Meet Herbalife’s CEO, Michael O. Johnson.

He works for a company that pitches a recruiting opportunity that, according to members of Herbalife’s Board of Directors, can make you $100,000/month. See? Here’s a picture I used in a ton of my articles on Seeking Alpha:

Pretty irresponsible, right? Even more irresponsible is the fact that these claims were taken from a presentation made by John Tartol, who Michael O. Johnson idly lets sit on the Board of Directors of the company he is CEO of. John Tartol makes over $3 million a year at Herbalife and he, I believe, also should go to jail.

Here is an interview where Michael O. Johnson, who had just started at Herbalife, admits that John Tartol has been “personally training” him.

Mr. Johnson is a millionaire many times over, and he’s made that money off the backs of people too dense to realize what they’re buying into; one shake at a time, one $5 daily nutrition club membership fee at a time – from millions of people – funneled all the way up from the poorest people on Earth, directly to John Tartol’s $3 million a year compensation and whatever Guatemalan guy Michael O. Johnson pays to do his landscaping at his Malibu home. In Johnson’s defense, he probably tips the guy during the holiday season.

While Mr. Johnson is pitching a millionaire’s lifestyle to people that will never, ever, in a billion years, be capable of making it for themselves by selling shake mix, he himself is living it.

This home, believed to be his, is between 20000 and 30000 Pacific Coast Highway in Malibu. It overlooks the ocean and appears to have a pool and a tennis court. If it’s not his, I’m going to take a guess that it’s likely very similar to the home he lives in. Regardless, this is the dream that is pitched to millions of distributors who quit every single year.

Michael O. Johnson runs the most sophisticated, complex, and successful pyramid scheme in the history of modern business.

I believe that Johnson, Tartol, Des Walsh, and CFO John DeSimone know exactly what they’re doing, exactly how their money is made, and exactly how they are in violation of numerous laws. I believe that Herbalife is a $6 billion fraud – in a league with the likes of Enron and Madoff. For these reasons, I believe Johnson belongs in jail. Also for these reasons, if Herbalife is allowed to continue to do business, I believe that regulators will eventually subject themselves to outrage from the public and politicians in the future, when the wheels really fall off.

So this becomes a question of whether regulators will put a halt to this, or if they’ll wait for the business model to implode on its own. Either way, it’s just a matter of time and either way, it’s going to be ugly.

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In 2012, Mr. Johnson gave a speech at Herbalife’s President’s Team Summit. You can watch the entire video here, but try not to watch it within 30 minutes of eating a meal. Fans of Oliver Stone’s movie “Wall Street” know that ultimately, Gordon Gekko was arrested when his protege Bud Fox turned on him and ratted him out.

Will life imitate art once again? Count on it. Already, I believe that Herbalife insiders are blowing the whistle against this company. The company’s recent decision to shut down distributor websites has only agitated a whole other group of distributors. If you need proof of that, I’d point you to Matt Stewart’s recent articles (here & here) where he claims to have been contacted by a slew of pissed off distributors who are eager to tell their stories. Now, the alarm bells seem to be coming from the inside, Mr. Johnson. Yikes.

What might they want to say to regulators about whether or not Herbalife’s marketing plan primarily encourages recruiting?

At a presentation I attended months ago in Manhattan, Mr. Ackman said that Michael Johnson is “a predator” who knows exactly what he is doing to defraud poor people around the world. At this presentation, Mr. Ackman also presented a disgustingly demonstrable amount of evidence that the primary “retail consumption” Herbalife has been citing is complete and utter bullshit. The media, instead of focusing on the key evidence that destroyed Herbalife’s piss poor remaining argument, decided to ridicule Mr. Ackman and allow people like Robert Chapman to go on CNBC and boast a $150 price target for Herbalife.

Feeling curious? Watch babbling idiot Liz Claman on Fox Business News, in between getting doe-eyed complimenting Charlie Gasparino and pumping the Herbalife corporate line, patting herself on the back as she takes backhanded jabs at Bill Ackman after his presentation.

Do we have any granular evidence to back-up the claims that Michael Johnson is “a predator” and that Herbalife is a “criminal enterprise?”

Herbalife’s business model is totally absurd and irrational. In order to understand why, all we need to do is imagine how a rational organization would operate. Specifically, how would somebody organize a rational distribution model for a company like Herbalife?

The answer, it seems, is obvious. Distribution coverage in a given territory would be matched to final demand in the market. This is what we see from other organizations, whether salesforces are wholly owned, franchised or otherwise.

Think of an island economy with 100 people. 50 are customers. How many distributors do you need? Is it 1? Is it 2? Who knows?

What we do know is it isn’t 50. This, of course, is why Herbalife has problems.

