Herbalife said it “welcomes the inquiry given the tremendous amount of misinformation in the marketplace,” and said it would fully cooperate with the investigation.
The critics bluntly say it is a well conceived “pyramid” scheme. Pyramids are a multi level marketing strategy whereby employee’s compensation depends more on personnel recruitment and additional distributors for the company rather than the sale of the company’s products. Generally you have to pay a “startup” fee to go into business for yourself selling Herba products and the person who brought you in gets a piece of the fee and every subsequent fee attached to that tree of distributor signups.
Herbalife denies this is their intention and strongly contends that their business practices are fully compliant with both State and Federal regulations. This did not stop billionaire activist investor Bill Ackman from going short Herbalife stock to the tune of $1 billion dollars. Ackman’s accusations put pressure on Herba’s stock and within a short time he would have been $300 million ahead had he closed the position. Ackman instead gambled the stock would fall more but was hemorrhaging millions when investor Carl Icahn stepped in to the buy the stock as did George Soros and Post Holdings CEO William Stiritz.
Herbalife has had their share of critics and controversy through the years. On the products side, in 2004 Israel’s Health Minister began an investigation against Herbalife’s products after four persons using Herbalife’s products were found to have liver problems. Herbalife’s products were accused of containing toxic ingredients such as Qua-qua, Kompri, and Kraska. In 2009, an Israeli woman sued Herbalife International and Herbalife Israel, claiming that her liver damage resulted from the use of Herbalife products.
The products were sent to Israel’s Forensic research laboratory. The company issued a press release stating that the Israeli government, and scientists working with Herbalife, were unable to establish a link between the product and the eight cases of liver damage. A study of the cases funded by the Israeli Ministry of Health nonetheless concluded that the evidence, including the temporal association between exposure to Herbalife products and the development of liver injury, the negative evaluation of other potential causes of liver injury, the normalization of liver function when Herbalife products were discontinued, and the return of liver injury symptoms in three patients who resumed using Herbalife products after recovery, suggests a causative relationship. Herbalife withdrew the product.
On the business side, a 2004 settlement resolved a class action suit on behalf of 8,700 former and current distributors that accused the company and distributors of “essentially running a pyramid scheme.” A total of $6 million was to be paid out, with defendants not admitting guilt.
In a California class action suit filed on February 17, 2005, Minton v. Herbalife International, et al., the plaintiff is “challenging the marketing practices of certain Herbalife International independent distributors and Herbalife International under various state laws prohibiting “endless chain schemes”, insufficient disclosure in assisted marketing plans, unfair and deceptive business practices, and fraud and deceit”.
Despite past criticisms and on going investigations Herbalife’s stock remains strong at about $55 per share. Their revenue in 2012 hovered around $4 billion with $480 million in net profits. New York has one of the largest numbers of distributors trailing only California, Texas and Florida. Herbalife’s products are not sold in stores and can only be purchased through individual distributors.