Saturday, June 13, 2015

Anti-Shoopites The Third: The Revenge of Shake Shake Booty

Is Herbalife a Ponzi scheme? Via @pmarca, Bronte Capital explores the ins and the outs in exhaustive detail. And it appears that there's a great deal to the case, as one might expect with a worldwide operation.

The skinny version: the physical Herbalife product is a nutritional supplement, sort of a meal replacement shake. You drink this once a day in lieu of a meal along with some tea and some aloe water and in a few months, you lose weight. But there's a great deal more to it than the shake mix and the tea. They seem to be in the business of selling local social clubs where like-minded folks gather for a common purpose in a comfortable setting. Participants congregate to share stories, to offer support, and to provide motivation for each other.

Naturally, law enforcement is obliged to intervene. The Federal Trade Commission has some bright-line guidelines for what counts as a Ponzi scheme, including how much of the product is sold for retail purposes and how much is consumed within the distribution network. The stereotypical cases for this are Amway and Koscot. Amway is particularly notable for complying with the letter of the regulations without obeying the spirit (nb, this is an editorial remark: I've known several folks to emerge from the other side of an Amway dalliance severely disillusioned. Still, that's anecdote, useful for filling a parenthetical, nothing more). Herbalife appears to be the converse: it's possible that they've violated the FTC guidelines, but they don't appear to be defrauding anyone. In the terms of the EE conditions, there's no ex post regret.

I think that's the important part from the perspective of the pedestrian moralist. If the shake, the tea, and the aloe water are merely the totems of the enterprise, and what Herbalife is really selling is ersatz ritual, it's silly to launch an inquisition.

Charles Ponzi was a con artist, for sure. But like with many things, so many things, the reaction to his scheming was poorly designed. Madoff was a type II error. Herbalife appears to be a type I error. It can be difficult to know whether or not an investigation is righteous without burning shoe leather. Maybe a centralized bureaucracy like the FTC isn't always the best approach to fraud prevention.

1 comment:

  1. The main success of economists is apparently their self-confidence in putting forth their expert claims.


Do you have suggestions on where we could find more examples of this phenomenon?