“WHO DOES HE THINK HE IS?”
Herbalife had no lawyer in the room. This will be much clearer to you when you are in the middle of it than now. Such as cat, cart, bay, about, said, plaid, raid, and so forth. Of all the home office staff, I liked Dean and Kim most. Excitotoxins are damaging to the brain and the heart as they make both organs overwork. And then if each of them apart from Dan is actually insured? Hair usually has the oldest cells and is thus the first target for renewal.
DISTRIBUTION CHANNEL … OR SCAM?
Herbalife might seem like an odd target for such venom. It is remarkably successful. Herbalife makes 25 flavors of shakes, including piña colada in the U. His issues stemmed from its being a multilevel marketing company, or MLM. Early participants make out like bandits, but later recruits are mathematically guaranteed to fail. Some consumer advocates ardently believe that all MLMs, also known as network marketers, should be illegal. Since , when the Federal Trade Commission blessed the business model of the home-products marketer Amway, MLMs have been considered legitimate so long as they enforce certain safeguards designed to guarantee sustainability.
Herbalife is the largest public MLM by market capitalization and the second largest by revenue, after Avon. As big as Herbalife is, however, the New York—based activist is even bigger—a fact that has enabled him to launch a novel, for-profit species of holy war: Drawing upon bottomless resources and boundless self-confidence, Ackman has committed himself to destroying the company. In the nearly three years since his AXA Equitable presentation, he has denounced Herbalife and its executives in terms that no government authority ever has.
He has hired lobbyists to alert community groups to the alleged dangers of Herbalife and has given those groups money to find victims and connect them to regulators.
His agents have set up websites, taken out ads, posted notices, and set up numbers. They have tracked down former Herbalife employees and distributors, looking for whistleblowers. The FTC and SEC have, in fact, initiated investigations of Herbalife, and Manhattan federal prosecutors have made inquiries about the company or its distributors, Herbalife has acknowledged.
The attack raises two important questions for society. Is he right about Herbalife being a pyramid scheme? As it happens, we should get an answer to this first question soon, because the FTC, responding to pressure exerted by Ackman, opened a formal inquiry into that question in March —now 17 months ago.
The second and perhaps bigger question is: What if Ackman is wrong? While activist investing was already controversial, Ackman has taken it into new terrain. Is it sound public policy to have freelance, for-profit billionaire regulators roaming the landscape, no matter how well-intentioned?
Ackman, by contrast, is trying to annihilate a company. Ackman rejects such criticism. We are extremely proud of the work we have done on Herbalife. Photograph by Michael Lewis for Fortune. For that matter, so might novelists, psychologists, and—if only they were still around—ancient Greek tragedians. At this point one might ask: Trying to protect huddled masses yearning to be free? Or trying to save face? Perhaps the best thumbnail précis of this saga was provided by hedge fund manager John Hempton, who runs Bronte Capital, in what was actually a prognostication.
Someone is going to lose big. And the victor will be so bloodied that the word victory will sound hollow. Johnson is the immovable object. Johnson, who headed Walt Disney Co. In July, Johnson, now 61, completed his third Tour TransAlp, the legendarily grueling, seven-day, mile stage race through the Alps during which cyclists traverse ascents totaling more than 60, feet.
That business took off, and he rode it up the ranks until he was heading the international operations of the whole company. Along comes a guy with half-facts and half-truths and a jaded point of view and starts not just shorting your stock but trying to totally demonize me and demolish the company.
Who the hell does he think he is? Six-foot-three, lean, fit, with salt-and-pepper hair, Ackman cuts an intimidating presence. He spits out words with machine-gun rapidity, and often with flesh-tearing trenchancy. We spoke at his offices on the 42nd floor of a midtown building that offers panoramic views of Central Park. In the corner of the conference room stands a striking memento: It evokes a crucial skill for a hedge fund manager: Yet he is fallible.
