The attack raises two important questions for society. One is: Is he right about Herbalife being a pyramid scheme? That’s important because if he is, all but a handful of companies in the now $34.5 billion MLM industry, affecting 18 million distributors, are almost certainly pyramid schemes as well. ... The second and perhaps bigger question is: What if Ackman is wrong? One man’s dragon slayer is another man’s vigilante. Herbalife has had to spend almost $90 million defending against Ackman’s attack so far, according to its SEC filings, while its executives, employees, and distributors have all been villainized, if not defamed. While activist investing was already controversial, Ackman has taken it into new terrain. Is it sound public policy to have freelance, for-profit billionaire regulators roaming the landscape, no matter how well-intentioned? ... There is no federal statute defining “pyramid scheme.” For years MLM critics have begged the FTC to draw some bright-line rules—but in vain. Such schemes are usually prosecuted by the FTC as an “unfair or deceptive act or practice.” If an MLM or its distributors have merely made some misleading claims, the FTC may fine the company and let it live to see another day. But if the commission finds that an MLM is a pyramid scheme—which is considered inherently deceptive—it must shut it down. ... The best definition of pyramid scheme emerged from a 1975 case in which the FTC shuttered a cosmetics marketer called Koscot Interplanetary. The key feature is that a pyramid scheme pays its distributors rewards “for recruiting other participants into the program … which are unrelated to sale of the product to ultimate users.” ... Few MLMs are so foolish as to do that. Instead, they typically pay a distributor—as Herbalife does—based on the products he orders, and on the products ordered by his first three levels of recruits, i.e., his direct recruits, his recruits’ recruits, and his recruits’ recruits’ recruits. ... While judges and economists have proposed other definitions, most boil down to this: The more genuine a company’s product, and the more genuine the consumer demand for it, the less likely it is that the company is a pyramid scheme.
The device, which costs about $40,000, is called a spectrum analyzer. And for years Dooley, a consultant and self-appointed expert who left college after a year, has been measuring and recording wireless data traffic—the billions of transmissions that travel back and forth from smartphones and laptops to cell towers, routers, and other Internet connections. If you’re checking Facebook on your iPhone and Dooley is nearby, his machine will see it and light up. And if hordes of people are posting pictures to Instagram and streaming Netflix videos all around him, the display on Dooley’s machine will turn bright red. Dooley takes the readings to track which parts of the electromagnetic spectrum—the frequencies that carry everything from radio signals to X-rays—are degrading from overuse. He likes to think of himself as a “21st-century version of a land surveyor.” ... What Dooley’s machine is telling him now is this: Wi-Fi is headed for a collapse. The preferred Internet connection for most users is quickly becoming overcrowded, he argues, and could soon be overwhelmed. ... According to Cisco, the amount of data transmitted via Wi-Fi is projected to nearly triple in the next four years. The problem, says Dooley, is that the signals from all our wired devices are increasingly beginning to bump into one another, causing performance to suffer. ... a growing chorus of critics say that Globalstar’s warnings about a Wi-Fi apocalypse are completely unfounded—and that its plan, rather than fixing spectrum congestion, would actually make the situation much worse.