A New Burst Of Life

A Dragged-Down Bond Becomes An Opportunity

Cutting Debt Will Lead To Increased Profits

Welcome to Porter & Co. Distressed Investing, edited by Wall Street’s Dean of High Yield, Martin Fridson.  To learn how distressed investments like this one help us take advantage of “The Greatest Legal Transfer of Wealth in History,” see the complete Guide to Distressed Investing on our Reports page. In addition to hosting Distressed Investing on our website, we also make it available as a downloadable PDF on the Issues & Updates page here.

Carl Rehnborg had had 27 consecutive years of bad luck.

He could pinpoint the exact moment the streak started. It was the day he stepped off a train in Seattle, Washington, in 1913, eager to board a ship and dig for gold in Alaska… only to discover that the Alaskan Gold Rush was officially over. On the train platform, Carl encountered a crowd of discouraged, homeward-bound prospectors who told the young college dropout he should go home, too.

Maybe Carl’s bad luck would have ended there if he’d taken their advice.

Instead, in an abrupt career shift, he decided he’d travel to China to become a Carnation canned condensed milk salesman. He’d heard rumors that no one drank milk there, suggesting that perhaps the country was the perfect untapped market. That plan, however, fell apart when he got there and found out that most Chinese people avoided milk because of a genetic lactose intolerance.

Hastily, he pivoted business plans again, sank all his capital into Colgate toothpaste, and prepared to market his inventory to the Chinese… just in time to get chased out of the country with other “foreign devils” during China’s 1920s civil war. He escaped with his life, but without his toothpaste (or money).

Back stateside – broke, and with one failed marriage under his belt – Carl stepped into the middle of the latest American craze: the “vitamania” of the 1930s and ‘40s.

First discovered by a Polish scientist who’d isolated compounds in rice that fought thiamine-deficiency syndrome, vitamins and food supplements (many of them of dubious health benefit) were all the rage among health-conscious consumers – with the vitamin market growing from $12 million to $83 million a year (in 1930s dollars) between 1931 and 1939. By 1943, that number was up to $180 million, and one in every four Americans was taking a vitamin pill to boost hair growth, cure the jitters, or just get a little more pep in their step.  

For many fortune-seekers, the gloriously unregulated vitamin business was a fast track to a mansion with an inground pool… unless, of course, your name was Carl Rehnborg…

In the mid-1930s, Carl settled in California, the health-nut, vitamin-crazy capital of the U.S., started a hygienic-sounding company called “Nutrilite” – and still couldn’t get it right. His product line of alfalfa-based laxatives and skin creams flopped, and his investors backed out. Eventually, his “lab equipment” dwindled to two picnic tables and two large milk cans – until it was destroyed in a freak fire, that is. All that was left was Carl’s recipe for alfalfa pills, and that wasn’t worth much on its own.

It was 1940. Bankrupt, living in a rented room, and now deserted by three wives in a row, Carl Rehnborg had hit rock bottom.

With nothing else to do, he decided he might as well go to a seminar based on motivational speaker Dale Carnegie’s best-selling book How To Win Friends And Influence People.

And that’s when, for the first time in 27 years, Carl got lucky.

Carnegie’s formula for popularity – described cynically by American author Sinclair Lewis as “how to smile and bob and pretend to be interested … precisely so that you may screw things out of [people]” – didn’t resonate much with Carl. But the seminar did help him “win a friend.”

And sometimes, one good friend is all you need.

After the conference, another attendee, small-time radio psychologist William S. Casselberry, struck up a conversation with Carl. Carl poured out his 27-year-long tale of woe, and his new friend perked up at the mention of the vitamin business. What Carl was missing, Casselberry explained, was the power of psychology. And Casselberry was willing to provide it. The shrink’s knowledge of the human psyche, coupled with Carl’s alfalfa pills, would surely bring in some long-overdue profits for Nutrilite.

Over the next five years, Casselberry and his buddy Lee Mytinger started handling sales for Nutrilite and eventually, took over the entire business. Perhaps sensing Rehnborg’s chronic bad luck, they convinced him to step into the background of his own company as a nutritional consultant. Together, Casselberry and Mytinger dreamed up an entirely new structure for Rehnborg’s vitamin business – a sales strategy they called, simply, “The Plan.”

Planned Ponzi-Hood?

The Plan was ingenious – and a little devilish – in its simplicity. 