His first fund, Gotham Partners, had to be suddenly wound down in late after some illiquid investments left him unable to rebound from a handful of redemptions. He also lost big on stakes in Borders, J. Risk management is not his strong suit. Ackman is astoundingly competitive. His father wisely let him off the hook the night before, and he scored a And then there was a Hamptons bike ride of , described by William Cohan in Vanity Fair, in which Ackman joined several hedge fund guys and serious cyclists on a mile pleasure ride.
Though out of practice, Ackman rushed out in front at an unsustainable pace, became dehydrated, and had to be helped back, barely able to pedal due to excruciating cramping. The battle has taken a toll. Yet he professes no regrets. But if the commission finds that an MLM is a pyramid scheme—which is considered inherently deceptive—it must shut it down.
The best definition of pyramid scheme emerged from a case in which the FTC shuttered a cosmetics marketer called Koscot Interplanetary. Few MLMs are so foolish as to do that. Instead, they typically pay a distributor—as Herbalife does—based on the products he orders, and on the products ordered by his first three levels of recruits, i. Further complicating the analysis is another striking feature of virtually all MLMs, including Herbalife. Whereas conventional businesses pay salespeople based on their sales, MLMs pay them based on their purchases and those of their downlines.
The year-old Johnson, training near his home in Malibu, recently completed his third Tour TransAlp, a mile, seven-day race across the Alps. While judges and economists have proposed other definitions, most boil down to this: With a pyramid scheme, the product is little more than a fig leaf camouflaging what is, at its core, an elaborate chain letter. When the FTC ruled that Amway was legitimate in , all other MLMs took steps to make themselves look like Amway—at least on paper—and an industry exploded.
In recent years, however, with consumer advocates protesting that the industry is rife with pyramid schemes, several market leaders have sought to disassociate themselves from the pack. Tupperware quit the Direct Sellers Association in , and Avon dropped out in Both declined to be interviewed for this article.
But Johnson has made key changes to Herbalife during his 12 years there. The question is whether the great white whale Ackman is so doggedly pursuing still exists. In the beginning Hughes, a ninth-grade dropout, sold weight-loss products from the trunk of his car, according to company lore. His main product was Formula 1, which then came in one flavor: That year the company became the subject of a CNN series that highlighted dubious medical claims distributors were making about Herbalife products.
The California attorney general sued the company, and a Senate subcommittee held a hearing. His scrappy performance energized his loyal distributors.
Hughes wrote for Herbalife a comically complex, page compensation plan. Such impenetrability is typical of MLM remuneration schemes. Critics say these are intended to perplex the recruit, leaving him no choice but to trust what the recruiter tells him. Defenders of the Herbalife plan say its complexity arises from efforts to reward diligence, punish laziness, and ensure fairness. The plan created nine main levels of distributor.
Ackman will later reject this notion, insisting that these distributors are pursuing the business but failing. At level seven they begin accruing additional bonuses. Only a tiny percentage of distributors reach this level, though precisely how tiny is a matter of dispute. In in the U. Top-tier distributors are also eligible for the subjective and lucrative Mark Hughes bonus. It has always been hard to make money as an Herbalife distributor.
That number excludes income distributors may make from retailing, but also fails to take into account any business expenses they may incur. Ackman will later argue that a system so slanted toward rewarding the highest tiers—attainable only through recruiting—must be a pyramid scheme. In May , Mark Hughes, 44, was found dead in his bedroom.
In two private equity firms—W. They went looking for a turnaround team to spruce it up and take it public again. A headhunter approached Michael Johnson, then in his 17th year at Disney.
But the private equity guys promised him he would be in control, stressed that it was about nutrition, and offered him a slice of the company. In April , Johnson made the move. Johnson tried to quickly launch a new product without consulting the distributors. And they deeply mistrusted him. What does he know? A lot of them felt that when the company went public I would exit. The company could annul their distributorship, but that meant forfeiting a business the distributor had built over years.
