The Facts About Direct Selling You Won't Hear From Short Sellers

As the association representing more than 200 leading firms that manufacture and distribute goods and services sold directly to consumers, the Direct Selling Association (DSA) would like to set the record straight in response to questions raised about the direct selling business.

STATEMENTS

Direct Selling Association Addresses Market Manipulation by Short Sellers

Millions of Americans will be harmed by unfounded and inaccurate statements about direct selling

Dec. 20, 2012 (Washington, D.C) - Today the well-being of millions of Americans who rely on direct selling as a source of supplemental income was put at risk when Bill Ackman of Pershing Square Capital presented a short thesis on Herbalife (HLF), making numerous statements and assertions critical of the company and the direct selling model that were misleading and unsupported by solid data. This follows his announcement on Wednesday that he holds a substantial short position on Herbalife stock.

"I think these short sellers are either disingenuous, misinformed or both," says Direct Selling Association (DSA) President Joseph Mariano. "Either way, it's unconscionable that they are putting at risk the legitimate sales and entrepreneurial activities for millions of people."

"Herbalife is a member in good standing of the Direct Selling Association. All DSA members abide by a strict Code of Ethics which specifically prohibits pyramid schemes. Clear legal standards and definitions have been developed over the past 30 years to rigorously enforce that prohibition. DSA and its members have worked for generations against the scourge of illegal pyramid schemes. To that end, DSA has supported strong anti-pyramid laws throughout the United States and worked to ensure consumers don't confuse legitimate direct selling companies with illegal frauds. Some short sellers have recklessly put at risk decades of public education and consumer protection in an apparent attempt to drive down stock prices of publicly traded companies so they can profit."

“The accusations made today by Mr. Ackman are made even more egregious by the distraction of his promise to donate the proceeds of his short position to his own company’s foundation,” Mr. Mariano added. “He is trying to masquerade as a consumer protection advocate when in fact he is not only taking money from other stockholders but harming millions of hard working Americans who are earning money through direct selling.”

Direct selling is a time tested and legal method of product distribution that is attractive to many different types of individuals because of the flexibility it provides. Most direct sellers were customers of the product before they started selling the products. After becoming a direct seller they continue to use the products. In fact, some people join the company only to buy the products at a discount – they never intend to sell a single product or recruit a single individual. However, this fact is never mentioned by critics because it is not consistent with their rhetoric that falsely suggests everyone who becomes a direct seller having a high profit motive.

“Unfortunately, direct sellers have been unfairly targeted by short sellers who are cashing in on the market turmoil they cause,” added Mr. Mariano. “If there is any group that should be investigated by the Federal Trade Commission or the Securities and Exchange Commission it is the short sellers themselves. There is no accountability for the accuracy of their statements and their profit has been made the moment the stock price falls. It’s an unconscionable situation that literally takes money out of the pockets of working Americans.”

VIDEO MESSAGES FROM DSA PRESIDENT JOE MARIANO

How to identify a pyramid scheme

Turn to DSA for credible information about direct selling

FACT SHEETS

The Direct Selling Business Model is Thriving

Legitimate Direct Selling Companies Offer Many Consumer Protections

The Difference Between Legitimate Direct Selling Companies and Illegal Pyramid Schemes

The Facts about Internal Consumption

White Paper on Internal Consumption and Pyramid Schemes vs. Legitimate Direct Selling Companies

The Direct Selling Association Responds to Questions about the Purchase of Products by Direct Salespeople
May 9, 2012

QUESTIONS AND ANSWERS

Q1: What's going on? Why has Herbalife been the subject of falling stock prices?

Recently, Bill Ackman, the founder of Pershing Square Capital Management and prominent hedge fund manager, announced that he’s been shorting Herbalife for months and called the company a “pyramid scheme”.

Unfortunately, even though direct selling industry has definitively demonstrated the propriety of its code of ethics to the regulatory community, Herbalife’s stock price fell as a result. Markets often react to misinformation and uncertainty, which is what we believe is happening in this case.

Click here to learn more.

Q2: Did Ackman reveal a widespread problem among direct selling companies?

A2: The direct selling business model is solid and strong. After falling slightly in the wake of the Great Recession, total industry sales grew nearly one percent in 2010 and are expected to show even stronger gains when 2011 numbers are announced in early June. Most publicly traded companies reported strong earnings and income in 2011.

As you can see from the table below, many publicly traded companies have performed very well over the last five years. All direct selling companies derive a certain percentage of their income from internal consumption, and that's perfectly legitimate.


Q3: If this isn't an issue, why is DSA getting involved?

A3: DSA exists to protect and promote the direct selling industry by educating policymakers, the business community and the general public about the nature of the industry and how it works; as well as ensuring DSA member companies behave ethically in all aspects of their businesses through enforcement of the Code of Ethics. Part of our job is to correct misinformation.

Q4: What is the difference between a legitimate direct selling company and a pyramid scheme?

A4: Pyramid schemes are illegal. They prey on unsuspecting victims by masquerading as legitimate direct selling companies using a multilevel com¬pensation plan. Conversely, legitimate direct selling companies contribute to a vibrant marketplace by selling competitive, high-quality products and services and providing a sustainable source of income for those who choose to sell those products.

Click here to learn more about pyramid schemes vs. legitimate direct selling companies.

Q5: What measures does DSA have in place to protect consumers against pyramid schemes?

A5: Pyramid schemes are illegal and companies operating pyramids are not permitted to be members of DSA.

Every member company pledges to abide by the DSA Code of Ethics as a condition of admission and continuing membership in the Association. The Code speaks to both the consumer and the seller. It ensures that member companies will make no statements or promises that might mislead either consumers or prospective sales people.

Click here for more information on the DSA Code of Ethics.

Q6: What is internal consumption?

A6: Internal consumption is a term used to describe the purchase of products or services by direct sellers. Nearly 16 million Americans engaged in direct selling in 2011, some as full-time entrepreneurs seeking to build a business and some as part-time representatives hoping to earn a little extra money. Others sign up as representatives simply to purchase products or services for their own use at a discount and never sell to anyone else. Regardless of their income expectations, almost all direct sellers use the products themselves.

Q7: Is internal consumption a legal business practice?

A7:Compensation received by salespeople for products they themselves buy and use, and those bought and used by other salespeople within their organization, is a legitimate, legal and ethical practice and not evidence of any impropriety.

Q8: If internal consumption is legal what, then, is the concern surrounding the issue?

A8:The Federal Trade Commission (FTC) and DSA Code of Ethics aim to protect consumers against compensation systems that are funded primarily or exclusively by payments made for the right to recruit other participants. Compensation must primarily be based on the sale of products and services to the ultimate consumer—whether or not that consumer is also a seller of the products. We believe the law, and resultant anti-pyramid enforcement, to be quite clear and settled on this issue.

Click here to learn more about internal consumption.



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