Film Review: Betting on Zero

Financial documentary that’s a David-and-Goliath-and-Goliath-and-Goliath tale of two financial titans, a hugely successful global company, and hundreds of thousands of ordinary people who lose their shirts chasing the American Dream.
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Talk about your big short: In December 2012, Bill Ackman, CEO of Pershing Square Capital Management, took a billion-dollar bet that the stock price of the nutritional-supplement company Herbalife would nosedive once federal investigators exposed it, he hoped, as a Ponzi scheme, a.k.a. a pyramid scheme. That's a form of fraud in which salespeople make money by recruiting new salespeople and taking a cut of what they make, and what the people they in turn recruit make and so on—with the catch being that nobody's making money from actually selling any product, but only because salespeople down the line from you have to buy supplies from the company and you're taking a cut of that. So only the first two or three tiers of this make big bucks while the hundreds of thousands or even couple million people after that make almost nothing or, often, lose their shirts.

Buoyed by a 2011 Belgian court ruling that said Herbalife was indeed a pyramid scheme, Ackman went on the offensive. The company—founded in 1980 by the since-deceased Michael Hughes and run by CEO Michael O. Johnson since 2003—fought back. So did pugnacious investor Carl Icahn, who took a big stake in Herbalife two months after Ackman's declaration. Add in a group of former Herbalife salespeople who felt scammed by the company and joined a class-action suit against it, and you've a David-and-Goliath-and-Goliath-and-Goliath drama that documentarian Theodore Braun (2007s Darfur Now) covers with clear detail while keeping focus on the human consequences.

Braun’s seemingly unrestricted access to Ackman at first suggests tacit sponsorship by the hedge-fund chief, but as the story progresses, Ackman becomes almost Ahab-like, and the battle of titans, taking place far over the heads of ordinary people, becomes ever more complex and troubling. The way Herbalife works, according to former distributors (as the salespeople are called), is that you spends $50 to $100 for a starter kit and around $3,000 in inventory purchases in order to become a “supervisor.” Once at that level, you recruit friends, relatives, anyone you can, and they in turn spend $50 to $100 for a starter kit and around $3,000 in inventory purchases in order to become a supervisor. You get a royalty on what they buy from the company. Not only that, but distributors have to maintain a purchase volume whether they’re selling the stuff or not. As William Keep, a business professor at the College of New Jersey, explains, no one aside from Herbalife executives knows how much inventory actually gets sold to the public—and if the bulk of the company’s money comes from distributors buying inventory they never sell, that’s a classic pyramid scheme. Keep has earnings statements from the publicly traded company showing that only about 17% of all distributors are eligible to earn anything from Herbalife—while 30.6% make nothing, and 47.5% make just $1 to $1,000 in gross earnings a year.

Johnson—who didn’t speak with Baum but whose side is well represented here through his numerous television interviews and company videos—tells a reporter who asks about it that to some people $1,000 a year in extra money is a lot. "This is what these elitists don't get," he declares. "Most people came in for part-time income." Did they? Really? When the lure of the company, repeated over and over in recruitment materials, is that you’ll be able to make a livelihood from your own business? The fact that many people lose tens of thousands of dollars, sometimes their life savings, doesn’t seem to bother Johnson in the least. Distributors almost inevitably run out of people to recruit and can't sell the product. But with the constant churn and turnover, the ones at the top of the pyramid always make money. Keep runs the math: In order for anyone to make money, 95% of those recruited cannot. Yet one executive tells Univision News that with Herbalife, "it's impossible to lose money."

The documentary shows how Herbalife goes after unsophisticated people and immigrants, Hispanics in particular. Julie Contreras, an activist, leads a group of Chicago Hispanics who travel to Los Angeles, where attorney Douglas Brooks hopes to convince a judge not to accept a settlement in which aggrieved former Herbalife distributors will each receive a pittance. Yet while the documentary makes his case seem cut-and-dried, the judge allows the settlement to go through anyway. The fact that filmmaker Baum doesn’t give us the judge’s reasoning is troubling, since perhaps the issue isn’t as black-and-white as the documentary makes it seems.

Which isn’t to say Herbalife is an innocent: The film’s coda tells us of changes the company has had to make following charges levied by the Federal Trade Commission in July 2016. Six months later, too late for the documentary, the FTC announced it had collected $200 million from Herbalife for nearly 350,000 people, who would receive $100 to $500 each—a small amount, given how much money unsophisticated distributors spent for inventory, but more than the California court’s settlement.

Despite a couple of shortcomings, most notably cheesy graphics and an overbearing score that scream “reality show” rather than “serious and responsible financial documentary,” Betting on Zero is an interesting look at financial machinations most of us never know about—and fair warning not to get involved with Herbalife.

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