If expelled, the distributor might take his whole downline—sometimes thousands of people—to another MLM. Top Herbalife distributors ran several dozen such side businesses at the time. They worked like this.
They, in turn, would contact the prospective recruits and send them a video that showed testimonials of top distributors describing astounding wealth they had purportedly amassed in very little time and with no discernible skills. Herbalife shut down Newest Way to Wealth in , before CEO Johnson was hired, and reached a tentative settlement of the suit a few months after he got there. That fall, he considered quitting.
He went to see his mentor, Jerry Perenchio, who was then chairman of Univision. Perenchio asked him a series of rhetorical questions, Johnson recalls: You can stick your tail between your legs and go back to Disney, or you can go in there and exercise your desires and will. The plan was about product, brand, image, and the business opportunity. The company needed its own upgraded manufacturing facilities, he felt, plus labs to ensure that the products really contained the herbs the labels claimed they did.
To tout the brand, Johnson wanted to sponsor sporting events, teams, and star athletes. It now sponsors more than of them, including Cristiano Ronaldo, the Portuguese soccer star. Finally, and most important, Johnson wanted changes in the way the business opportunity was pursued.
That meant curbing some practices while also embracing positive ideas being urged by other distributors, he says. At a videotaped global management retreat in June , viewed by Fortune , Johnson appeared to walk a tightrope, discussing the need for these changes while trying not to alienate powerful distributors.
It puts distributors in debt up to their ears. Johnson also wanted to embrace changes being urged by two top distributors, which were designed to reduce the high rates of turnover then being experienced among level-five distributors—those beginning to pursue the business. The company phased in changes. It rolled out its own online software tools, supplanting those sold by distributors. Herbalife charged less and could exercise control over content.
Over time, most top distributors exited that business. The rule changes easing the qualification hurdles for level-five distributors were introduced on a test basis in Russia in , and then globally in As a result, according to statistics provided by Walsh, the percentage of U. Purchasing patterns also changed, these statistics show. Throughout the Johnson era, the size of the average purchase has been getting smaller, while the number of orders has been increasing. Though the impetus for the changes was apparently not regulatory, its impact could be.
In an Herbalife distributor introduced nutrition clubs into the U. The charge entitled the customer to consume on premises servings of three prepared Herbalife products: Herbalife CEO Johnson first heard about nutrition clubs three years earlier, he says, when certain distributors were complaining about them. Johnson and Walsh went to look at a club in Zacatecas, Mexico.
Today there are about 6, nutrition clubs in the U. Herbalife nutrition club owner Edgar Montalban, shown in June , prepares a meal-replacement shake in Queens, N. They became particularly popular in Spanish-speaking communities of the U. All of the results I thought my own students were achieving were false.
The director was willing to trick parents and manipulate a credible test like the WJIII to make money. I would advise buyer beware. I also was in management with LearningRx. Let me start by saying, I worked at two different locations each with different owners. I started as a receptionist and tester and worked my way up to Assistant Director. Everything from falsifying test scores to trying to make her employees claim they were independent contractors….
Standardized assessments like the initial and supplemental tests are not meant to be given more than once a year. LearningRx gives them every months. This allows the student to get a higher than average score on the test…. If you are not familiar with the system, the entrance test and exit test is identical. LearningRX bases success on whether or not the person being trained moves beyond what they are initially able to complete on the test.
So, on paper and according to their guarantee, their program has worked. However, there was absolutely NO improvement in any of the areas that had been discussed during the initial visit! My daughter went through this program at the beginning of this year… now that she is in 8th grade everything has just gone downhill.
She has worse grades than ever and has dozens of missing assignments. So I feel like I threw away 7, dollars on the product that has no true guarantee. Are LearningRX trainers and testers under pressure to return positive results, even if it requires questionable tactics?
