Fraud
DAVID MALAMED
The Real Thing or a House of Cards?
like a chain letter, ‘must end up disappointing those at the bottom who can find no recruits.’ ” In another widely distributed document, Pershing Square
disclosed excerpts from an October 2005 company video that involved senior and mid-level Herbalife distributors as well as members of Herbalife’s board of directors, corporate manage- ment and corporate staff. According to Pershing Square, par- ticipants in the video, led by Chairman Club member Stephan Gratziani, “corroborate much of what Pershing Square has said about the company, including that … distributors are trained by their upline and incentivized by the Herbalife compensa- tion system to focus their efforts on recruiting new distributors into the scheme rather than selling Herbalife products to retail customers outside the distribution network.” According to Pershing Square, Gratziani acknowledges in the
I
N DECEMBER 2012, BILLIONAIRE INVESTOR Bill Ackman began a campaign to prove that Herbalife International, a successful US-based multilevel marketing company, oper-
ates a pyramid scheme. Ackman, founder and CEO of hedge fund Pershing Square
Capital Management LP, announced his company was taking a significant short position on the publicly traded Herbalife, which develops, sells and markets a range of nutrition, weight- management and skin-care products throughout the world. The exact amount of Pershing Square’s gamble has fluctuated since 2012, but it is believed to be at least several hundred million dollars, down from an initial US$1-billion equity position. In media interviews and documents published by Pershing
Square, Ackman has argued that Herbalife’s primary business purpose is to recruit new investors. In an interview with CNN, Ackman said, “Only a tiny fraction of 1% of the people make a real living from working with Herbalife. Over 90% of the people quit in a short period of time.” A pyramid scheme, he said, “is a modern-day version of a Ponzi scheme but more sophisticated. They hide the Ponzi features of it, if you will, in a product.” Pershing Square also released several documents critical of Herbalife. “Distributors earn more than 10 times as much from recruitment as they do by selling the company’s overpriced products to bona fide retail customers,” it alleged in a 2012 paper. “As a result, Herbalife distributors are incentivized to aggressively recruit new participants to buy in to a system that,
44 | CPA MAGAZINE | APRIL 2015
video that many of Herbalife’s distributors fear bringing in new recruits, saying: “They don’t want to. Who wants to bring their family into a struggle to make it? Who wants to bring their family into an eventual deception?” In March 2014, the Federal Trade Commission (FTC) announced it would investigate Herbalife, a move ABC News said was motivated by complaints from the Hispanic commu- nity, whose members make up a significant proportion of Herbalife distributors. In response, Herbalife said it welcomes the inquiry given the tremendous amount of misinformation in the marketplace and will cooperate fully with the FTC. “We are confident that Herbalife is in compliance with all applicable laws and regulations.” A month later, Reuters reported that the FBI had also begun looking into the company. In July 2014, Herbalife, noting it has been around 34 years
and has 7,400 employees and millions of members worldwide, released the findings “from research and analysis conducted by Walter H. A. Vandaele, PhD, of Navigant Economics LLC, regarding Herbalife’s US business operations.” After listing Vandaele’s credentials, Herbalife claimed he had concluded that “Herbalife’s US business operations are consistent with the socially beneficial [multilevel marketing] model and incon- sistent with the socially harmful pyramid scheme model.” On the website
factsaboutherbalife.com, however, victims
detailed the losses they incurred after signing up with Herbalife. One man said, “In order to be a success at Herbalife, I now believe you must be dishonest.” Another website state- ment estimated that over the next 10 years, consumers will lose US$2 billion to US$4 billion through Herbalife’s practices.
Photo: Jaime Hogge
Blow Up/Getty Images
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