Too Good to be True They say if it sounds too good to be true,
it probably is. Just ask anyone who's found themselves caught in the clutches of a pyramid
scheme. The scammers lure you in with claims that their unique business opportunity will
make you rich beyond your wildest dreams. But in reality, it's near impossible to make even
just a living working at the bottom of a pyramid scheme. Herbalife is an international health and
nutrition-based corporation whose entire business model is founded on its multi-level marketing.
Despite constant accusations that they're nothing more than a pyramid scheme on steroids,
Herbalife has stayed in business for 40 years. The most interesting stat? 89%
of Herbalife distributors won't ever make a dime.
Herbalife Beginnings Herbalife first came to be in 1980.
Its founder, Mark Hughes, had watched his mother struggle with obesity and
drug addiction for much of his childhood before she ultimately passed away when he
was still a teenager. His mother's battle with drugs leaked into his own life,
and he dabbled in illegal substances himself after dropping out of the 9th grade.
He was sent to a boarding school for troubled youth in California,
where he discovered his hidden talent for sales. Part of his rehab revolved around
raising money by selling raffle tickets, and ticket sales heavily influenced your
standing in the school's community. Hughes understandably felt pressure to outperform
his peers and prove his worth as best he could. This pressure to sell probably
triggered the pyramid scheme mentality that would come to characterize his life's work.
His life's work, of course, was Herbalife. With his mother and his past mistakes in mind, Hughes
wanted to create a business that would help people manage their weight and lead a healthy lifestyle,
and thus, Herbalife was born. Originally running the company out of the back of his car,
Hughes' first product was a protein shake, and he sold it through the use of multi-level marketing.
For those who need a little refresher, multi-level marketing is a business model
that focuses heavily on recruiting non-salaried salespeople. These salespeople have two jobs:
sell the product, and recruit others into the company. The
cycle continues as more and more people are recruited as sales reps.
Legality You may be thinking,
"Wait a minute. That sounds like a pyramid scheme to me." You're not the only one to think so,
either. Herbalife has been accused of being a pyramid scheme for as long as
it's been in business. It's also been inundated with lawsuits stemming from
allegations that the company makes false and misleading claims about its products.
The first spark of trouble came two years into Hughes' business venture. The FDA contacted his
company about complaints they'd received regarding Herbalife's marketing claims and
questionable ingredients included in certain products. Hughes was forced to
alter the claims he was making and even had to modify the formula
of his keystone products. Nevertheless, he publicly maintained that his company
was innocent, calling the FDA's treatment of him and his company a "trial-by-publicity."
This marked the beginning of Hughes' run-ins with complaints about the way they do things at
Herbalife. Just two years later, deceptive claims made by the company in a slew of advertisements
caused Canada's Department of Justice to file criminal charges against them.
California's Attorney General later sued Herbalife for more false claims, and Hughes
was forced to answer questions before a Senate sub-committee as a result. During this hearing,
Hughes fired back at his detractors, saying if they were so knowledgeable about health
and nutrition, why were they so fat? Before the United States Senate and the American public,
the founder and CEO of a growing company made a fat joke about his
critics. Not exactly a good look, and Herbalife didn't come away unscathed.
Herbalife posted their first loss in 5 years of business, bleeding $3 Million from negative
press. They also laid off 800 employees, paid an $850,000 settlement to California,
and discontinued two of their supposedly effective products. Bit of a rocky start, wouldn't you say?
Public Trading Herbalife started trading
publicly on the NASDAQ following its array of legal troubles. As the '90s approached,
they rebranded to Herbalife International and expanded sales into Spain, Japan, Mexico,
New Zealand, and Israel. Despite several complaints and pyramid scheme accusations,
the company proved quite successful during this time. Its worldwide reach helped sales skyrocket,
and they even expanded their product line to include a series of personal care products.
Despite the claims that their business model was illegal, the company became a legitimate player
in the market. They underwent two public share offerings that resulted in millions
of Herbalife shares being sold. But successful IPOs didn't stop the lawsuits from piling on.
Hughes attempted to take back control of his company by facilitating a buyout of his
shareholders in 1999. He felt the Wall Street highflyers selling stock of his company were
criminally undervaluing it, and he'd had enough. This resulted in another lawsuit
from the shareholders themselves, who believed the price Hughes was offering for their shares wasn't
good enough. Hughes backtracked and dropped his efforts to make Herbalife a private company again,
choosing to settle the suit rather than continue to battle with his investors.
This proved to be the last lawsuit Mark Hughes would ever settle.
In 2000, he passed away, following a life-long battle with substance abuse.