Herbalife doesn’t recruit its own salesforce. On a day to day basis, its salesforce recruits its salesforce – which is totally bizarre. Even more specifically, an endless chain of salespeople are recruited each and every day because of the incentive system. Too many people chasing the same one object results in one person getting it and most others failing. That’s how Herbalife works on a day to day basis. The people that come and go, lose their money, get spit out of the bottom of the pyramid – Herbalife doesn’t seem to give a shit about these people.

There is no doubt in QTR’s mind that Michael Johnson knows this. He knows that the vast majority of the people who sign-up for his unique business opportunity fail. Knowing this, Mr. Johnson continues to tell the world that it’s never been a better time to join Herbalife.

I keep asking myself: Does the company measure the size of the market in any geography? Does the company match the number of distributors in a given geographic area to the size of the market? Does the company do anything to protect retail margins? Does the company do anything to prevent price wars? Does the company do anything to offer any geographic rights to its distributors?

On the contrary, the company intentionally and deliberately unleashes a total clusterfuck, where salespeople turned recruiters are not only allowed to, but are encouraged to saturate given geographies with an endless supply of distributors. Saturation is the inevitable result of a pyramid scheme. Then, you get maps that look like this one from Mr. Ackman’s original thesis. This shows the saturation of Herbalife’s nutrition clubs in a given area versus the McDonald’s in the area. Note that the McDonald’s are evenly distributed, yet Herbalife nutrition clubs all see to be right up each others’ ass.

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So, then the question becomes, “Does Michael Johnson know exactly what he is doing?” Of course he does.

Michael Johnson is a lot of things, but one thing he isn’t is stupid. On a day to day basis, he may be one of the most clever people the world has ever seen. Mr. Johnson makes the traditional “forward looking statement,” that so many companies protect themselves from with their securities lawyers’ carefully scripted language, seem almost laughable – as he paints the world green with a never ending supply of optimism.

Back to his speech from the above linked extravaganza.

On pursuing his role at Herbalife, here’s what Mr. Johnson had to say:

“I worked at Disney at the time. And we were very proud of our content. The best content in the world whether it was a theme park, whether it was an animated classic, the videos that I was responsible for or DVDs now, to put on the shelf, and there’s distribution. And in my mind distribution was bricks and mortar. It was these Wal-Mart’s and Kmart’s and Carrefour’s and Oshawn’s [PH] and you go Corte Ingles and you go on and on around the world to the major retailers and it was bricks and mortar. And we put a product on the shelf, we’d advertise it, we would make every mother in the world feel guilty if she didn’t buy a Disney video and she promptly responded by pushing her shopping cart to the right direction and she’d go in to those shelves and there’d be a massive amount of product and we hoped that she would find our product in the middle of all that clutter, those competitors, that other stuff. So we would brand our Disney sections and we would make sure that people responded to us and do those ads and scare the heck out of ’em and tell ’em that product’s going back in the vaults and it’ll never come out again so you better get it right now.”

Or how about this? Here is the section of the speech where he talks about recruiting the inventor of Herbalife 24:

“John, was it two or three years ago on that bike ride. I always forget. Three years ago? Three years ago, you know me, I’m passionate about my sports and passionate about my bike riding. I’m aging a little bit, but there was these things called time trials. And so you race against a clock. And they have this little time trial up this road called Piuma Road out there in Malibu and it’s about an 1,800 foot climb, about eight miles or seven miles, I don’t know exactly what it is, but it’s a grinder. It’s a real grinder. And so you race in this time trial. And so I get up to the top of this thing, checking my time, seeing how I’m doing and there’s these two young guys up there, out of the trunk of their car, got a little Mark Hughes thing going here, passing out samples of a nutrition product, an endurance product called Prolong [PH]. So I go over and I grab a couple of these samples, bring it back to Steve, [LAUGH] and I said, Rich, Steve, and I said run this through the NMRI, let’s check this bad boy out, let’s see what we got here. And they came back and said, wow, this is quite a formula. This is pretty good stuff in here. Carbohydrates, electrolytes, proteins, great mix, great blend. I said, hmm, called these guys up and said, hey, want to go on a bike ride with me? They were like, who are you? What do you want? Very suspicious. We’ve got our own company. We’re distributed in bike shops all throughout southern California. I said, how about distributors throughout the world? I said, you might want to think a little bigger here. You might want to expand your horizon a little bit here, boys. They were living in a one bedroom apartment together and they used to hook the cable television up during the Tour de France. These guys were broke. Okay? But they had their own company, they were proud of it, they built a great product, they got something special going. So we kept getting more bike rides, a little closer, invite them down to the company. It takes a little while. You know, you recruited a lot of people, sometimes it takes a little while to get them warm to Herbalife, right, to understand where we’re going and what we’re up to because we believe in a healthy, active lifestyle and this is a perfect product for, endurance product. So we get them in. I’ll spare you the long story, all the suspicion, all the doubt. We finally get them over the edge, we buy their company, put a little money in their pockets probably for the first time in their lives. [LAUGH] They both go out immediately and buy new cars and I went, yes, we got them. [LAUGH] [CHEERS] You know? You know? We got them, boys. They’re ours now.”

