Is Herbalife a Pyramid Scheme?

Billions of dollars ride on that question, and people on both sides of the issue want to know what one person thinks: TCNJ’s Bill Keep.

Words by Mary Jo Patterson

Illustration by Ian Dodds / Bill Keep photo by Nick Romanenko

Throughout much of the last two decades, Bill Keep toiled in relative obscurity as the country’s leading expert on multilevel marketing (MLM), a popular but controversial brand of marketing in which salespeople make money by selling to the salespeople they recruit, as well as to consumers. But for the last year and a half, the dean of TCNJ’s business school has been playing a starring role in what’s shaping up to be the country’s biggest potential consumer protection case.

It all started in December 2012, when Wall Street titan William Ackman, the CEO of Pershing Square Capital Management, shocked the business world by declaring his belief that Herbalife, a publicly held MLM firm with $4 billion in revenue, was nothing more than an elaborate pyramid scheme, which uses perpetual recruitment, distributor turnover and high failure rates to drive purchases and distributor commissions. To support  his position, Ackman cited research Keep had done years earlier.

The announcement put Herbalife’s business model under the microscope and shone the spotlight on Keep. In the months since then, the dean has emerged as the single authoritative voice on the situation. Media members and investors alike have sought his insight. Bloomberg TV brings him into the studio to explain the murky world behind sensational financial headlines. Reuters called him the “new go-to adviser for some of Wall Street’s biggest players.”

In point of fact, Keep began building his expertise in 1995, when the U.S. Department of Justice contacted him at the University of Kentucky’s business school to ask if a Kentucky firm named Gold Unlimited could be a pyramid scheme. Within a few years, prosecutors were knocking on his door again, asking him to study public data and tell them whether they had a case against a suspicious MLM firm.

In 2002, Keep co-authored an article with Peter J. Vander Nat, a senior economist with the Federal Trade Commission. Their paper, fact-specific and assembled from public filings, proposed a mathematical way to detect pyramid schemes. Ten years later, Ackman used that methodology in reaching his conclusion that Herbalife is a pyramid scheme reliant on fees collected from new recruits (a charge the company has hotly disputed). The hedge fund executive staked a billion dollars on Herbalife’s collapse by short-selling the company’s stock. Other investors, including fellow Wall Street titans George Soros and Carl Ichan, took the opposite position.

At the center of this billion-dollar, headline-grabbing saga has been Keep, a Michigan native whose father sold potato chips for a living. The dean hasn’t taken sides on the issue of whether Herbalife is a pyramid scheme. (It’s not that he doesn’t have an opinion; he does—he’s just not sharing it. “The final determination will be made by a court,” he says.) He also hasn’t accepted a dime from those who seek his advice, nor has he strayed from the strict ethical rules binding him as a New Jersey state employee. He sees his role as that of a disciplined outsider. “Academics are supposed to approach social problems. We are evidence-based. I’ve always tried to do that, and I’ve been trying to do that here.”

In June, Keep wrote Mary Jo White, chair of the Securities and Exchange Commission, one of several federal agencies investigating Herbalife, about a pending lower court ruling in a separate multilevel marketing case. He urged her to take seriously the threat posed by unregulated distributors.

In the meantime, billions of dollars ride on the Herbalife drama, which is certain to continue for years. Count on Keep to stay on the story, even if Herbalife succeeds in defending itself. Investigations are also said to be under way by the Federal Trade Commission, the U.S. Department of Justice, the FBI and the U.S. Attorney in Manhattan. “Everyone is watching,” says Keep.

Fast Facts on the Herbalife saga

• The U.S. is crawling with multilevel marketing (MLM) companies, public and private. The best known include Avon, Mary Kay, Nu Skin Enterprises and The Pampered Chef.
• With more than $4 billion in revenue, Los Angeles–based Herbalife is a giant. It burst into the news in December 2012, when hedge fund CEO William Ackman outlined his firm’s belief that Herbalife is a pyramid scheme.
• Ackman announced he had bet $1 billion Herbalife would collapse by short-selling its stock. A short sale occurs when an investor bets that a stock will lose value.
• Billionaire investor Carl Icahn and other portfolio managers took the opposite position, opening a very public spat.
•  Numerous MLMs have been charged by federal and/or state regulators with operating a pyramid scheme. Of those charged, some have been found guilty by a court and some have settled before a complete trial, paying a fine and closing their business.
• Amway is the only MLM company to face an FTC charge of operating a pyramid scheme and then be found by a court to be operating a legal business model (i.e., found not to be operating a pyramid scheme).