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Herbalife to restructure after settlement of pyramid scheme allegations

Herbalife to restructure after settlement of pyramid scheme allegations
July 17, 2016

Global nutritional supplement company Herbalife will pay a US$200 million fine and restructure its business as a result of a US Federal Trade Commission (FTC) finding that it undertook “unfair and deceptive practices” in its business.

The FTC called the settlement a “significant law enforcement action,” but the multi-level marketing company claimed it as a victory in its fight against claims it was operating a pyramid-style scheme.

The agreement allows the company to avoid being charged with operating a pyramid scheme and facing a forced shutdown.

The settlement caps a two-year FTC investigation of the company's operating structure instigated by billionaire hedge fund operator William Ackman, who alleged the company's operating system was improper.

Under the settlement, Herbalife must get rid of incentives that reward distributors primarily for recruiting. The new compensation structure would depend on whether participants sell Herbalife products, not on whether they buy.

The legal complaint the FTC filed said Herbalife focused not on retail sales of its nutritional, diet and personal care products but rather on bringing in hundreds of thousands of new sales people who were deceived into believing they could reap big profits by selling its merchandise.

The newcomers, alternately titled distributors or members by Herbalife, were encouraged to recruit others with promises they would profit from a share of the products sold to those they they brought in, the complaint charged.

The company offered new participants a dream, promoted by videos in English and Spanish that featured testimonials in which some Herbalife distributors boasted of earning thousands of dollars a month, while a few proclaimed million-dollar profits, the complaint alleged.

However, the FTC determined that more than half of the company's sales leaders received less than US$300 in reward payments during 2014. Owners of Herbalife's Nutrition Club brand invested an average of US$8,500 to launch their operation, but 57% broke even or lost money, according to an internal survey found by the FTC.

FTC Chairwoman Edith Ramirez said Herbalife’s claims of participants were “an illusion", stating “Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”

The Australian Competition and Consumer Commission explains pyramid schemes on its Scamwatch page at www.scamwatch.gov.au/types-of-scams/jobs-investment/pyramid-schemes

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