Herbalife: Accused Of Running A Pyramid Scheme

Last updated December 12th 2014

Herbalife has recently become the subject of investigation in the United States for the potentially fraudulent running of the company. Here the company shall be reviewed, and exactly why they appear to be in trouble will be explained.

In March 2014, the United States Federal Trade Commission launched an official investigation in to the company ‘Herbalife‘, which sells a wide range of nutritional and weight loss supplements. This investigation is based on accusations that the company is running a fraudulent pyramid scheme – a cycle of investment within an organisation that is not sustainable, as will be discussed in more detail below. Herbalife has grown significantly as a company since the founder was selling products from his car boot in 1980. The company now sells health products to customers all over the world, but has been particularly successful in the United States and the United Kingdom.

Who Are Herbalife?

Herbalife is a company that specialises in nutrition and weight loss products. The company was formed in the United States in 1980, and has been growing steadily ever since. The official Herbalife website claims that all of the products sold by the company are inspired by nature and created by a team of nutritionists and scientists. Perhaps their most well known products sold to help aid weight loss are simply named ‘Formula 1’, and ‘Formula 2’. The company now sell a whole range of health products; these include protein shakes, snack bars, energy drinks, a range of general food supplements, and a whole range of skin care products. It also offers a range of weight loss programmes and advice.

Herbalife has grown gradually and has been trading successfully for several decades. The company began by trading exclusively in the United States, then expanded to Canada, and now sell to a wide range of countries all over the globe. Unlike most weight loss supplements, Herbalife products cannot be purchased online, through the company’s official website, and neither are the products stocked by any high street retailers in the United Kingdom. Instead, Herbalife products are sold through independent distributors. In order to purchase a Herbalife product, it appears that the customer must fill in a form on their website, and then one of their distributors will get in touch with them.

There is also no mention of product prices on the company website; it seems that these are largely set by the individual distributors. Herbalife are a large company, employing a huge number of independent distributors that are spread over 80 countries. The official Herbalife website states that together, these distributors have an annual sales figure of $3.5 billion. Although the company denies allegations, in recent years Herbalife has been accused of operating under a complicated pyramid scheme.

What Is Pyramid Scheme?

When a company works using a pyramid scheme, people who wish to join the company have to pay a fee. In return, the company will pay the new ‘investor’ a certain amount of money for each additional person that they can recruit to join the company. The founders and directors of the company also make money from the small payments made by these new recruits. The company will usually sell some goods, but these tend to be products that do not have a great worth; as such, the people joining the company will make a large proportion of their income through recruiting more people.

The organisation structure thus resembles a pyramid, with the single founder at the top, the few people they recruited below them, and then the number of recruits ever-growing as you go towards the base of the pyramid. Evidently, this is not a sustainable way to run a business. Eventually, people will no longer be able to recruit new members; even if everybody in the world wanted to join the company, the scheme would not be able to continue forever. Somewhere along the line, people will lose their money and will be unable to recruit enough people to pay off the above level of recruiters.

Is Herbalife A Pyramid Scheme?

In the United States (where Herbalife is based), it is illegal to run an organisation using a pyramid scheme. Herbalife is undoubtedly run using a multi-level marketing scheme, through which recruits pay a fee to join the company, and in turn are paid commission when they manage to persuade others to join the company. The way in which the company is run seems to be a bit of a mystery, and there are lots of contesting opinions regarding whether or not it is a legitimate business. The potential for Herbalife being a pyramid scheme received a significant amount of media attention, though most of this was related to the stock market, and the actions of the hedge fund ‘titans’.

On the 12th of March 2014, the United Stated Federal Trade Commission (FTC) confirmed that they were undertaking an investigation into Herbalife following allegations that it performs under a pyramid scheme. The company denies that it operates using a pyramid scheme, and welcomed the inquiry into its practices. Despite the hedge funds receiving most of the attention, the important aspect of this case is the impact on the people who have entered the business at the bottom of the ‘pyramid’. These people are unlikely to be earning much money, and are often part of a minority. The case was in fact flagged up originally by the Latino leaders, who were unhappy with the way that the company was recruiting, apparently targeting the Latino community.

It is the view of most people that even if a company is making profits, if it is doing this through a pyramid scheme, then it is wrong, and indeed, illegal. The problem here is if a distributor makes most of their money from recruiting more distributors, rather than through the sale of the company products. Some reporters who have spoken to recruiters of Herbalife strongly suggest that this is the case for this company. In Herbalife, people who sign up to become distributors have to pay a certain amount for the products they are selling; this amount varies depending on which package you choose – the higher the amount you pay initially, the more discount you get on products. It seems that a large amount of distributors cannot sell enough to make up the initial amount paid, and indeed the amount that they have to spend on product every month; these distributors end up quitting whilst already in debt, to avoid losing any more money.

The investigation by the FTA will determine whether or not the business is operating on a pyramid scheme simply by determining whether the distributors of the business make more money by selling the products, or by recruiting more distributors. The investigation is ongoing, and will undoubtedly be having an impact on the company at present, with its share prices dropping, and more people aware of the potential negative effects of joining the scheme as a distributor. Until the findings of the investigation are revealed however, it will not be possible to say for sure whether or not Herbalife is a legitimate business.

Conclusion

Herbalife is a large company that has grown significantly over the past 30 years. The organisation has faced a large number of allegations in recent years regarding its structure. It is not yet clear whether or not Herbalife is based on a pyramid scheme. The company does appear to work on a structure of multi-level marketing, but whether or not this structure is legal is yet to be determined. If the ongoing FTA report concludes that the company distributors make more money from selling Herbalife products than from recruiting new distributors, the company will be considered legitimate, if not, then it will be considered an illegal organisation.

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