Expert Witness Blog
Pyramid scheme expert witness Dr. William W. Keep was in the news this week urging SEC chief Mary Jo White to intensify the investigation of Herbalife. The FTC recently closed pyramid scheme BurnLounge, the New York City online music store and Dr. Keep, business dean of the College of New Jersey, recommended that multilevel marketing companies submit their enforcement policies to regulators every five years. Herbalife is a global nutrition company founded in 1980. The company has over 7,400 employees worldwide, and its shares are traded on the New York Stock Exchange with net sales of $4.8 billion in 2013.
Herbalife.com commented on the recent ruling by the Ninth Circuit Court of Appeals in its decision in FTC v. BurnLounge, Inc. Herbalife issued the following statement:
Today’s decision by the United States Court of Appeals for the Ninth Circuit in the FTC v. BurnLounge, Inc. validates product consumption by participants as a legitimate measure of demand for multi-level marketing companies and rejects Bill Ackman’s fundamental thesis against Herbalife. This ruling from one of the country’s most influential courts is consistent with Herbalife’s position that the widespread demand Herbalife has demonstrated for its products, by members and non-members alike, confirms that it is a multi-level marketing company with proper business practices.
SEC.gov describes pyramid schemes:
In the classic “pyramid” scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money. The chart below shows how pyramid schemes can become impossible to sustain.
Perhaps the most publicized pyramid/Ponzi scheme is that of Bernard Madoff who made an admission to his sons that his investments were “all one big lie.” As of December 2008 the losses were estimated to be $65 billion, making it the largest investor fraud in history.