6/25/15

One of the more interesting things to happen in the Herbalife saga lately is tonight’s report by the NY Post’s Michelle Celarier that there is video of the company’s CEO, Michael Johnson, in 2005 saying what appear to be incriminating things about Herbalife. The comments came a short time after Johnson on-boarded at the company. From the Post article:

Success in Herbalife, he decried, was a “lottery ticket,” with few making it to the top ranks. In fact, he said, distributors had sometimes engaged in “false promises, claims, in hopes for product, for money, for recruiting, for customers, for pyramiding.”

In the video, an earnest Johnson worked hard to reassure the distributors that the recruiting that had made them multi-millionaires would always be the “most vital part of our bloodstream.”

But, he said, sales tactics that “top dog” Herbalife distributors used had sometimes led people “down a false road” where $4,000 could buy an “instant distributorship.”

When the credit card bill comes, the spouse says, ‘How are we going to pay this? You didn’t sell this stuff. It’s in the garage. It’s in the pantry. What are we going to do?’ ” Johnson said, noting some of the practices that led to complaints that Herbalife is a pyramid.

Johnson’s speech even contained what several lawyers said was a stunning statement of the new CEO’s fears: “You guys gotta do things right because Rich [Rich Goudis, then Herbalife’s CFO] and I have one major job .… to stay out of jail,” he said. “We go to the graybar hotel together if you don’t operate with ethics.”

It’s quite a leap to hear the CEO calling the business opportunity a “lottery ticket” in 2005 and then hearing the President of the company calling it an “unrivaled business opportunity” in 2014 – which is it? Have material changes been made to the marketing and compensation plans, or has the Tirelli Agreement prevented any material changes from taking place since then?

This is interesting for obvious reasons. It appears Johnson was on to the company at some point in 2005. This may have been his “cognitive dissonance” moment. The Post article alludes to the fact that the video is similar to the Gratziani video – with the executive calling for change in how the company was working in 2005 – albeit with Johnson saying so it can keep him out of jail. The company’s response will likely be that the video is old and that the changes have since been made. However, it doesn’t look like changes were ever made.

This line is really interesting. From the Post’s article:

In a video of his speech, a copy of which was obtained by The Post, a tanned and fit Johnson, dressed in a black polo shirt and slacks, gave the impassioned plea for change at the company’s global management retreat in Laguna Beach, Calif.

For instance, the Post article claims that Johnson called the practice of selling leads the “source of many evils,” yet the company continued the practice all the way to 2012-13. It looks like the company may have continued keeping recruiting the focus and “pyramiding” well after this video, as well.

How do we know this?

I have to do some digging, but I vaguely remember one of the most recent President’s Summits (April 2015) where Johnson spoke. For some reason, the video which I thought was readily available I can’t find at first glance. Regardless, after going into the details about his time caught drunk driving as a kid, he talks about a specific time where, upon entering the business, he tried to make changes and do things the way he did at Disney (read: legally?). He then says something to the tune of he was directed either by his mentor or a top distributor about the way things are done at Herbalife – differently. Paraphrasing, he basically attributes the way the business was run then as the successful driver of what it is today.

Could the changes he tried, but failed to implement, potentially have been the ones detailed in this video/report?

If regulators can reconcile the statements Johnson makes in a video in 2005 with a story he told in 2015 about not being able to implement the changes he wanted when he started, it could prove to be one of the most damning pieces of evidence thus far.

If you can find the video of the April 2015 President’s Summit, please e-mail me the link at quoththeravensa@gmail.com

Let’s see what the market thinks tomorrow and if the company responds. Meanwhile, I’ll dig for that video to try and bring clarity to Johnson’s statements.

QTR