By Cara Kenefick
When Robert, a Connecticut resident who requested his last name be withheld for reasons of privacy, heard an ad for the opportunity to sell Herbalife products on a local radio station, it sounded like a life-changing opportunity. Becoming a nutritional supplement distributor was the key to become an self-made businessman, and Herbalife appeared to pave the way.
Right away, Robert signed up to be an independent Herbalife distributor. He experienced little success throughout his attempt to sell the products, and he claims to have lost thousands of dollars since February of 2012. Looking back on his experience, he advised others to learn from his mistakes.
After investing a significant amount of money and time, he said he began to think Herbalife was the only one making money, as the company seemed to prioritize chasing recruiting leads rather than pushing sales.
According to Robert, Herbalife’s message was “a lot of emphasis on recruiting. . . about 80 percent recruiting, 20 percent selling.”
Now, investment adviser Pershing Square Capital Management has brought allegations against the Los Angeles-based business’s practices, accusing them of operating a non-sustainable pyramid scheme that emphasizes recruitment over sales, as well as preying on vulnerable members of the Latino community. They have requested the Federal Trade Commission launch an investigation and have encouraged other business leaders to do the same.
Pershing Square stated it identified several red flags against the company in a report published in December 2012 following an 18-month investigation, which details their allegations that Herbalife had violated federal and state consumer protection and anti-pyramiding laws.
A few Latino and consumer organizations have taken notice of the allegations, and to date, the Hispanic Federation President Jose Calderon and Sally Greenberg, Executive Director of the National Consumer League, have sent letters to the FTC petitioning them to investigate . Calderon wrote, “A particular concern to us about Herbalife is whether distributors make money selling products or recruiting others to sell products. The latter is an indicator of a pyramid scheme .” The letter goes on to say that, while many multi-level marketing companies are legitimate businesses that provide “a real opportunity to move forward” and the chance to “earn a decent living” for new immigrants and other Latinos, the federation has “serious concerns about [Herbalife’s] business practices.”
Similarly, Greenberg wrote that after meeting with representatives from Pershing Square, the Direct Selling Association and Herbalife, her organization believes that only the FTC “has the resources and expertise to investigate these claims and determine whether Herbalife is, in fact, an illegal pyramid scheme rather than a legitimate multi-level marketing business.” She goes on to say, “the practices in question include overstating the likely income distributors will earn, requiring distributors to recruit new members to secure a return on investment, failure to disclose accurate profits earned by top distributors and maintaining an ‘extremely difficult’ buyback process for unsold merchandise.”
According to a July 16 news story by the NY Post, a member of the FTC called Herbalife’s practices “disturbing” and told consumer activists that the commission was “looking into” the company, but did not reveal whether they were launching a full-scale investigation.
In Connecticut, Pershing Square is working to prompt a similar look into Herbalife’s practices with the Office of the CT Attorney General. In the past week, officials said the office received one complaint about Herbalife, as well as a letter to the Federal Trade Commission from Waterbury mayor Neil M. O’Leary about the company.
“We will be following up on the complaint we received and determining the best course of action,” Jaclyn M. Falkowski, Executive Assistant for Press and Communications in the Office of the Attorney General said in an email.
Pershing’s interest in the matter is explained on “Facts About Herbalife”, a website hosting information compiled by Pershing Square on Herbalife. It states, Pershing Square “currently maintains a substantial short position in the common stock of Herbalife Ltd… Pershing Square will profit if the trading price declines for common shares of Herbalife and will lose money if the trading price increases for common shares of Herbalife.”
Buying the Herbalife Dream
Even though he already had a full-time job, Robert viewed Herbalife as a way to supplement his income by becoming a distributor. Shortly after hearing the ad, he signed up on the company website, and according to Robert, he soon received a phone call from a “mentor”, another distributor, who Robert says told him he would help him grow his business and sales. As a part of the Herbalife business model, mentors also earn a percentage of their recruits’ sales.
Boxes of Herbalife products came in the mail as a part of his start-up package and Robert hit the ground running. He did not expect the boxes to remain full for months. A year and a half later, he has lost thousands of dollars and is now trying to move his product the only way he knows how – selling Herbalife at a discounted rate on Ebay. Overall, he said he had spent between $5,000 to $6,000 of his savings on start-up fees, products, leads and shipping costs that he will never be able to make back.
Despite using Herbalife products himself to be an example for his consumers, he said he had difficulty making sales and landing leads to recruit new distributors. Meanwhile, his mentor had left Herbalife and in retrospect, Robert added, Herbalife seemed to be more interested in him recruiting new distributors than making sales.
He recalled receiving emails encouraging him to buy leads with the promise of receiving more for free. By the end of his dealings with Herbalife, he had purchased 15 training packs which contained the leads for potential recruits at $129 each, costing him nearly $2,000. Shipping cost him an additional $150 out of pocket expense. “They encourage you to buy 15 or 30 training pack leads a month, and they’re expensive,” he said.
For Robert, the struggle was outweighed by the draw of the independence that came with being his own boss. “I figured, no risk, no gain, and if I didn’t take a chance I wouldn’t get anywhere and I’d just be stuck in my other job,” he said, explaining why he ignored initial gut feelings against Herbalife.
According to a Herbalife company statement sent to CTLatinoNews.com, the profits made from retail sales are not paid by the company to the distributor. Instead, retail profits are made when distributors mark-up the products. They also strongly asserted that “the majority” of their distributors do not make their profits through the people they recruit.
The statement goes on to state, “As we have reported, Lieberman Research found that over 70% of former distributors said that they joined to be able to purchase products at a discount for their own use.”
Herbalife officials do say that for distributors who have successful recruits, they receive a five percent royalty of the suggested retail price, which carries on down three levels of recruits.
While Robert tried to sign up a couple of people as distributors, they never ended up doing business, he recalled. “I should’ve called the Better Business Bureau right away,” he said. “I think they should be exposed, obviously it’s not right to take advantage of people. . .”
Robert is Italian, but he said many people mistake his last name for a Hispanic one, and that he believes Herbalife could be targeting Latinos. Several of his leads seemed to be Hispanic as well, he said.
While working as a distributor for Herbalife, Robert lost his full-time warehouse job when it shut down and laid off all its employees. Herbalife has not been enough to sustain him and he is currently surviving on unemployment.
Looking back on his experience, Robert said he would not encourage anyone to become involved with Herbalife, and he would like to sell his remaining product inventory and move on.
“I thought it might be an opportunity, I thought I might get lucky and build a business, be able to work for myself and build a better life,” he said, reflecting on his experience with the company. “I’m not looking to be a millionaire, just a better life.”
Herbalife fires back against accusations
Marco Gonzales, North America’s Senior Director of Corporate Communications for Herbalife, did not mince words in his response to Pershing Square’s allegations of operating a pyramid scheme and maliciously targeting Latinos, calling them “absurd” and “ludicrous.”
According to Gonzales, Herbalife is not operating a pyramid scheme and Pershing Square’s claims that the company is are “false allegations”. “We do not pay our distributors to recruit distributors. . . Pyramid schemes exhaust the market. We have a strong consumer base.”
If distributors do gain recruits by sharing their success stories and inspire others to sell Herbalife products, they do so on their own accord, Gonzales said, adding that distributors are “not encouraged and they do that on their own.”
For those who do gain recruits, distributors will gain a percentage of their sales, with a chain going down only three levels, Gonzalez explained. He countered the claims, saying that the company sells products that are of value to their consumers and are a sustainable business model, unlike pyramid schemes.