost $2 billion. Michael Johnson had become the highest compensated CEO in America. As for Herbalife's independent distributors, well, they seemed to be doing just fine for themselves as well.
That's what Herbalife distributors were saying in scripted promotional videos for the company anyway.
But here's what Mr. Ferrari had to say when he wasn't aware that he was being recorded. We sell people on a dream business that they can make it. Yet deep down inside, what do we really know? Yeah, we know that the reality is that most of them aren't going to make it. The Herbalife business model at this point in time is not based on customers purchasing. It's based on distributors purchasing volume. That is the Herbalife business model. That's the way that it works.
That is the way that it works. A few people at the top collecting the revenue from the people at the bottom, who buy the products in bulk thinking it will be an easy sell. It's the same old criticism of every MLM company that has ever existed. It's a rotten arrangement that by all accounts is unsustainable in the long run. And in 2011, a court in Belgium agreed when it made a ruling that found Herbalife International to be a pyramid scheme.
The ruling itself had very little, if any, effect on the price of Herbalife's stock, which continued to reach record highs. But one investor on Wall Street, armed with a year's worth of research, was not fooled. And he planned to expose Herbalife to the world for what he thought it was really worth, absolutely nothing. First of all, what are you accusing Herbalife of? Of being a pyramid scheme. We believe Herbalife is a pyramid scheme.
Explain, what do you mean by that? Well, Herbalife sells products, weight loss products, nutritional supplements, vitamins, things like that. But what they really sell, what their distributors make money from, is by selling what they call a business opportunity. The business opportunity is to sell the business opportunity to your friends who in turn sell the business opportunity to their friends. That's hedge fund manager Bill Ackman, the founder and CEO of Pershing Square Capital Management.
On December 20th, 2012, Ackman announced publicly that he was short-selling a billion dollars worth of Herbalife stock, which essentially meant that he had a billion dollar bet that the company would fail, and he gave a three and a half hour presentation at the Seoul conference to explain his reasons why. Ackman argued that Herbalife was the quote "best managed pyramid scheme in the world" and that it was quote "the only two billion dollar brand nobody's ever heard of."
He accused Herbalife of selling a fictitious business opportunity where no one actually makes any money. He cited the fact that in 2011, 88% of Herbalife's nearly 2 million salespeople were paid nothing at all and that the reason Herbalife had been so focused on international expansion was because the company requires endless turnover to remain sustainable. "Determined schemes depend on the confidence of their distributors because distributors have to write big checks to become sales leaders. You've got to spend three or four thousand dollars just on the product
You've got to buy an inventory of the product, a large amount of product, in order to qualify to get commissions. And then you have to recruit people beneath you who in turn have to buy a large amount of product to qualify for you to get royalties on them, all the way down. But it requires a lot of confidence in the system because you're convincing people to do something that requires writing a check. And the people they go after are the lowest income people in this country and the lowest income people around the world and the people who are generally financially unsophisticated. So it depends on confidence.
Bill Ackman also accused Herbalife of targeting undocumented immigrants in the United States because they knew that undocumented immigrants would be hesitant to turn to regulatory authorities in fear of deportation. It's a population right to be taken advantage of. But Bill Ackman did not anticipate that Herbalife's success would continue. He was predicting that the federal government would step in and shut it down eventually. And his very public short-sell and presentation were his way of getting the feds to pay attention.
Ackman proclaimed that he was 100% convinced that Herbalife was a criminal operation and that the United States would be a better place when Herbalife was gone. After the weekend of Bill Ackman's presentation, the stock price of Herbalife had decreased by 42%. The company had lost almost $2 billion of its market value.
Herbalife CEO Michael Johnson was not happy. Now we know what this has been going on for in the shadows, as we say, for the last eight months. This has been ridiculous what's happening here. We're not a pyramid scheme. That's a bogus accusation. This is a legitimate company. Mr. Ackman's proposition that the United States will be better when Herbalife is gone. The United States will be better when Bill Ackman is gone. When Bill Ackman was asked why he was so passionate about taking down Herbalife,
He claimed that he had a moral obligation. Michael Johnson saw things a bit differently.
In response, Bill Ackman stated that he had no interest in profiting off the demise of Herbalife, and he pledged to donate 100% of any proceeds from his short sale of the company's stock to charity.
A pledge that not everybody believed. That's complete bulls**t. He's not giving it to charity. His limited partners aren't going to give it to charity, as assuming they don't need charity themselves. Now that's what I'll say about Ackman, okay? Let me remind you that we are on live television, so that was an interesting choice of words.
