Markey Calls For Herbalife “Pyramid Scheme” Investigation
This article was originally published in The Tan Sheet
Executive Summary
The Massachusetts Democrat Jan. 22 asked Herbalife for information about its compensation system and sales to non-distributors, and urged the Securities and Exchange Commission and Federal Trade Commission to investigate the company’s marketing practices.
Sen. Edward Markey, D-Mass., Jan. 22 called for federal investigations into Herbalife Ltd.’s marketing practices and whether they constitute a pyramid scheme, sending letters to the Securities and Exchange Commission, Federal Trade Commission and the firm asking for information about the business practices of the nutritional and weight-loss products firm.
In his letter to the FTC, Markey asks the agency to include Herbalife’s marketing practices as part of a recently announced investigation of “deceptive claims made by national marketers of fad weight-loss products.” Specifically, he encourages the commission “to examine whether false and deceptive claims are being made about either the efficacy of Herbalife’s products or the business opportunities available to Herbalife distributors.”
Markey’s request to the SEC asks the commission to look at the number of compensation levels employed by multi-level marketing companies such as Herbalife and by pyramid schemes and to inform him of the turnover rate in the lowest tier needed to trigger an investigation. He also asks the SEC to provide information on the pyramid schemes with the least complex structure that have been prosecuted by the commission and the time it took a distributor to rise through each compensation level; and to investigate sales of Herbalife products to non-distributors.
The questions in Markey’s letter to the Los Angeles-based company seek information about Herbalife’s operations and activities that typically could form the basis for an investigation.
The letter asks how the company’s compensation system works, how commissions are earned and average distributor compensation, how many people have become distributors or exited that position in the last five years and how long it takes to achieve each level of compensation. The senator also asks for data on sales to customers outside the distributor network and information on Herbalife’s marketing of distributorships to minority communities.
An Herbalife spokesperson noted Jan. 23 that "we received the letter from Senator Markey this morning and look forward to an opportunity to introduce the company to him and address his concerns at his earliest convenience."
The question of targeting minorities was previously raised by Rep. Linda Sanchez, D-Calif., along with the National Consumers League and the Hispanic Federation, in urging the FTC to investigate Herbalife because pyramid schemes often take advantage of low-income consumers looking for a business opportunity (Also see "In Brief" - Pink Sheet, 17 Jun, 2013.).
The company took several opportunities in 2013 to refute allegations that it is not a product-oriented company. During an investor day in January 2013, the company defended itself against charges by investor William Ackman, Pershing Square Capital Management, who short sold his 8.24% share of the company’s stock, alleging Herbalife products are overpriced and too little is spent on research (Also see "Herbalife Defends Reputation Against Investor’s “Misrepresentations”" - Pink Sheet, 14 Jan, 2013.).
Company executives held a media event in June 2013 to explain why its independent distributor network is not a pyramid scheme (Also see "Herbalife Pushes To Counter Pyramid Scheme Narrative" - Pink Sheet, 3 Jul, 2013.).
Markey Cites Constituent Complaints
Markey, a member of the Senate Commerce, Science and Transportation Committee, cited in the letters cases in which Massachusetts’ residents lost the money they paid to become distributors or were pressured to buy more products.
“There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families,” according to Markey. “Herbalife may be a purveyor of health and wellness products, but some of its distributors are suffering serious economic ill-health as a result of their involvement in the company.”
The senator asked the agencies to respond by Feb. 28.