I read the article you referred to. The owners all live in very nice houses. Ken Gibson lives on a hill west of Colorado Springs in a mansion that overlooks the city. I think Kim Hanson was a school teacher. I think she lives in Monument, Colorado. Tanya Mitchell is a liar. See her pretending to be someone else at the top of this thread. The fact that LRX LearningRx Learning RX did their own pre- and post-testing; that I personally saw cheating on these tests; that one of the people in my center saw cheating while visiting other centers; that the director of training in the corporate center in Colorado Springs told me that she plays tricks with final testing to get good results this is the center on Woodmen Rd in Colorado Springs, Colorado and is owned by the home office and was run by Tanya Michell at one point all point to this result.
I hope the franchisees bring a civil lawsuit and get some of their money back. It is terrible that nice people some are very nice are harmed in this. Most franchisees are completely unqualified to talk about the brain or brain research. There is a post online about a franchisee who was a former hairdresser. I tried to tone down the claims made at my center. Then left after waiting too long.
I told the director that before the program started, it sounded like this was all that was ever needed and the problem would be solved forever, but then at the end there would be a sell job about how customers needed more or needed to come back before the start of middle school or high school or college.
I told him that the claims made in the literature could not be made based on the research that had been done. LearningRx itself said that to do the research of in-center training would cost millions, so they created a digital product and tested that — probably still in progress. They can make no claims. I told the home office that I had seen cheating on testing. Now, I hope that the damage in my community can be undone.
Word needs to be spread. I will try to spread it. By the by, Lumosity also was making claims that had to be removed from their website. I still think brain exercise is a good thing. Lumosity is much less expensive. But as I said above, you can create your own brain exercises. The Learningrx family is repugnant and Machiavellian in associating their company religious values of wanting to help children because it requires you to rely on faith rather than science and it leads you to believe they are good people when they are simply predators pulling your emotional strings.
I think all prospective franchisees, prospective customers, and prospective business partners of LearningRx should read those comments thoroughly. Those comments are substantially and pervasively true. The FTC got it right in this case. As a specific example, I was working on an advertising piece, when I asked the home office for citations to support the claims I had written into the piece.
The claims were all copied from other LearningRx marketing materials, I found out that the claims were not at all supported by science. They could give me no references, no citations, nothing — not a single one. I killed the piece and THAT moment was the beginning of the end for me as a franchisee. After that, I continued on as a franchisee, but the scales started to fall from my eyes and I saw the depth of the deceptions and the conflicts of interest built into the business.
I believe LearningRx is full of good people doing bad things because of these built in conflicts of interest and well-meaning ignorance. I think the home office is more culpable than the franchisees themselves: These are the folks that created the business model; these are the folks that enforce it.
I think another perspective is important to capture — the perspective of the former franchisee as a franchisee — from franchisee training to opening the business to running the business.
I am writing a document targeted at current and prospective franchisees. Today is a big day. We are posting the final drafts of each of the sections of the document referred to in the previous post. These will be posted one after another, then consolidated into one longer document to be posted together. We warn you in advance that there will be a lot of posts.
If you are considering becoming a LearningRx Learning RX franchisee, this material will help you with your due diligence. If you are a past, present, or future customer of LearningRx, this material will help you understand the LearningRx business and product. It will also help you understand the conflicts that affect you as a customer. If you are a competing product or service, some of these conflicts may apply to your business also.
As a former franchisee, we are creating this document to help current and future franchisees understand the inherent conflicts in the LearningRx Business Model. Conflicts of interests abound within this business model and these conflicts explain much of what franchisees do within this system. We wish we had been told these things before we wasted good time and money inside this business. By the by, these materials are written and edited by one of us and reviewed and edited by the other.
One of the things I am struggling with is mixing first person singular I and first person plural we as I write. The previous post mixed these. It should be plural we. I suspect, there will be times when we will intentionally use first personal singular I because only one of us observed or experienced that particular item.
