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Herbalife, Ltd.

File:Herbalife Stacked.svg
Company type	Public (NYSE: HLF)
ISIN	KYG4412G1010
Industry	Nutrition & Skin Care products
Founded	Los Angeles, CA (1980)
Headquarters	Los Angeles, CA
Key people	Michael O. Johnson, Chief Executive Officer Brett R. Chapman, General Counsel and Corporate Secretary Richard P. Goudis, Chief Financial Officer Y. Steve Henig, Ph.D., Chief Scientific Officer
Products	Weight management, nutritional supplements, personal care
Revenue	USD$2.4billion (2008)
Net income	213,900,000 (2017)
Number of employees	4,500
Website	www.herbalife.com

Herbalife Class Action Settlement Reveals "Secret" Business, Similar to Amway/Quixtar's Exposed on NBC Dateline

July 14, 2004

A $6 million settlement reached by attorneys for victims of Herbalife and its recruiting organization, The Newest Way to Wealth, reveals the same type of "secret" business that was exposed at Amway/Quixtar in the May 7, 2004 NBC Dateline. Both Amway/Quixtar and Herbalife are members of the Direct Selling Association.

Pyramid Scheme Alert has formally requested that the FTC investigate Amway/Quixtar's recruiting practices. It is now expanding this request to also include Herbalife, which follows the same pattern of deception.

The victims of Herbalife's recruiters tell the same story as those interviewed during NBC's exposé on Amway/Quixtar. They are lured to recruitment meetings and told about the extraordinary income opportunity in the business, in which speakers claim they have personally become wealthy. Recruits are then told they also need to purchase books, tapes, marketing materials and attend seminars offered by the kingpins in order to become as successful as they are.

According to a story in the Los Angeles Business Journal where Herbalife is based, "The suit… alleged that top-level distributors made more money selling independent promotional materials, which were supposed to help the lower-level distributors drive sales, than on the actual sales of Herbalife products."

This is exactly the charge made to NBC Dateline by top-level Amway whistle blowers. They stated that the claims by Amway's kingpins of high income from Amway product sales are false and that actually the top-level recruiters earn most of their money from the recruitment business itself, not from the Amway business. The NBC report focused on the recruitment operations of Amway kingpin Bill Britt of North Carolina

Victims in both cases, Amway/Quixtar's and Herbalife's, stated that these recruiting programs operate as secret pyramid schemes in which the upper level recruiters pay the lower levels a portion of the money gained from sales of these recruitment-based products (books, tapes, seminar fees, etc.) when they bring in new recruits. These products are not resold to the public on a retail base. They operate as an "endless chain" in which investments can only be recouped by recruiting others who would then do the same.

The Direct Selling Association, of which Herbalife and Amway are members, is currently lobbying state legislatures and the US Congress (HR 1220) to enact a new law that will legalize non-retailing endless chain marketing schemes. It would also exclude the sales of "tools" sold to recruits from the definition of a pyramid scheme. Pyramid Scheme Alert has sent warnings to all members of the House Subcommittee on Commerce, Trade and Consumer Protection, which is reviewing the bill, alerting them of the harm this bill will inflict on consumers and informing them of the special interests that are promoting it.

Pyramid Scheme Alert has also called on Congresswoman Sue Myrick of Charlotte, North Carolina to withdraw her name from sponsorship of the bill. Mrs. Myrick has been an Amway distributor, spoken at Amway recruitment meetings where these deceptive practices occur and has received hundreds of thousands of dollars in political contributions from Amway/Quixtar kingpins.

Herbalife International (NYSE: HLF), is a global nutrition, weight-loss and skin-care company. The company was founded in 1980 and it employs around 3500 people worldwide. Herbalife reported global sales of USD 2.4 billion in 2008 and its corporate headquarters are in Los Angeles, USA.

The company distributes its products in 72 countries through a network of 1.9 million independent distributors, who earn profit on product sales and additional commission from a multi-level marketing (MLM) compensation structure.

As one of the largest nutrition companies in the world Herbalife faces occasional legal challenges over the safety of its products. As of 2009, none of these have been upheld.

