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Federal Judge Rules: Test Accusation that Herbalife is a Pyramid Scheme in a Trial

October 2009

A federal judge has ruled that accusations by former top level Herbalife distributors that the MLM, Herbalife International, is an illegal pyramid scheme are worthy of a trial. A trial of Herbalife's legality is expected in the near future.

Herbalife had sought to have the charges dismissed. The ruling is a huge legal setback for the MLM. The outcome could be devastating for Herbalife and the entire MLM industry.

Herbalife is one of the largest and oldest MLMs, a steadfast member of the Direct Selling Association. If Herbalife were found to be a pyramid scheme by a jury, most members of the DSA would be in serious legal jeopardy.

If ever an MLM fit the picture of a "product-based pyramid scheme" it is Herbalife:

  • Herbalife charges consumers to join the pyramid pay plan. To become a "supervisor", the distributors who are the active recruiters, a consumer must buy nearly $4,000 of company products within a two month period. The requirement for a large inventory purchase is the pyramid investment.
  • To recoup their investments, new recruits are paid to expand the pyramid – in an endless chain. The only feasible way for a new "supervisor" to make money in Herbalife is to recruit new supervisors. Pyramid recruitment is the foundation of Herbalife's business.
  • Herbalife pays the most to those who recruit the most. The compensation plan pays more and more the higher one rises on the pyramid, with recruiting being the only way to rise.
  • Money is transferred from "last ones in" to those at the top (who got in early). 85% of all Commissions paid out by Herbalife are transferred to less than 1% (0.76%) of Herbalife distributors positioned at the top of the pyramid.
  • There is no "external revenue source". Herbalife is a "closed" market. It's sales people are the only buyers and sellers, and the prices are fixed by Herbalife. Virtually all the money that Herbalife pays in "commissions" comes from the investments of the latest investors (newly recruited distributors). Anecdotally, salespeople report that little product is ever retailed. The business is based on inducing investments from the sales people.
  • The pyramid operates in a state of "continuous collapse." Each year, it wipes out the investments of the great majority and then rebuilds its base with new investors (recruits), year after year. New recruits are doomed from the start.
  • 60% of all "supervisors" quit the scheme as "failures" each year, after suffering financial loss. 90% of the non-supervisor (those who make a lower initial investment) quit within a year. Overall, 80% of all Herbalife salespeople quit the scheme each year.
  • The bottom 88% of the distributors gain no commissions at all.
  • The bottom 99% (99.24%) of all Herbalife sales representatives earn a mean average income of $1.65 p. wk. before all business expenses and inventory purchases are deducted.

Relevant Information:

  • Expert Report: Analysis of Herbalife Business Model, Practices, Compensation and Shareholder Disclosures
  • Counter-Claim by Former High Level Distributors against Herbalife
  • Federal Judge's Ruling that Distributor's Charge that Herbalife Is a Pyramid Scheme is "Triable"
  • News Article on Pyramid Scheme Charges Made by former Top Level Distributors
This page last updated on 10/11/09