Imagine you are starting LearningRx Franchisee Training today. You arrived in Colorado Springs last night. You have two weeks ahead of you. As you walk across from the Marriott Hotel on Centennial Drive to the LearningRx home office, you turn around and notice how tall and beautiful Pikes Peak is in the morning sunlight — so beautiful!
There is a bounce in your step as you walk in the front door, rise up the stairs and walk straight into the training room. As we help you imagine opening and running your business, we are going to refer back to these two weeks of training frequently. During the flight home, you will daydream about all the children — all the moms — all the families — you are going to help.
You know how much work you have ahead of you, but you also know it will be worth it. Your heart is so full of passion and expectation for this business that you cannot wait to start helping others. Before you know it, the business is ready, the doors are open, the marketing mailers are hitting mailboxes, and you are trying not to watch the phone as you wait for it to ring off the hook. Then it happens, the phone rings! It is a potential customer! As you can tell, these materials are written from your perspective as a new franchisee.
You imagine and feel the weight of the conflicts of interest that you will face as a new franchisee as they arise in your own franchise business.
We can write these things because these were our collective experience. You remember from training that Kim Hanson daughter of the founder told you how to answer the phones. These are the rules:. It will tell you why Sarah is struggling. The assessment takes about one hour. Your goal is simple though not as easy as it sounds sometimes , avoid answering questions such as cost and program duration or how the program works by taking control of the conversation. Your goal is to get the parent to schedule an assessment.
As a parent, you want to call LearningRx to get a no-hassle answer to your quick questions so that you can decide whether you are interested. As a franchisee, you want to postpone answers about cost, program duration, or how the program works until the consultation because you are much more likely to have the interaction result in a sale.
As a potential franchisee, you should read from beginning to end as part of your due diligence. You want to deliver on that promise and get your first customer. But are even qualified to administer a cognitive skills assessment?
At Franchisee Training, three or six months ago now, Dean Tenpas son-in-law of the founder gave you less than a day of training on how to do Woodcock-Johnson assessments. Each test was explained briefly, demonstrated, and then you got a bit of time to practice. At the end of the training session, you were told that to finish your certification to become an assessor that you must administer three additional assessments on your own without any oversight or correction just to get practice.
By personality, I am organized, methodical, diligent, and persistent; I wanted to do assessments perfectly. Many, many, many of the assessments we did had unintential errors in the administering and scoring of the test. She told me that the standards to become certified at the university were significantly higher than those at LearningRx. The university required more training, more practice, and more oversight to ensuring that the assessment practices were consistent with all testing norms.
She said that despite all of my efforts, she still found errors in how the test was administered and scored in my center. As a parent, you are entrusting your child to be assessed by a certified professional assessor because you want the test results to be valid.
As a franchisee, you are not qualified to do assessments with so little training and so little oversight. You are even less qualified to teach and oversee others as you delegate these responsibilities within your business. The assessor must never want the assessment instrument to show any particular result — whether good or bad. Yet every employee in your LearningRx center knows that a low initial assessment score is more likely to result in a parent signing up for brain training.
Thus, there is an inherent bias toward a child performing poorly on the initial assessment in every LearningRx center. Keep reading to learn that the attitude of the franchisee, trainers, and assessors all LearningRx employees is very different when it comes to final assessments. This difference is explicit, noticeable, and substantial. As a parent, you are entrusting your child to be assessed by an unbiased certified professional assessor. You expect the assessor to be completely objective and the results to be as accurate and reliable as possible.
As a franchisee, you know you are more likely to get a client if the scores are low. Thus, by definition, you are biased in that you want the test to lead to a customer as often as possible. When you were at Franchisee Training, Ken Gibson himself the company founder came in to show you how to recommend brain training programs based on the intake form and assessment results. The process as taught is really quite simple: These programs can typically be increased in increments of four weeks.
In Franchisee Training, every single example client result resulted in a recommendation. This was presented as a goal for all of us franchisees — sign almost everyone up for a program.