So, here’s a question. Does this seem like a normal course of thinking to you?

Mr. Johnson talks about mothers as marks. He talks about his business acquisition as a conquest. Further on in the speech, we hear him say the following:

“But where are we today? What are we gonna do tonight? Des and I are gonna stand on this stage and we’re gonna have a tremendous honor to give the top ten checks away in this company. The cumulative value of our bonus tonight is $52 million. [CHEERS] [APPLAUSE] Fifty two million dollars. [CHEERS] [APPLAUSE] [MUSIC] Give me one of those checks! [LAUGH]”

Ever see the video clip of him leaning over the podium and barking, “Give me one of those checks?”

Watch the look on his face at 19:09 – 19:26 in this video. It’s like a man possessed.

Now, let’s imagine what a rational and ethical CEO might do. Imagine you are sitting in El Segundo, California. Every week your CFO brings you a report. You like him, he’s very good with numbers. Numbers can sometimes be confusing to you, but when the right numbers are presented to Wall Street, you notice that good things happen for you and your business. Jim Cramer invites you on Mad Money, your stock goes way up, people like Meredith Adler, Tim Ramey and Carl Icahn opine about how great you are. Inside this report, in addition to the perpetually growing “good” numbers, you get a list of all of the distributors that are quitting around the world. These are the “bad” numbers. What would you do with this data?

Imagine for a moment the data file you get is for the above pictured market in Queens.

Would a rational and ethical CEO gather more data on the market, try and find out why things are so “out of whack” in Queens, or perhaps cut off distributors in the area to prevent super-saturation?

Or, would he continue to travel the world on a private jet telling people “there has never been a better time to sell Herbalife,” while drinking martinis with John Tartol? In case you missed it, here’s a picture of the private jet that the millionaires get to fly around on. Matt Stewart included it in one of his recent articles after doing the super intensive, time consuming research involved in taking 12 seconds to log onto Facebook.

As Matt said:

If you are getting wicked rich as a result of the success of a money transfer scheme that is currently under investigation by no fewer than 7 state and federal regulators it probably isn’t the brightest move in the world to publish pictures of your private plane online for all the world to see. It probably isn’t wise to show shots of a board member dressed up like James Bond with a Martini glass in his hand vs. dieting on Formula 1. It probably isn’t all that intelligent to emphasize the point that you make at least a thousand times more dineros in annual compensation than the average Latino paying for Consumos to graduate from Club 100.

I believe that Michael Johnson knows he sells a lie.

I believe he knows what the failure rates are in his business, and I believe he deliberately and intentionally fails to disclose them. Sometimes it’s what you don’t say that gets you into hot water. And, I believe that Mr. Johnson is in hot water.

Pershing Square has brought $50 million worth of sunshine to disinfect this confidence game. Mr. Johnson’s defense? Some fancy wording meant to obfuscate, a new return policy that does nothing to control recruiting, distributor websites being shut down and a PR machine that spews out so much rhetoric it makes Karl Rove look like Mr. Rodgers.

Here’s the problem for Michael Johnson and his defense: the evidence and the truth.

The evidence and the truth aren’t getting the attention they should be getting from the media. But, that’s fine. The only people that I need to be concerned with the objective truth are the critical thinkers at the FTC, SEC, et. al.

“Facts do not cease to exist because they are ignored.” – Aldous Huxley

I believe that:

1. Ethical people don’t lie.

2. They don’t exaggerate or omit relevant information.

3. They don’t deceive.

4. They don’t harvest organs from their prey, like Eugene Victor Tombs from the X-Files.

5. They don’t try to make mothers feel guilty.

6. They don’t gloat and celebrate outdoing a business partner.

7. They don’t publicly gush over money as if it is the only thing worth worshipping in life.

Rather, they treat people with honesty, integrity and compassion. As human beings and children of the same God, it’s about the best we can do.

Michael Johnson has made millions upon millions of dollars from the perpetual churn rates from his salesforce. He, and the likes of John Tartol, conspire with one another to figure out ways to take the money from the bottom of the pyramid. The bottom of the pyramid looks like this picture, which was taken from an Herbalife internal strategy document.

Don’t believe me? Here is the link to the Herbalife internal strategy document (slide 16) that this picture is from, describing how to go after the “bottom of the pyramid.”

