Herbalife a “pyramid scheme”?

Posted 31 December 2012

From: Consumer Health Digest #12-46, December 27, 2012

Herbalife attached as “pyramid scheme”  

Billionaire hedge fund investor Bill Ackman has mounted an attack on Herbalife that he apparently hopes will drive it out of business. The attack was launched with a 3-1/2 hour presentation at the Sohn Conference Special Event on December 20th. During his presentation, Ackman noted: 

  • Herbalife recruits unwitting “distributors” with the promise they can achieve lofty incomes. However, fewer than 1 in 1,000 do so. 
  • Herbalife’s products are overpriced but sell because they are bundled with a perceived business opportunity. However, the vast majority of new distributors make nothing. 
  • Herbalife is a pyramid scheme because its participants obtain their monetary benefits primarily from recruitment rather than the sale of goods to consumers.  

Ackman began short-selling as his report was compiled and says that he has short-sold more than 20 million shares. (A short sale is a market transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal number of shares at some point in the future. Short sellers will gain if the stock price goes down and lose if it rises.) Ackman has pledged to donate any personal profits to charity. Herbalife’s price plummeted after Ackman’s presentation but has rebounded slightly in the past few days.  

Pershing Square Capital Management, L.P., which Ackman heads, has launched FactsAboutHerbalife.com, which contains Herbalife distributor presentations, recruiting scripts and presentations, distributor lifestyle videos, third-party investigative reports, Herbalife Today magazines, court hearing and deposition transcripts, archival video and other materials on the company’s history, lead generation systems, SEC correspondence, and other data to help the public understand the facts about Herbalife. The most significant items are the video of Ackman’s presentation, the PowerPoint slides from the presentation, and the 4-part CNN investigation that decimated Herbalife sales in 1985.

5 Responses to Herbalife a “pyramid scheme”?

  1. Roy 9 January, 2013 at 8:28 am #

    It is interesting that Herbalife is a member of the Health Products Association of SA (HPA) (http://www.hpasa.co.za/) and is described under “Member Company Profiles” on the HPA website as: [comments in square brackets inserted]

    HERBALIFE INTERNATIONAL
    http://www.herbalife.com/
    For more than a quarter of a century, Herbalife has built upon the mission of founder Mark Hughes to improve the health and financial well-being of people around the world. [Mark Hughes died in 2000 at age 44 of an apparent accidental alcohol overdose.] Herbalife is a premier nutrition and weight management company that offers life-changing products and business opportunity. The Herbalife mission is to change people’s lives by providing the best business opportunities in direct selling and the best nutrition and weight management products in the world. These quality products combine the best of science and nature for a lifetime of good health. [Is there evidence for this statement?] Herbalife has become a world-class company with over 1,5 million independent distributors in over 60 countries on six continents. [But is it actually a “pyramid scheme” as claimed by Bill Ackman?]

    In its “Code of Practice” the HPA states that “Members shall not engage in any practice that the [HPA] Council may from time to time designate as undesirable.”

    Would the HPA Council consider a pyramid scheme as an undesirable practice?

  2. G 6 October, 2017 at 1:22 am #

    You can blast Herbalife if you like…I dont care. But you give the impression of guiding consumers & yet it is clear from your writing that you are uninformed as to what a pyramid scheme is. A pyramid scheme is one where money changes hands, in return for zero consideration. That is, you get nothing in return.

    Furthermore, pyramids are illegal and should be reported to the commercial crimes unit. Why not report this Herbalife company & let the police explain the difference between network marketing & a pyramid scheme to you.

    Many articles I have read on this site are clearly biased and one-sided. You are not putting us in a position to make an informed decision, but rather offering your biases and opinions.

    Maybe its pure opinion/preference or maybe you are getting paid to favor or bash products. I don’t know.

    But please in future do proper research and give useful information instead of gossip which is misleading, not to mention distasteful.