In the years that followed, Herbalife fell into the hands of various CEOs tasked with defending
the company from a constant barrage of complaints and attacks, much like their late founder did for
nearly half his life. The most notable figure to spearhead Herbalife was Michael O. Johnson,
former president of the Walt Disney Company. Still, even he couldn't provide the company
with the credibility necessary to stop the lawsuits and accusations from pouring in.
MLM vs. Pyramid Scheme As Herbalife struggled to
find leadership following the death of its founder, they continued to walk the
delicate tightrope that separates a pyramid scheme from a legitimate company. In 2004,
they started trading on the New York Stock Exchange at $14 a share, enabling the company
to move much of its manufacturing into its recently renovated in-house facilities.
But why are people always so up-in-arms about Herbalife and its business model?
If it was indeed just a pyramid scheme, wouldn't it have been found out years ago?
The problem lies in the vague language that defines the difference between
a lawful multi-level marketing venture and an unlawful pyramid scheme. It's so
vague that it's easy to think there's no difference at all. Let's break it down.
Multi-level marketing has been around for a long, long time. Well-known companies like Tupperware,
Amway, and of course, Herbalife rely on it to support their business. But what is it exactly?
It involves the enlistment of multiple layers or "levels" of recruited salespeople who, in turn,
recruit people that they know to become distributors themselves. However, the
self-proclaimed purpose of a multi-level marketing scheme is to make sales, not recruit distributors.
Pyramid schemes make no such distinction. The primary function of an illegal pyramid scheme is
the perpetual recruitment of distributors without the intention of ever selling an actual product to
consumers. To make money in a pyramid scheme, you must recruit 10 new salespeople. To make money,
they each have to recruit 10 people, meaning a total of 100 new recruits. Each subsequent
level of the pyramid becomes larger and larger until it becomes unreasonable to
recruit the number of people necessary to keep the scheme going. In fact, in a pyramid
scheme's recruitment plan, the number of new recruits required after just 12 levels would
exceed the entire global population. That's why so many pyramid schemes die off fairly quickly.
Multi-level marketing companies use a similar structure of recruiting
non-salaried workers to sell products. However, the primary source of income
must come from actual product sales to escape the dreaded "pyramid scheme" label. According
to a ruling by the Federal Trade Commission, a multi-level marketing distributor must sell 70%
of their inventory to customers outside of the company for their business to be considered a
legal MLM and not a pyramid scheme. That means you can't just sell products down the levels of
salespeople; it has to go to actual customers. But that 70% rule is a little vague in and of itself.
If you sell 69.9% of your product, are you instantly a criminal pyramid schemer?
The debate continues. But the line that separates multi-level marketing from pyramid scheming
is so thin that companies like Herbalife will always receive their fair share of accusations.
Bill Ackman One of Herbalife's most
passionate antagonists was Bill Ackman, the founder of a billion-dollar investment firm
called Pershing Square Capital. Ackman's reasoning behind taking down Herbalife in the first place
was less than heroic. He wanted to conduct a massive short of the company by dragging
its name through the mud and profiting from the negative press that followed.
Ackman didn't hold back from criticizing every aspect of the company and its business model,
repeatedly calling it nothing more than a "sophisticated pyramid scheme" that scammed people
into selling products they could never profit from. But he did far more than name-calling. In
2012, he put his money where his mouth was when he bet a whopping $1 billion against Herbalife
by shorting its stock. Shorting is when you bet against a company by borrowing shares,
selling them for what they're currently worth, and then buying them back when the price drops.
The battle that ensued between Ackman and Herbalife was very nasty and very public.
Their verbal sparring match went back and forth, with accusations launching from both sides.
Both parties insisted that the other was lying. Herbalife's stock suffered greatly from the whole
charade, and if Ackman had closed his short at one point following his public statements,
he would have pocketed $300 million. Ackman held out for more, however,
and his attacks against Herbalife continued for several years.
It's since been discovered that Ackman's actions during his shorting of Herbalife stock were not
entirely true. According to an FBI investigation into Ackman's affairs, the investment mogul had
made untrue and misleading claims regarding the nature of Herbalife's business and even
contributed to anti-Herbalife lobbyists who also lied about the company. A 2018 article in the Wall
Street Journal revealed that Ackman's firm had lost hundreds of millions of dollars due to his
massive bet against Herbalife. It seems Ackman's greed truly got the better of him.
Betting On Zero But his crusade to
take down Herbalife once and for all wasn't over.
Ackman's short of Herbalife stock became the focus of a documentary called Betting on Zero.
The doc closely follows Ackman's bet against the nutrition company, also featuring firsthand
accounts from former Herbalife distributors who had negative experiences with their employer.
