The Billionaire Who Nearly Brought Herbalife Down

Betting on Zero

Ted Braun (2016)

Film Review

This is the very sad story about efforts by billionaire hedge fund manager Bill Ackman to end Herbalife’s predatory pyramid scheme by 1) short selling* their stock and 2) pressuring regulators to end their deliberate exploitation of low income and minority communities.

Bloomberg News reporter Christine Richard’s 2011 book Confidence Game describes how Ackman helped to bring down MBIA (Municipal Bond Insurance Association) by purchasing credit default swaps against them. In 2012, she alerted Ackman to a similar scam perpetuated by the multibillion dollar international health supplement company Herbalife. Ackman’s response was to short sell Herbalife’s stock (in an endeavor to drive their stock price down) and to engage in a multimillion dollar investigation and public information campaign to pressure federal and state regulators to take regulatory action.

Herbalife was founded in the 1980s by Mark Hughes. After Hughes died in 2000 from an accidental overdose, former Disney CEO Mark O Johnson took over as Herbalife CEO. Just like other pyramid schemes, Herbalife derives profit, not from selling health products, but from continuously recruiting new distributors – and pressuring them to recruit other distributors.

According to the investigation Ackman commissioned, only 17% of these distributors could make a living selling Herbalife. Forty percent earned less than $1,000 and 40% were left with a garage full of Herbalife products which had passed their expiry date. One reason Herbalife is so difficult to sell is that it’s three to four times more expensive than Slim Fast, the closest equivalent available in pharmacies and supermarkets.

In the US, Herbalife deliberately targets illegal migrants in the Hispanic community, who are reported to immigration if they complain about the way the company treats them. The film profiles a grassroots group in Los Angeles that organized a series of protests highlighting the fraud Herbalife had perpetuated against them. In 2014, they joined a class action suit of 1.5 million former Herbalife distributors. Despite losing an average of $10,000 apiece, the California judge approved a settlement awarding them $10 each.

In 2016 the FTC ruled that Herbalife was indeed a pyramid scheme. The penalty imposed was essentially a slap on the wrist – a $200 million fine and an order to restructure their corporation.**

Ackman’s short selling scheme was defeated the same year when rival billionaire Carl Icahn*** invested heavily in Herbalife shares to short up their stock price. Ackman would exit his short position in 2018.

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*Short selling means investing in way to derive income if the stock price falls. When a large number of investors (or a large hedge fund) short sells a single stock, it can force its price to collapse.

**Herbalife was required to reduce shipping costs they charged distributors, to increase their acceptance of unsold product, to crack down on unofficial distributors, and to engage an independent monitor.

***In 2017, Trump appointed Icahn as his key regulatory advisor.

Public library patrons can view the full film free on Kanopy.

The End of Growth

The End of Growth: Adapting to Our New Economic Reality

by Richard Heinberg

(New Society Publishers Aug 2011)

(This is the sixth of a series of posts about stripping private banks of the right to issue money. It stresses the link between our debt-based monetary system and the drive for perpetual economic growth.)

The basic premise of The End of Growth is that the world economy has flat-lined. Not only is it contracting, rather than expanding as most politicians claim, but there are important reasons why it will never return to pre-2007 growth levels. The reason? The last two centuries of continuous economic expansion were only possible due to the ready availability of cheap fossil fuels. Growing fossil fuel scarcity has caused energy costs to skyrocket. And this, according to Heinberg, is the main reason for declining economic growth.

As well as making an strong case that economic expansion has ended, Heinberg also writes about far-sighted governments (Japan, Sweden, Denmark, Norway and Finland) that are enacting policies to ensure the welfare of their citizenry as they confront new economic realities.

Heinberg and others in the Peak Oil/climate change movement have always argued that infinite economic expansion is mathematically impossible on a finite planet with finite natural resources. The End of Growth highlights the massive ecological devastation caused by this reckless obsession with economic growth, while warning that we are depriving our children and grandchildren of natural resources (fossil fuels, water, industrial fertilizers, fish stocks, top soil) that may be needed for basic survival.

In Heinberg’s previous work, he predicts it will take a decade or more before fossil fuel scarcity causes the capitalist economic system to hit the wall. In The End of Growth, he argues it already has: in October 2008. While a few countries can claim an occasional quarter of increased GDP, aggregate global economic growth is either stagnant or slowly contracting. Even China’s so-called economic “miracle” hasn’t been sufficient to generate a genuine increase in total global wealth.

The Ultimate Ponzi Scheme

Heinberg goes on to explain how private banks use the fractional reserve system to invent money out of thin air. In a global economic system where money can only be created by issuing bank loans, there’s never enough money in the system to repay all the debt. This means the global economy can only function via continual creation of new loans. And continuous economic growth is essential to make this happen.

Heinberg’s analysis of the 2008 meltdown starts with an introduction to classical economic theory, and a discussion of of the “financialization” of the US economy that occurred in the 1980s. There’s a detailed discussion of the risky financial derivatives that led to a decade of speculation and “debt” bubbles. The largest was the subprime/derivative boom, in which massive amount of borrowed money was speculated on derivatives and subprime mortgages that couldn’t be repaid. The debt bubble created was so large it plunged the entire world economy into depression when it burst.

The End of Growth in China

Heinberg also presents a painstaking analysis of why the China’s current phenomenal growth rate (7-8% per year) and somewhat slower growth rates in India, Thailand, Malaysia and Vietnam also represent “bubbles” that will eventually pop and trigger recession. China is pursuing the identical economy strategies that caused the Japanese economic miracle to collapse in the 1990s – resulting in a two decade long recession.

Life in a Steady State Economy

Obviously the end of economic growth, and continuing job, wage and benefit cuts mean that people in most industrialized countries will be forced to massively downsize their lifestyles. Outside the US, some far sighted governments are intervening in ways to make this transition less painful. Heinberg gives examples of countries (Japan, Sweden, Denmark, Japan, Norway) who openly acknowledge the reality of their steady state economies and pursue policies that make it easier for their citizens to adjust.

Sweden, for example, has transformed depressed industrial towns into “ecomunicpalities,” by “dematerializing” their economies. They have made them into fossil fuel-free towns with organic farming, public transportation and alternative energy projects – while simultaneously fostering social equity.