How Herbalife Only Scams the Sellers - YouTube

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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