Herbalife Charged with Fraudulent Marketing,
Hyped Stock, Phony "Leads" Scheme, Health Risks (Update: Herbalife President Resigns for Faking a College Degree)
April, 2007
Herbalife, one of the oldest and largest America-based multi-level marketing schemes is, once again, charged with fraud and deception. The charges target the scheme's business model, its recruitment practices, its legality and potential health risks of its products. Herbalife promotes weight loss herbs and markets its products by selling "distributorships" in a multi-level marketing model.
Fraud Discovery Institute, headed by famed fraud investigator Barry Minkow, has published a detailed list of deceptions that Herbalife perpetrates in its marketing program. These include lack of retail sales, top-loaded pay plan in which 85% of all commissions are transferred to less than 1% of distributors at the top, and financial losses suffered by 99% of the rest of the distributors. The report characterizes Herbalife as a pyramid recruitment scam that has reached global saturation.
Operating on the theory that where much deception exists, still more can always be found, Fraud Discovery Institute inquired into the credentials of Herbalife's president and publicized the findings. On May 2, the Wall Street Journal reported, "Gregory Probert, the president and chief operating officer of Herbalife Ltd., lost his job after acknowledging he claimed a fake master's degree in corporate filings."
The Fraud Discovery Institute report, titled "Doomed by Design," reveals that Herbalife has no sustainable customer base but operates primarily by luring consumers to buy products as part of an investment in a "business opportunity". The business investment opportunity is false, according to the report. In fact, 80% of all Herbalife distributors quit the scheme within one year. Herbalife is noted for its front end charges of more than $3,000 to become a "Supervisor". Only Supervisors are eligible for payments gained through endless chain recruiting. 60% of the Supervisors quit Herbalife within a year. The average payment to the Supervisors is just $10.55 a week. Herbalife must replace all the dropouts each year.
Additionally, the Fraud Discovery report includes audio and video evidence of Herbalife engaging in illegal recruitment practices in China. Herbalife recruitment has declined in key countries such as Brazil, Mexico, Japan and Germany. Herbalife is claiming it will grow in China. However, multi-level recruiting is illegal in China. The fraud report shows that Herbalife upliners are still recruiting in China. Herbalife's sales in China are minimal - about 3% of total revenue – but Herbalife promoters claim that recruiting will soar there.
European regulators are now also raising questions about the safety of Herbalife's "health" products. The Spanish Ministry of Health and Consumer Affairs is investigating "possible links between the dietary products and liver toxicity." In addition to Spain, similar cases have been reported from other EU countries and in Iceland, Switzerland and Israel, according to news in Spain.
The charges of business fraud are not new. A recently certified class action lawsuit against Herbalife and several of its marketing groups makes many of the same charges now leveled against Herbalife – operating an "endless chain" in violation of California law, and causing widespread losses to consumers who are lured by the unproven health claims and false income promises.
The class action case against Herbalife addresses one other area of fraud accusations – the collaboration of Herbalife with infamous "lead generation" schemes. The lawsuit charges that Herbalife distributors not only are lured into a pyramid recruitment scheme but are also induced to purchase thousands of dollars in basically worthless sales "leads" which they are told they will need to "succeed." (99% of all Herbalife distributors never earn a profit.)
A similar 2004 case against Herbalife was settled several years ago with millions paid back to consumers in restitution. The case documented the lead scheme – mostly unknown to distributors and shareholders – that enriches some Herbalife's upliners and further impoverishes the recruits.
Charges of fraud and health risks against Herbalife go back to the 1980's. An ABC Evening News report, April 22, 1985 hosted by Peter Jennings detailed controversy over Herbalife diet products and pyramiding sales structure. The health risk issues centered around Dr. Richard Marconi who promoted Herbalife products. It was revealed that Marconi received his Ph.D. through a mail order course from an unaccredited school. In that report other nutritionists described Herbalife products as primarily laxatives and diuretics with potential of potassium deprivation.