    I think the next scam you should be writing about is your own poorly researched, biased articles masquerading as “consumer guidance.”

    • Harris 6 October, 2017 at 7:10 am #

      @G
      Maybe YOU should “in future do proper research and give useful information instead of gossip which is misleading”

      FTC Sends Checks to Nearly 350,000 Victims of Herbalife’s Multi-Level Marketing Scheme January 10, 2017
      (FTC = USA Federal Trade Commission)
      The Federal Trade Commission is mailing checks to nearly 350,000 people who lost money running Herbalife businesses. The checks are the result of a July 2016 settlement with the FTC that required Herbalife to pay $200 million and fundamentally restructure its business. This represents one of the largest redress distributions the agency has made in any consumer protection action to date.

      Herbalife Paid a $200 Million Fine. Fortune Magazine Feb 2nd, 2017
      It was the final outcome in the FTC’s lengthy battle with Herbalife, which in July agreed to pay $200 million in a controversial settlement. And it was supposed to be a great victory for the hedge fund manager Bill Ackman, who had poured $1 billion into a bet against Herbalife stock and long argued that Herbalife was scamming immigrants into loading up on weight-loss shakes they’d never be able to sell at a profit.

      Herbalife dodges ‘pyramid scheme’ label and agrees to pay $200m fine
      The Guardian
      The regulator’s chairwoman, Edith Ramirez, said the FTC had stopped short of branding Herbalife’s tactics a “pyramid scheme” or shutting its operations down, opting for the less severe “unfairness” charge.

      The Real Winners and Losers in the Herbalife-Bill Ackman War
      Fortune Magazine
      In the bitter short-selling war that is Bill Ackman vs. Herbalife, both sides declared themselves victorious. Of course, that can’t possibly be the case. On Friday, the Federal Trade Commission closed its pyramid-scheme investigation into Herbalife by handing it a $200 million settlement fine, but not actually declaring it a pyramid scheme.

    • Harris 6 October, 2017 at 7:30 am #

      @G
      “Many articles I have read on this site are clearly biased and one-sided. You are not putting us in a position to make an informed decision, but rather offering your biases and opinions.”

      In some cases, articles may appear to support your argument. However, one of the constant threads of discussion is whether one should give a scam’s point of view. For example, the argument is that those who claim that vaccination is bad for you, when the overwhelming evidence is that it is not, should not be given airtime. I concur.

  3. Steve 2 December, 2017 at 7:55 pm #

    For me it seems clear there needs to be a proper and authoritative definition of a pyramid scheme. This will solve a lot of issues around this seemingly endless debate where authorities seem just as lost as anyone else.

    Then the question needs to be asked : is there any difference between a pyramid scheme and a Ponzi scheme and if so what is it?

    Some people say that a pyramid scheme is where the people at the top make most of the money or when you draw it out it is shaped like a pyramid.

    Welcome to the corporate structure organogram and compensation which is always a pyramid with the CEO and direct subordinates make considerably more than anyone else.

    Also these positions are not available to the vast majority of the employees even if they work at the company for a lifetime.

    Your position , even that of the CEO can also be terminated at the drop of a hat together with the income because it is completely linked to your active hour to hour occupation in the position.

    I am sure many didn’t realize there were so many pyramid schemes out there, with your employer, bank, church and sports club included.

    Then there is network marketing which is a better description in my view than multi level marketing because a corporation is, as I have just demonstrated, also multi level.

    There are major differences between various network marketing companies just as there are between corporations and it definitely not a one size fits all environment. So may be the question that should be asked is what is the fundamental characteristics that a proper network marketing company should have just as there are fundamentals that corporations have and realizing that in both network marketing and in corporations there will always be those that masquerade as the real thing but lack the complete fundamental requirements.

    This is called misrepresentation and is at the crux of many cases , corporate and otherwise. It is certainly not unique to the network marketing environment. There is good and bad in everything , from medicine to business to religious organizations to child care.

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