And here’s what the whole slide looks like:

Michael Johnson and John Tartol want the $5 a day from people like this woman who lives in a hut, these two impoverished children, and the people in this shantytown. It’s as simple as that.

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So, has Johnson done anything to prevent these huge churn rates at the bottom of his pyramid? On a day to day basis, he has only continued to sell his nonsense into more corners of the globe (yes, longs and distributors about to write comments, I know that globes don’t have corners) while targeting the poorest of the poor.

What Michael Johnson, Carl Icahn, and the bulls have been underestimating is this: the argument against Herbalife is not about Bill Ackman.

Shit talking Bill Ackman, whether it’s on CNBC, blogs, or among your group of longs, doesn’t make Herbalife any less of an illegal business model.

Putting out a boatload of PR’s in the last year only serves to make the company look more ridiculous. Consult this piece by SA Contributor “The Specialist” where he/she notes the same. Then, take another glance at my PR chart I made earlier this month showing the absurd ramp up in meaningless press that Herbalife is churning out trying to make itself look legitimate.

The argument is not about Pershing Square. It is not about who’s bets might pay-off once regulators intervene. It is not about how many clicks CNBC or Fox Business News might get sensationalizing the side-show that is unfolding between high profile hedge fund managers. It’s not about Charlie Gasparino and it’s not about Scott Wapner’s billionaire smackdown from January 2013.

On the contrary, the Herbalife tragedy is about ethics, morality, conscience, justice and the law.

Fraud is a crime. I’m not a lawyer or law enforcement official, but it’s mainly a simple crime to understand. If you use deceptive practices to separate somebody from their money, you are breaking the law. If you lie to someone to get them to pry open their wallet, you are committing fraud. If you use the mail or the internet to do so, that’s wire fraud. If I tell you that my car’s transmission works fine when I know that it does not and sell my car to you on that basis, I am defrauding you.

If I tell you that you will become a President’s Team member simply by completing Club Cien, I am lying to you. It is just as simple as that.

If I tell you that the opportunity set for distributors of Herbalife products is limitless, I am lying. The math behind it, as pointed out by M.I.T. PhD Kay Herbert (read: MUCH smarter than QTR), simply doesn’t add up. I don’t understand all that math stuff, but I do understand that it’s rotten at its core – it’s intrinsically, a fraudulent business model.

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Michael Johnson tells the world there has never been a better time to join Herbalife. Isn’t the obvious truth that there has never been a worse time to join Herbalife?

Those who join Herbalife today aren’t pursuing the business opportunity – they are the business opportunity.

Wasn’t the “real” best time to join Herbalife when guys like John Tartol joined up? Wasn’t the best time to join, technically the time that cranked out the current President’s team as we know them? Wouldn’t the “real” best time to join be the time early in the late 80’s when the first distributors were getting their start? Or, when guys like Doran Andry were leveraging the “new” internet to pry open the wallets of people who have the I.Q. of shelled pistachios and thought that they could get rich by buying $3,000 worth of weight loss shake?

I mean, let’s just call a spade a spade: now is ANYTHING but the time to join Herbalife. I could probably get some of the bulls to agree with me on that. And, as I’ve remarked before, it’s looking suspiciously like distributor confidence is starting to show that people are realizing this. Last quarter’s earnings missed, showing a slow down in volume points in the U.S. – and Herbalife can’t afford to miss this quarter.

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Here’s the only thing you have to think about when you think about whether or not Herbalife is a fraud.

Imagine all of the lies, nonsense and deciet that goes into selling the business opportunity to new marks at an upline’s presentation to new recruits. Review my past articles for the list of false medical claims and absurd income claims.

Next, imagine somebody with a full command of how Herbalife’s business works who is well versed, well spoken, and intelligent like Bill Ackman having the opportunity to explain to that mark “the truth” about Herbalife. Isn’t the chance of succeeding at Herbalife today about as likely as winning the lottery?

How many would really join up if they knew the truth?

Herbalife is not a legitimate business. Herbalife is a pyramid scheme.

Public market investors get paid off because pyramid schemes shift money from the bottom to the top. Investors and bulls on Wall Street don’t care because “they pay a dividend and buy back a lot of their own stock.”

Herbalife is the most successful pyramid scheme in modern history, and Michael Johnson has been at the helm for the company’s incredible growth – which has come as a result of false medical claims, false income claims, and recruiting over product sales. This is fraud, and this is why QTR believes that Michael Johnson belongs in jail.

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Herbalife will report its Q3 earnings at the end of this month. Hopefully, it will be the last earnings release the company makes as a public entity.

The sooner the regulators shut this company down, the better.