With regard to the Herbalife investigation …
First let’s be clear that there is no difference between “Markey” and “Markey’s staff”. For electeds, they are their staff. They depend heavily upon the judgment of their staff, and Markey’s has long been said to be one of the best in DC, FWIW. I’m not at all interested in the question of what “he” vs. “his staff” knew.
The problem is that Ackman has been poisoning his own well. Markey’s action cannot seem completely divorced from Ackman’s public and private lobbying vs. Herbalife, even though this issue is right in Markey’s wheelhouse and the call for an investigation is just the kind of thing that Markey would do otherwise. Markey’s staff should have recognized that Ackman isn’t doing this for the public good — not solely or mostly. He’s doing it to make money. Herbalife may be a lousy and exploitative company, but that doesn’t necessarily make it a Ponzi scheme.
Herbalife presented a summary of the study at an investor meeting in January. Ackman dismissed it as biased and flawed, asking why the company can’t get precise records on the sales of distributors. Herbalife has since released the study to Bloomberg Businessweek and made executives and researchers available for questions. Bloomberg asked two independent research firms to evaluate the results. Both said Lieberman was a reputable researcher and concluded the sample size was large enough to generate valid results. “I don’t see any red flags,” says Jay Myers, a market researcher for New York-based Interbrand (OMC) who reviewed the study. Swartz, the SunTrust analyst, says if the survey is to be believed, it pulls the rug out from under most of Ackman’s Herbalife claims.
Maybe it is and maybe it isn’t. Here’s a good and (I think) temperate explainer, from over a year ago.
It would be a horrible precedent for a short-seller to pursue a vendetta against a firm, including heavy government lobbying, in order to profit from its demise.
On the other hand … what do you do if you’re Markey? Should you do nothing, simply because a short-selling vulture stands to gain?
Tough one.
Bob Neer says
Just like the other 99 U.S. Senators, including Elizabeth Warren. Ackman has no doubt been lobbying all of them, too, and
bribing anyone willing to be paidusing his money to fight for justice as he sees it and help the disadvantaged. In this case Markey, his staff, or his former staff, look like they might have gotten played.JimC says
… what is wrong with Herbalife? Ackman says it’s a pyramid scheme; how so? I know almost nothing about it.
It’s pretty unusual (though not unheard of) for a government official to single out one company.
Charley on the MTA says
And the shake-sellers also recruit other franchisees. The question is how much of Herbalife’s profit is from the shakes and how much from recruiting franchisees. There’s a technical definition of that based on %. Herbalife’s finances make it very hard to find that out.
IOW, read the links.
SomervilleTom says
It is not accidental that Herbalife’s finances are designed to inhibit such inquiries. The product, like all too many OTC remedies, does nothing.
I don’t think this is a particularly tough decision. I think the Globe is looking for a way to sell papers by manufacturing a scandal.
JimC says
I’ll try to do better on my homework next time.
SomervilleTom says
Herbalife IS a pyramid scheme — call it a “multi-level marketing system” if you prefer, but the concept is the same. A Herbalife distributor makes money by selling other Herbalife distributorships. Each level in the chain gets a piece of whatever is sold lower down. This means that the number of actual customers must expand geometrically in order for the pyramid to grow. It’s similar to the schemes used by Amway and Mary Kay — except that Amway and Mary Kay sell products that actually DO something.
In the case of Herbalife, its “product” is a line of “nutrition and weight loss” products — snake oil. None of them have been shown to actually DO anything. It isn’t hard to measure the amount of dirt on the floor before and use of an Amway product. Nobody has done (or can do) the same for a Herbalife product.
The FTC has been warning the public about “multi-level marketing” plans for a very long time.
The SEC “singles out” fraudulent schemes like Herbalife reasonably often — that’s its mission. The FBI does likewise.
Senator Markey did exactly the right thing in promoting an SEC/FTC investigation of Herbalife — Mr. Ackman did exactly the right thing in taking a short position on the company.
Those two actions are what a Senator and investor, respectively, do when confronted with a publicly-traded Ponzi scheme.
Charley on the MTA says
the shakes are a crappy product is, alas, outside the bounds of whether it’s a Ponzi scheme.
I mean, I think Herbalife is an inherently sleazy business as a MLM firm. But there’s a technical, legal definition, and Markey (and Ackman) had better be right.
SomervilleTom says
If there is a scandal here, it is that a publicly-traded company can sell pure snake-oil to an unsuspecting public. It isn’t just Herbalife, the shelves of any CVS are filled with similarly fraudulent “remedies”.
Those of us who place a higher value on protecting the public than attempting to skewer a Senator should, in my opinion, focus our energy on OTC frauds and the MANY questionable companies that promote them — including Herbalife.
judy-meredith says
it is that Senator Markey’s staff either did not do a good job researching Herbalife perfectly legal selling practices (this is America after all) and Ackerman’s perfectly legal stock manipulation (this is America….) or they did a good research job and knew about Ackerman’s role and didn’t share the information with their boss.
Sloppy work or bad judgement on the part of the staff or the Senator?
Only the Senator knows for sure.