That's Carl Icahn, one of the most successful hedge fund managers on Wall Street, who publicly took the opposite position on Herbalife than Bill Ackman after his presentation. The two investors had a falling out over a deal years earlier, and even though Icahn claimed his position opposite Ackman was merely coincidence, many wondered if Icahn had invested in Herbalife just to spite an old friend. Well, you know, listen, I, you know, I...
As their feud escalated,
Both Bill Ackman and Carl Icahn called into CNBC to reopen old wounds for the world to see. I told Carl after the whole thing called me up and he literally said, you know, Bill, we can be friends now. I wish I had a recording in the conversation. I simply said to him, I said, look, Carl, you are no friend of mine. And that was it. And every time until he goes on TV, he wants to splatter me. I'm going to defend myself.
Keep in mind, both of these men are billionaires, and the deal they're holding a grudge over was worth $9 million, essentially pennies for people in their position. Truly pathetic.
As other notable investors took sizable positions in Herbalife against Ackman, the company's stock price began to recover. But Bill Ackman was in it for the long haul. How long are you willing to wait and sit on this bed? We're not sitting. We're shouting from the rooftops. They've never had someone like me prepared to say the truth about the company. So how long are you willing to wait on your short position? I'm going to the end of the earth.
Ackman began funding community groups and civil rights organizations to help him find people that had been negatively affected by Herbalife's promises of financial success. He set up websites, took out advertisements, and set up hotlines in hopes that these victims would surface. Ackman also paid a former Herbalife executive over $1 million to blow the whistle on the company. In total, Bill Ackman is estimated to have spent up to $50 million in his campaign to kill Herbalife.
This is a war and for any of us to think otherwise in here would be foolish because this guy has spent 50 million dollars to try to ruin this company. Name another company this has ever happened to. This is unique in the American business landscape. There's nothing that's ever happened like this before and the tactics that are being employed against us and someday when the book is written people are going to go, you've got to be kidding me. You've got to be kidding me.
Bill Ackman's opponents accused him of market manipulation, of pulling out all the stops in an attempt to tank the stock price of Herbalife. While Bill Ackman maintained that his quest to destroy Herbalife was nothing more than a philanthropic pursuit, which is hard to believe considering Bill Ackman was the largest investor and eventually director of Valiant Pharmaceuticals, the company whose business model was built upon aggressively acquiring prescription drugs only to significantly increase their prices. Never forget,
Ackman's investment in Valiant Pharmaceuticals never paid off. In fact, he lost nearly $4 billion. But when it came to Herbalife, he was about to get exactly what he wanted.
The FTC has charged Herbalife with deceiving hundreds of thousands of hopeful people who saw Herbalife's promotional campaigns in English and in Spanish and signed on for what they thought was a legitimate and lucrative business opportunity selling Herbalife nutritional and personal care products. The company promised people a dream, a chance to change their lives,
quit their jobs and gain financial freedom. In 2014, the Federal Trade Commission announced that it would be investigating Herbalife to determine if the company was in fact a pyramid scheme. If the FTC were to conclude that the company was operating illegally, it could be shut down and the stock would be worthless. Bill Ackman would win. The two-year investigation revealed that on average, Herbalife distributors earned less than $5 a month from product sales.
For those distributors that opened nutrition clubs, over half lost money or broke even on the year. And even though the FTC stated that it was "virtually impossible to make money selling Herbalife products" and it ordered the company to fundamentally restructure its business so that it does not incentivize recruiting others to join in order to move up the compensation ladder, the words "pyramid scheme" were never used in the complaint.
Hello everyone. Hey, we've got great news. We've reached an agreement with the U.S. Federal Trade Commission that ensures that our mission to improve people's lives will continue to thrive. The terms of the settlement do not change Herbalife's business model as a direct selling company and set new standards for the direct selling and multi-level marketing industry. In a nutshell, the new procedures build upon a customer-focused foundation that we've already established.
I have to tell you, this is really good news. And it comes at a time when our business is growing bigger and better than ever before. AgriLife agreed to pay a $200 million fine for engaging in, quote, unfair and deceptive practices. But the company declared victory anyway. And so too did Carl Icahn and everyone else who bet against Bill Ackman.
The company shares spiked and continued to rise in the following years. In November 2017, after a five-year battle,
Bill Ackman claimed defeat and closed out his position in Herbalife, much to the relief of those who had money invested in his fund. The total amount of his loss is unknown because Bill Ackman will no longer talk about his bet against Herbalife publicly. Herbalife, on the other hand, continues to thrive. It changed its name to Herbalife Nutrition and recorded more than $4 billion in sales in 2017.
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