Two weeks ago the big news was Herbalife’s earnings call, and questions asked by David Einhorn. Stephen Gandel, senior editor at Fortune Magazine wrote a great article on the Herbalife questions and their significance. I was quoted relative to the issues of distributors and recruiting:

It’s not clear Einhorn has already placed his bets against Herbalife, but it seems likely he would do so before tipping his hand, even slightly. Einhorn only asked three questions on the conference call, so it’s not clear why he thinks the company’s shares will fall. But Tracy Coenen, a forensic accountant, who has been following Herbalife for a few years, says that from Einhorn’s questions it appears he is concerned about Herbalife’s growth.

Herbalife’s business model is similar to Avon. It sells its products in bulk to individuals who then resell the products to other people. Herbalife “salespeople” can also make money recruiting others to sell Herbalife products. Coenen says that most companies like Herbalife lose 60%-90% of their sales people a year. So the business model is based on constant recruitment.

Recently, Herbalife stopped disclosing how many of its salespeople solely make their money from recruitment, something it traditionally told investors. On the conference call, Einhorn asked why it had changed its policy. The company’s CEO responded that he and the other executives didn’t think it was a valuable metric. But after the conference call, the company disclosed on its website that its percentage of salepeople who were recruiters had dropped to 12%. That number was in the 20s a few years ago.

“Herbalife’s growth is slowing, if not stopped all together,” says Coenen. “I think Einhorn knows a lot more about this company than he is letting on.”