Barry Minkow And The Herbalife Fraud
In 2008 the Fraud Discovery Institute announced that they were investigating Herbalife in connection with a number of allegations surrounding the volume of lead in their products. They also revealed that an investigation into the biographies of Herbalife’s top executives had revealed that CFO Gregory Probert had falsified details regarding his university education. The allegations had the potential to be very damaging to the reputation of Herbalife, and undermine consumer confidence in both the company and their products.
But the Fraud Discovery Institute is an organisation shrouded in controversy itself. It is the brainchild of Barry Minkow, one of the most controversial figures in American financial history. Convicted of a string of offences including racketeering, embezzlement, tax evasion, and fraud, Minkow was sentenced to 26 years in prison and fined $26million in 1988. Even following his release after only 7 years inside, his involvement in stock shorting controversies has continued to see him labelled a crook. Yet Minkow is hailed by the FBI as being responsible for uncovering $1.8billion in frauds since his release, and many people see him as some kind of hero. So what is the truth behind Barry Minkow and the FDI? Are Herbalife running scared, or are they being set-up by a convicted con artist with an agenda? This article exposes the truth behind the Herbalife fraud allegations.
Barry Minkow, Con-Artist Extrordinaire
In They Thought For Themselves, written by Sid Roth in 1996, Barry Minkow admitted to a lifetime of fraudulent behaviour, starting at the age of just 9. He recalls how he falsified signatures whilst selling newspaper subscriptions, and how he stole a watch from his own grandmother to trade in for cash. This type of behaviour escalated, and by his teenage years he was faking robberies to claim insurance money for his fledgling company ZZZZ Best, and by his late teens and early twenties he was involved in financial deals with the Mafia, and massive bank-fraud, claiming loans for huge carpet restoration projects that did not exist. On top of this, he was also involved in credit card fraud, and it was this that would lead to his downfall.
Initially, however, Minkow got away with it on a staggering scale. His carpet cleaning company became a multi-million dollar enterprise, and Minkow became something of a celebrity figure due to the enormous success that it appeared he had achieved by the age of only 21. But the whole business was a sham. Minkow was securing massive bank loans by lying about fictitious restoration projects, which he secured large sums of money to complete, but instead used it to service debts to the Mafia. The company’s value was massively overestimated, as Minkow continued to gain money for a product which he wasn’t delivering. It was a form of pyramid selling at its worst and, like all pyramid schemes, it came crashing down around him all too soon.
The Fraudster Is Rumbled
Just days before ZZZZ Best, who were massively overvalued and hugely in debt, completed a take over of a rival firm which would have made them the largest carpet cleaning company in America, details of Minkow’s credit card fraud emerged in the newspapers. Banks immediately began calling in their loans, and since ZZZZ Best’s assets were largely fictitious, they had no means of paying them. Ever the conman, Minkow remained defiant until the end, telling lie after lie to try and cover his tracks and deflect the blame onto others. It didn’t work, and in 1988 Minkow was found guilty of all charges and sentenced to 26 years behind bars. The company collapsed under the weight of its unsustainable debt, and its thousands of employees, shareholders and creditors were left devastated. Minkow became one of the most notorious white-collar fraudsters in American criminal history.
Herbalife And The Fraud Discovery Institute
Minkow emerged from prison only 7 years later pertaining to be a changed man. He claimed to have found God, admitted to the error of his ways, and resolved to use his experiences for good. He founded the Fraud Discovery Institute in 2004, and according to the FBI he has been responsible for uncovering $1.8billion of fraud.
It is not surprising, then, that when Minkow and the FDI published allegations about Herbalife in 2008, they were treated very seriously. Minkow alleged that Herbalife products contained a dangerous and illegal amount of lead, and that they could potentially be harmful to the health of their users. Further, he hired private investigators to examine the company biographies of Herbalife Executives, with startling results. It emerged that CFO Gregory Probert had invented the fact that he had a Masters of Business Administration degree from California State University. In reality, it was revealed, he had dropped out before completing the qualification. These allegations were confirmed by Probert himself, and he resigned his position as a result.
The allegations about the volume of lead in the products, however, were much more controversial. Herbalife vigorously denied any wrongdoing, and independent tests backed them up. Under the overwhelming threat of legal action, Minkow was forced to release a statement retracting his allegations, and praising Herbalife for the quality of their products and the extensiveness of their scientific research. His allegations were further undermined by the revelations that Minkow was involved in shorting Herbalife stock, whereby it was claimed that he was deliberately undermining the shares in order to buy them at a lower price, knowing that they would rise again in future and he would cash in. Minkow’s campaign against Herbalife began to look more and more like a concerted vendetta. There is a danger that Minkow, in an attempt to make up for the errors in his past, is trying too hard to accuse others of things they simply are not doing, and seeing things which just are not there.
Can Barry Minkow Be Trusted?
There are also question marks over the extent to which Minkow really changed during his time in prison. He is on record as saying that the motivating factor behind his original crimes was ‘recognition’ which, he claimed was like ‘a drug in my vein’. ‘Once I tasted recognition’, he said, ‘I was hooked. I got addicted to it’. To the impartial observer, however, Minkow’s desire for recognition seems as strong as ever. In a number of TV appearances since his release, Minkow appears to thrive in front of the camera. He speaks with enthusiasm and verve, and often seems to revel in his past, in the sense that he doesn’t regret it because it has made him what he is today. On top of this, his Fraud Discovery Institute often seems to be used as a vehicle of self promotion, and for getting his name in the media again, rather than as a way of repaying his debt to society. Further, Minkow’s open involvement in stock shorting suggests his desire for wealth at all costs is as strong as ever, and casts serious doubt on the reliability of any of the claims the FDI make. Minkow, in his defence, claims that the FBI are fully aware of his activities, and that he is committing no offence.
Michael O Johnson And The Fraud Discovery Institute
Under Michael O Johnson, Herbalife have taken major steps to improve the image of the company, and Minkow’s retraction and apology is testament to how strong the faith in the Herbalife product currently is. Herbalife Nutritional And Scientific Advisory Board, headed up by Nobel Prize Winning Scientist Louis Ignarro, is ‘continually striving for improvement’, in the words of the FDI themselves. All independent tests carried out on the products show the levels of lead to be within current guidelines, and not dangerous to anyone’s health.
The Truth About The Herbalife Scam
So what do Minkow’s allegations mean for Herbalife? Well, as Jim Cramer pointed out, Herbalife continue to exceed all expectations on the New York Stock Exchange, and world class athletes continue to take pride in being associated with the products. There is no doubt, then, that Barry Minkow and the Fraud Discovery Institute’s allegations are not to be taken too seriously. Whether Minkow really is a reformed character or not is not for me to say, but his vested interest in devaluing Herbalife shares means he must be treated with suspicion and caution. His specific criticisms regarding lead have been retracted and dismissed.
If you a customer or a distributor you can rest assured that the Herbalife products are safe.
If you would like to find out the truth about more of Herbalife’s controversies, then read Herbalife And Mark Hughes – A Success Story?