It turned the standard pavement-pounding practice of door-to-door sales into something bigger, something that appealed especially to the American spirit of free enterprise. The Plan enabled a single salesman to recruit other salesmen to sell products, and then receive a commission from everything those people sold… and everything the people they recruited sold, and so on down the line, in an endless stream of lower-level salesmen – hence the term “multi-level marketing” (“MLM”). It was a kind of perpetual profit machine, with, of course, the people on the top profiting the most.

No one in the hitherto-straightforward business of direct sales had ever seen anything quite like The Plan. The U.S. Federal Trade Commission (“FTC”) and the Food And Drug Administration (“FDA”) were, naturally, skeptical.

To government regulators, the Plan seemed suspiciously close to the high-profile pyramid scheme developed in the early 1920s by swindler Charles Ponzi, who promised Boston investors a 100% return on a business venture where they’d buy discounted foreign stamps. In reality, there was no business opportunity – Ponzi just paid earlier investors (the top of the pyramid) with the money from later investors. When the scheme eventually unraveled, over $300 million (in today’s dollars) vanished, six Boston-area banks closed down, and Ponzi was sentenced to federal prison. To this day, the terms Ponzi and pyramid schemes are synonymous.

The U.S. government was – rightly – a little concerned that the Plan wasn’t really about selling vitamins, but about treating salespeople as products. A 1948 investigation – where the FDA raided Nutrilite labs and accused the company of misleading advertising, and of running a pyramid scheme – ended without a prosecution, but the criticism spurred Casselberry and Mytinger to fine-tune their strategy and differentiate it more clearly from Ponzi-world.

Over the next several decades, the MLM business structure flourished, with copycat companies like Avon, Tupperware, and Mary Kay Cosmetics springing up to take advantage of Nutrilite’s innovative Plan. One of these businesses, Amway, whose founders started as Nutrilite distributors, eventually grew so large and successful that in 1972 they bought a controlling interest in Nutrilite and added Carl’s alfalfa pills as a best-selling product line in Amway’s ever-expanding inventory… all sold, of course, according to the original Plan.

Rumblings from regulators continued – and the malcontent came to a head in 1975, when Amway (by then posting impressive sales of $250 million a year) found itself at the center of an FTC lawsuit accusing it of nefarious pyramid-scheme intent. 

After four years of investigation, though, the FTC admitted it had been wrong. Amway had three key features that kept it securely out of Ponzi territory.

These were the “10 retail customer policy,” which required that Amway sales representatives make at least 10 actual retail sales of their own before they qualified to receive commissions on sales from other reps in their downline; the “buyback policy,” which meant that Amway bought back unsold inventory and didn’t require reps to purchase it themselves; and, most notably, the “70% rule,” an ironclad requirement that reps sell 70% of their inventory before putting in a new order. This ensures that the business is focused primarily on selling product, not recruiting hapless minions.

These criteria, established in 1979 at the conclusion of FTC vs. Amway, and now known as the Amway Safeguards Rule, are still used today to distinguish a legitimate MLM business from a Ponzi scheme. It’s worthwhile to know these differentiators – because many people (especially those who’ve been hit up by an old “friend” pestering them to buy some overpriced leggings) lump all MLMs together as pyramid schemes, and that’s simply not correct.

I (Marty Fridson) worked for a legitimate MLM company in college, so I have personal experience in this field. I sold Webster’s Dictionaries and educational children’s books  door to door. After the first year I recruited other students and got a small override on their sales. So if I did a good job of training and managing them, they did well and I benefitted, too. Does that sound like a scam, or does it sound like the free-enterprise system? 

We sold real products to end customers and did not make money by recruiting distributors and selling stuff to them until they finally quit after having resold nothing.  That would be a pyramid scheme. 

The company whose bonds we are recommending in this issue is a legitimate MLM – one that meets the Amway Safeguards Rule above – and one that came off victorious in its own FTC investigation based on those criteria. Its triumph also left one billionaire short-seller, who doesn’t understand the difference between a Ponzi scheme and a MLM, with egg on his face – and a $1 billion hole in his portfolio.

It Sells Products In 95 Countries

The bond we are recommending was issued by a company that was the focus of an epic battle between two investment titans, which caused share-price volatility for some five years. Since that dispute ended more than five years ago, company performance has continued to be up and down – currently putting its share price and the price of its bond to levels below where we believe they should be, thus creating an opportunity to buy a bond with both a high yield and solid credit statistics at a very large discount to its face value. Specifically…

• Management has committed to applying its cash flow to reducing its debt even further
• It is priced at a roughly 28% discount from its face value
• Features an annual 15.6% yield 
• The company is asset light – most of its value comes from its salesforce – and generates annual free cash flow 
• Its total debt load is modest – less than 4x operating income in 2024