However, this is not a burger franchise. This is a business where you are offering a professional service based on your supposed expertise. What does an hour or two of Franchisee training do to make you an expert in assessing Sarah? The sad answer to these questions is that you are an not an expert in any of these. Jodi Jedlicka — franchisee in Wisconsin — might be able to say she has some of these qualifications.
With few exceptions, franchisees are pretenders. They are told to speak with confidence in areas where they lack even basic training, knowledge, and skills. As a franchisee, you present yourself as an expert with the qualifications to advise parents. Franchisee training leaves you unqualified in at least these ways relative to advising clients:.
I rewrote the previous two sections as I wrote subsequent sections. Here is a better version of each. Franchisee training is two weeks long. If all of these two weeks were completely devoted to understanding brain science, understanding cognitive skills, and interpeting assessment results, you would still be unqualified to advise parents on these matters.
No time will be spent in franchise training on brain science, whether anatomical or functional. Very little time will be spent understanding what science can tell us about cognitive skills such as memory, working memory, long-term memory, attention skills, processing speed, auditory processing, visual processing, and logic.
Very little time will be spent understanding how to interpret assessment results which involves linking assessment results to the real-life struggles of children. As a franchisee, you present yourself as an expert with the qualifications to advise parents when you lack these credentials. It is ironic but true. Without knowing anything else about Sarah or her mom or dad , let me answer this question for her: Ken Gibson the founder of LearningRx taught you how to recommend programs during Franchisee Training.
The process is really quite simple:. The intake form and by talking to them in the consultation to be discussed in a later section. In Franchisee Training, every single example client result discussed resulted in a recommendation. In this she said that Sarah struggles were related to attention and memory. Thus, she needs at least 12 weeks of the ThinkRx program.
Thus, Amit needs at least 24 weeks of the ReadRx program. Johan needs at least 36 weeks of the MathRx and ReadRx programs. Are there any exceptions at all? The exceptions are those who are unable to receive brain training:. As a franchisee, you believe that everyone — no matter the struggle — no matter the skill level — needs your service.
Thus, you will almost always recommend a program. And you must do this with confidence. Thus, LearningRx teaches you a simplistic understanding of the linkages between assessment results and real-life struggles. This is necessary so that a brain training franchisee can be a former hair dresser advising people about remediating cognitive deficiencies.
However, even if the assessment scores are both above the 50th percentile, if the parent says reading is a struggle, you will recommend ReadRx.
This means that even if the child is over 50th percentile in these scores, the franchisee will figure out some other sensible-sounding reason that underlying cognitive skills are causing the struggles with attention skills. However, even if the assessment scores are both above the 50th percentile, if the parent says attention skills are a struggle, you will recommend a LearningRx training program. The linkage in this case is supposedly that the child is not good at making good, reasoned choices and is choosing not to pay attention.
This is sometimes very difficult because the scores are too good , but you will usually have a couple days to figure out something that sounds plausible. The assessment does not measure morality. And, worse, an immoral person with an improved logic and reasoning score may do more harm in the world rather than less. At Franchisee Training, you received a full day of training on how to lead a successful consultation. The home office defines a successful consultation as one that results in a new client.
This is very important to the business health of every LearningRx center because this is when a prospective client becomes an actual client. The consultation starts with information gathering and discussion. The franchisee asks questions, listens, takes notes, and expresses empathy. You might wonder why this would be the case when you as a franchisee already have the intake form and assessment results.
The reason is that parents express emotions when they share these things about their children. It is one thing to write on a form that Sarah struggles to pay attention, but to tell this to someone else often results in mom feeling anguish, desperation, or sadness. As a franchisee, you want to hear the following from mom:. To illustrate this point and to drive home the point that this is taught by the home office, one of us had a home office representative come to our center soon after opening our doors.
The representative did a consultation with me present and observing.