Most everyone has a neighbor, friend, or family member that attempts to make money on the side by selling products from a multi-level marketing or MLM firm. Bill Ackman’s stock market short against one of the biggest multi-level marketing firms is documented in the documentary, Betting on Zero. The reason this documentary is important to me is that it shines a light on the predatory business practices of Herbalife and other similar MLMs, in which individuals only truly make a profit by recruiting new members. The Latino community is one of the major victims of Herbalife’s deceptive marketing practices, the promise of the American dream (Braun). While they are not technically a pyramid scheme, they function very similarly. Some people were severely hurt financially by their investment, and all of those interviewed in the documentary is told to make money they must recruit others. I learned why people become victims of this business model by watching “Betting on Zero.” The documentary made me want to learn more about what a short bet is in the stock market and more about pyramid schemes.
People who know me well might describe me as a skeptical or at least a cynical person. A pet peeve of mine has always been seeing businesses legally take advantage of those who are poor, desperate, or oblivious. My hometown, Lafollette TN, has a large amount of poverty. Additionally, I have seen people pushing products from an MLM in the form of parties or catalogs. Some do not require investment and are an inefficient use of time, not a scam. On the other hand, MLMs like Herbalife take advantage of those who are impoverished by requiring an investment to sell their products in the promise of fortune (Braun). I believe that Herbalife is a scam. As shown in the documentary most who sell Herbalife products exclusively do not make any amount of money due to the high cost and almost non-existent margins. Herbalife defends their products and practice by claiming they are promoting healthy lifestyles and giving those who need small additional income a method of income (Braun). These claims are false because generally those on the bottom who need the income the most do not make any money (Braun).
Bill Ackman claims at the beginning of the documentary that Herbalife is operating illegally. He says, “A couple of times in our history, we come across a company that we think is causing harm, operating illegally, and we can make money betting against that company (Braun)." In this thought process, he started a public battle that would last for years against the MLM. He made a billion-dollar short bet against Herbalife. In the short term their stock dropped, but soon after his rival Carl Icahn bought stock in Herbalife in opposition to Ackman’s short. While Bill Ackman is trying to take the moral high ground on this issue, I’m not sure that publicly announcing you’re betting against a company is the best way to spread awareness, as it creates a conflict of interest. He does claim, however, any profit he makes will be donated to charity since it is “blood money.” Ackman pushes for the government to regulate and deem Herbalife an illegal pyramid scheme. This does not happen. Instead, the documentary says, “On July 15, 2016, the Federal Trade Commission charged Herbalife with four counts of unfair, false, and deceptive business practices. The FTC required Herbalife to pay a 200 million dollar fine and “fundamentally restructure their business.” In the clip shown, Edith Ramirez, the chairwoman of the FTC, admits that people were tricked by Herbalife advertising and made little or no money, and were unfairly compensated. This seems to be an oversight by the FTC to continue to let Herbalife operate at all. On December 21, 2016, Carl Icahn was named special advisor to the President on regulatory reform by Donald Trump. Icahn has shown by his position on Herbalife, he does not value morals in companies. He will most likely only push to regulate companies when benefits him to do so (Braun).
Another story the documentary shows the effect Herbalife has had on members of the Latino community. Members of a local community rally together as a group against the company, led by Julie Contreras. Herbalife sells a fake American dream promise that is not reality (Braun). There are a few of these stories told by the people who experienced them. One victim, Julio Ulloa used money from his construction company to fund a Herbalife “club.” He says in the documentary, “I realized in four months I wasn’t making any money… I lost my money that I had to keep my construction company running.” These clubs are meant to draw people in with healthy eating. Once people are lured into the club they are told of all the money they can make if they open their own club. The club’s true purpose is recruiting new members and not selling the product. Zac Kirby tried opening 5 of these clubs to rely solely on the product without recruiting new people. This led to a lot of unsold product that had to be thrown away because the products were too expensive to sell (Braun). Fortunately, Kurby was able to transform his clubs into vapor lounges that are now a successful business. Herbalife encourages sellers to overbuy their products with the incentive of discounts and leveling up to the “presidents’ team.” Since the sellers over meet demand, their products go to waste and they are left with recruiting as the only way to turn a profit. This model has helped Herbalife spread globally from only ten countries in their first decade to now with representation in ninety-three countries (Braun).
The concept of shorts was an important part of the documentary. It was a concept I was unaware of and still didn’t completely understand until I did some further research. Short selling a stock is one of the “tools” in a Wall Street investor “tool case” (Frankel). To short stock means borrowing the stock from a broker and selling on the open market (Braun). The person shorting the stock is responsible for paying back the broker the worth of the stock at a later date (Braun). When a person shorts a stock, they are expecting the value to go down in the future (Frankel). The profit or loss comes from the difference between the original sale and the value of the stock that’s paid back in the future (Braun). Shorting a stock is high risk and low predictability action (Frankel). A USA Today article was written about the option of shorting stock, “When you hit the ‘sell short’ button in your brokerage account, you are effectively borrowing shares of the stock from your broker and selling them on the open market” (Frankel). It’s a risky move for any investor because markets act irrationally and the stock can go infinitely up (Frankel). If the stock goes down there is a great opportunity for profit, as you would only be required to pay back the new lower amount to your broker (Frankel). In Ackman's case, when he shorted 1 billion dollars' worth of Herbalife stock, the price was around $40 after he exited the short several years later the stock was around $90 per share (Decambre). In result, he lost about $50 per share, which is an astronomical loss (Decambre).
Lastly, there are some important predatory similarities between Herbalife and a pyramid scheme. According to an article from Investopedia defining pyramid schemes says, “New recruits make up the base of the pyramid and provide the funding, or so-called returns, in the form of new money outlays to the earlier investors/recruits structured above them in the scheme. A pyramid scheme does not usually involve the selling of products. Rather, it relies on the constant inflow of money from additional investors that works its way to the top of the pyramid” (Staff). MLMs do not typically fall into the category of a pyramid scheme, since products make up the revenue stream (Staff). The documentary shows that the people at the bottom make little to no money selling products without recruiting new members (Braun). Another thing that a pyramid scheme will do is “promising extraordinary returns to new recruits” (Staff). Herbalife is also guilty of doing this as well. Their advertising to recruits is filled with promises of big house, sports cars, and large bank accounts (Braun). Showing what can happen if one of their members work hard and sell their products, this marketing is a fabrication and not representative of reality (Braun). While the FTC does not recognize Herbalife as a formal pyramid scheme, the similarities show why MLMs such as these are harmful to society (Braun).
Overall, the documentary helped expose Herbalife for taking advantage of those who choose to sell their products. It related to my sense of fairness and justice. It made me want to dive deeper into how short bets work and taught me the deceptive marketing techniques companies like Herbalife use to lure in new members. I learned to stay far away from supporting MLMs, directly or indirectly. Armed with my new knowledge I can protect myself and others against companies that deceptive marketing and a nuisance to hardworking, well-meaning individuals.