Herbalife wasn't going down without a fight, though. They bought the rights to the domain
name "BettingOnZero.com," Instead of promoting the film, they used the site to discredit it
thoroughly. Herbalife also highlights the questionable nature of the film's funding.
As it turns out, Betting on Zero was financed by a man named John Fichthorn,
the founder of Dialectic Capital Management, who also shorted Herbalife's stock at one point.
Fichthorn had been a long-time opponent of multi-level marketing companies,
and Herbalife tried to portray a conflict of interest for the film's main financier.
Despite Herbalife's best efforts to tarnish the documentary,
it premiered at the Tribeca Film Festival and was met with immediate acclaim.
It currently holds a 100% rating on "Rotten Tomatoes."
To this day, Ackman's battle with Herbalife rages on. If you search "Is Herbalife a pyramid scheme"
on Google, the top result is a website called FactsAboutHerbalife.com. The site is riddled with
anti-Herbalife sentiments and seeks to portray the company as a full-fledged pyramid scheme. Why?
Well, FactsAboutHerbalife.com is run by none other than Pershing Square Capital, the investment firm
founded by Bill Ackman. Ackman's war on Herbalife won't be coming to a cease-fire anytime soon.
FTC Opinion While the whole charade with
Ackman didn't make him any money, Herbalife was subject to an FTC investigation shortly
after the investment titan began his campaign against the company. The investigation began
in March of 2014, tasked with determining whether or not Herbalife was or was not a Pyramid scheme.
If the hazy distinction between multi-level marketing and pyramid scheming wasn't confusing
enough for you, the FTC's ultimate ruling is sure to make your head spin.
Their thorough appraisal of Herbalife and its business model brought them to
the conclusion that the company was not not a pyramid scheme. You heard that right. The FTC
stated in a 2016 press conference that Herbalife was not officially a pyramid scheme,
but that they weren't not a pyramid scheme, either. Don't you love a good double negative?
As confusing as the ruling was, it did lead to substantial changes in the way Herbalife
operated. They vowed to alter their business model to better comply with the laws and regulations
regarding multi-level marketing companies. They also paid a $200 million settlement to the FTC,
which might account for the lack of criminal charges.
This was just the latest in a seemingly endless string of settlements Herbalife has made over
its 41-year history. The company has paid hundreds of millions of dollars to reconcile the many legal
battles against armies of critics and naysayers. Through it all, Herbalife has maintained its
innocence entirely. How much longer can Herbalife keep up this song and dance? Only time will tell,
but it seems they're perfectly content on settling high if it means subverting legal consequences.
New Herbalife So remember those significant
changes Herbalife made to their business model? What exactly happened there? The company was
forced to show that 80% of its gross sales were to people outside its distribution network.
If they could do this, they could prove that they weren't just recruiting more distributors,
focusing instead on selling products to customers.
The settlement also limited how much money distributors could earn from recruiting
additional distributors, making their sales of Herbalife products the most important
influence on their total earnings. It seems like common sense changes that the company
probably should have made much earlier to convince people they were not, in fact,
a pyramid scheme. But it took nearly 40 years of lawsuits and multiple FTC investigations
to implement these fairly basic checks and balances into their business model.
While the changes may have made Herbalife a more legitimate company in the eyes of
federal regulators, they didn't do anything to help boost the money-making potential of the
company's valued distributors. Herbalife promises high profits to the salespeople it recruits,
but in reality, it's very difficult to make any meaningful cash distributing Herbalife products.
The FTC itself said it was "virtually impossible" to do so. People who find themselves on the lower
levels of the multi-level marketing structure make very little money. Between $200 and $1200
a month, to be exact, which falls well below the poverty line.
It doesn't matter how you feel about the legitimacy of Herbalife's business model,
the facts are the facts, and the facts say the opportunity they offer to prospective
distributors isn't any more appealing than your run-of-the-mill pyramid scheme. You
can't make a living as an Herbalife sales rep, no matter how much the company insists you can.
Herbalife Today Herbalife is still going strong today. They bring
in billions of dollars annually off the backs of their health and nutrition products, their
best seller still being that protein shake Mark Hughes started selling from the trunk of his car.
As Herbalife remains a legitimate factor in the world economy, the debate surrounding their
business model will live on. Are multi-level marketing ploys very well disguised pyramid
schemes? Should they be outlawed? There is no widespread consensus on the matter.
Until that consensus is reached, companies like Herbalife will continue to operate as
lawful institutions. If they're raking in enough cash to pay for all their
settlements and still post a profit, why wouldn't they keep business as usual?
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