JimC says
… there’s no scandal here. Markey didn’t send anyone to Gitmo, he’s just calling for more scrutiny. Any company that is playing footsie with its finances is inviting that.
Thanks all.
Charley on the MTA says
And it’s about where I come down. I have no brief with Ackman either way, but there’s adequate cause to look into it pretty deeply. Bloomberg asked some professional auditor types for their opinion on Herbalife’s own audit, and they said it didn’t raise alarm bells by itself … but that’s really not what I’d call an adequate vetting.
And again, staff-vs-boss is not a distinction I’m interested in. When you elect someone, you elect their staff too.
SomervilleTom says
The point of Mr. Markey’s request for investigation is that there is strong evidence that company’s behavior is NOT “perfectly legal”.
So suppose the staff found what we now know — a public company is committing fraud, and Mr. Ackman was betting on the company being hammered in the market.
You seem to be suggesting that Mr. Markey should NOT have pursued the fraud. Is that REALLY what you mean?
judy-meredith says
But I do think the Senator could have done a better job of explaining what the hell was going on with Ackerman’s again perfectly legal calculated puchases in the stock market. That assumes of course that he knew about Ackerman’s motivation.
bob-gardner says
Herbal Life has been around a long time (I just came across a reference to it from the early ’90’s by Mystery Science Theatre).
Markey never felt the need to have them investigated until this hedge fund manager decided to take a short position on the stock. When someone comes into a congressional office with a scheme to make money with a reverse pump and dump campaign (which is all this is), a letter should go out–to the SEC demanding that this stock manipulator be investigated.
As far what the staff found out, let the public see what Markey’s staff was doing. Let’s see the memos between the staffers and from the staffers to Markey. Let’s see the notes from any interviews the staff might have had with Ackman or his representatives.
If an ordinary citizen went to his state rep and said that he wanted to buy house in, let’s say Somerville, and thought he could get a better deal if the current owners were investigated, how far do you think he would get?
How long have you “known” that Herbal Life is a fraud, Tom? Why have you kept it a secret so long?
JimC says
… which is pretty recent. From the wiki:
judy-meredith says
SomervilleTom says
Suppose a property in Somerville was the subject of a long list of health violations, police complaints, neighbor complaints, was already on the radar screen of the police department, fire department, and health department, and was months behind in property tax payments. Suppose the owner had also not paid the mortgage holder in months.
Suppose a well-heeled citizen decided it was time to teach the owner a lesson, and bought the mortgage with the intent of driving the owner into bankruptcy.
Suppose a local alderman, who that well-heeled citizen happened to also support and contribute to, had been hearing complaints from all over the neighborhood about the eyesore and “problem property” and decided to ask the Board of Aldermen (generally sympathetic to businesses) to more aggressively pursue the long list of complaints against the delinquent property owner.
Are you still so sure the Alderman has done something wrong? Are still so sure the well-heeled activist is doing something wrong?
Are still so sure there’s a scandal?
Why do you hate Senator Markey?
SomervilleTom says
Let me see … a product that does absolutely nothing, sold through a pyramid scheme. Nah, nothing wrong with that — a fine upstanding member of the business community.
I’ve known that Herbal Life is a fraud for as long as I’ve known of Herbal Life.
Are you also a fan of Donald Trump?
bob-gardner says
I’ll try to answer them.
1)What should the staff have done differently?
The staff should have walked away from this pump and dump scheme and let the FTC do their job based on real complaints from real victims. If they felt that letter to the FTC was necessary, under no circumstances should they have provided Mr Ackman with a copy of the letter while it was not available to the public, which gave Ackman an opportunity to capitalize on inside information. As I said before, they should have immediately notified the SEC of this reverse pump and dump scheme. What the staff should do now is to release the notes and memos about their contacts with Ackman so that the public can judge what happened.
2)You seem to be suggesting that Mr. Markey should NOT have pursued the fraud. Is that REALLY what you mean?
No, what I REALLY mean is that Markey should not participate in fraudulent activities like this reverse pump and dump scheme and should not be providing inside information to stock manipulators.
3)Why do you hate Senator Markey?
I don’t hate him, but I think he is acting like a crook.
4)Are you still so sure the Alderman has done something wrong?
In your hypothetical example, yes.
5) Are still so sure the well-heeled activist is doing something wrong?
In your hypothetical example, yes.
6) Are still so sure there’s a scandal?
Yes.
7) Why do you hate Senator Markey?
See number 3 above.
8) Are you also a fan of Donald Trump?
No.
Those are my answers to your questions, Tom. How about you answering my questions? For someone who posts comments three minutes apart, you sure seem to be taking your time.
SomervilleTom says
Let me recapitulate:
Q: how far do you think [an elected official] would get?
A: See my earlier comment
Q: How long have you “known” that Herbal Life is a fraud?
A: Since I first heard of it. I’ll accept the early nineties, though I don’t remember.
Q: Why have you kept it a secret so long?
A: I’ve expressed my contempt for Herbal Life whenever asked. This is the first thread on BMG, that I am aware of, that the company has come up.