Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—Senator Edward Markey ponders pyramid scheme by Herbalife, requests SEC investigation, (Jan 23, 2014)

By Jay Fishman, J.D.

Senator Edward J. Markey (D-Mass.) sent letters to the SEC and the Federal Trade Commission (FTC) requesting those agencies to investigate the possibility of Herbalife Ltd., operating a pyramid scheme. Senator Markey also requested Michael O. Johnson, Herbalife’s chair and chief financial officer, to respond to a written request for information about Herbalife’s business practices.

Senator Markey sent the letters after hearing serious complaints of improper pressure from Herbalife, which included one Massachusetts’s constituent stating that she was not only encouraged to stay in the program after expressing her desire to leave but to recruit her family as Herbalife members. Additionally she was pressured to spend money to buy more Herbalife products so that she could qualify as a so-called supervisor in the Herbalife system. Senator Markey further learned of a Massachusetts resident who lost her entire $130,000 retirement savings for her family after investing in Herbalife.

Herbalife’s business practices. Senator Markey remarked about how Herbalife, a company that sells nutritional and weight-loss products through individual distributors, promises its sellers significant monetary compensation in the form of additional bonuses and royalties if they recruit new sellers and establish their own network of product distributors. He said moreover that this compensation system appears to strongly favor distributors who focus on selling to other distributions rather than to the public, making its business model far more likely a fraudulent pyramid scheme than a legitimate multilevel marketing plan.

Senator Markey also expressed his constituents’ concerns that Herbalife aggressively markets its business opportunities to lower-income and vulnerable communities, many of whom are at greater risk if they invest their savings in business ventures that have little potential to turn a profit. He specifically declared that 88 percent of product distributors received no payments from Herbalife according to 2012 data from the company itself.

Letters to Herbalife and the SEC. Senator Markey, by virtue of having serious questions about Herbalife’s business practices and their impact on his constituents, sent the letter to Michael Johnson at Herbalife requesting information about Herbalife’s: (1) compensation system; (2) operating structure; (3) estimated sales outside its distribution network; and (4) distributors, i.e., their ethnicity and income status. He simultaneously sent the letter to SEC Chair Mary Jo White requesting that she investigate Herbalife’s compensation system, operating structure, estimated sales outside the distribution network, and the ethnicity (minority status), and income levels of its distributor-members, to determine whether the company is operating a pyramid scheme.

Senator Markey concluded, “There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families. While Herbalife may be a purveyor of health and wellness products, some of its distributors are suffering serious economic ill-health as a result of their involvement in the company.”

LegislativeActivity: FraudManipulation MassachusettsNews