History

In February 1980, Mark Hughes began selling the original Herbalife weight loss product from the trunk of his car. Hughes often stated that the genesis of his product and program stemmed from the weight loss concerns of his mother, whose death he attributed to an eating disorder and an unhealthy approach to weight loss. Adopting the multi-level marketing system for distribution and growth, the company attracted thousands of distributors who sold its products door-to-door or through word-of-mouth, shunning commercial distribution in retail stores.

The company's slogan, "Lose Weight Now, Ask Me How", became a marketing theme for distributors, featuring heavily on badges, flyers and posters. Early methods to recruit distributors included seminars, which would feature distributors giving health and weight loss testimonials on the Herbalife products and a keynote address by Hughes. By 1982 Herbalife had reached USD 2 million in sales and had expanded into Canada.

In 1985, the California Attorney General sued the company for making inflated claims about the efficacy of its products. The company settled the suit for USD 850,000 without admitting wrongdoing. In 1986 Herbalife became a publicly traded company on the NASDAQ, and in 1996 Herbalife reached USD 1 billion in annual sales.

Mark Hughes died at age 44. The Los Angeles County Coroner autopsy results ruled that the entrepreneur had died of an accidental overdose of large quantities of alcohol and the prescription anti-depressant Doxepin. The company continued to grow after his death and in 2002 was acquired by Whitney and Co LLC and Golden Gate Capital for USD 685 million, who took the company private again.

In April 2003, Michael O. Johnson joined Herbalife as CEO following a 17-year career with The Walt Disney Company, most recently as president of Walt Disney International. On December 16, 2004, the company had an initial public offering on the NYSE of 14,500,000 common shares at $14/share. 2004 net sales were reported as USD 1.3 billion. In April 2005, the company celebrated its 25th anniversary with a four-day event attended by 35,000 Herbalife Independent Distributors from around the world. In August 2005, Dr. Steve Henig joined the company as Chief Scientific Officer, responsible for product research and development. In 2008, President and COO Greg Probert resigned after it was reported that he had not completed the degree requirements for the MBA he claimed on his resume.

Business

Herbalife is a multi-level marketing (sometimes called MLM or network marketing) company. In addition to profits from product sales, Herbalife distributors can earn additional commissions from sales by their 'downline' distributors. Supporters of MLM contend this is a fair compensation system, whilst critics of MLM contend that it is similar to a pyramid scheme. Critics also argue that the company does not make enough effort to curb abuses by individual distributors, though Herbalife has consistently denied such allegations. Herbalife is a member of the Direct Selling Association in most countries in which it operates.

In its filings with the U.S. Securities and Exchange Commission (SEC), company management note problems with inappropriate business practices in the past, their subsequent long-lasting effects and the need to avoid any repetition. Herbalife's September 2006 quarterly report to the SEC describes a distributor network that is relatively easy to enter and exit by comparison to many other network marketing companies. Company management considers the number and retention of distributors a key parameter and tracks it closely in financial reports. Most recent figures show 41.5% of distributors were still active after twelve months, up from 39.7% a year before. As of December 2008, Herbalife has 1.9 million independent distributors in 70 countries. It refers to supervisors who qualified in 69 countries under its traditional marketing plan plus China sales employees collectively as ‘Sales Leaders’. The company had 456,858 Supervisors worldwide and 48,236 sales employees in China, for a total of 505,094 sales leaders. In both global sales and number of distributors, it is one of the world's largest network marketing companies. According to the non-profit Consumer Awareness Institute Herbalife is the most successful multi-level marketing business from a distributor's perspective with 99.42% of distributors losing money, compared with Amway's 99.99%

Herbalife Family Foundation

In 1994 company founder Mark Hughes started the Herbalife Family Foundation, a children's charity. The foundation receives donations from Herbalife itself as well as distributors and customers. The Herbalife Family Foundation has donated more than USD 6.5 million to children's causes worldwide, and it also supports disaster relief efforts.

The foundation's main focus is its Casa Herbalife program, in which it partners with existing children's charities. There are currently over 43 such Casa Herbalife programs around the world.

Sports sponsorships

Herbalife sponsors a number of athletes, sports teams and sporting events around the world, including:

• The LA Triathlon
• AYSO (the American Youth Soccer Organisation)
• The LA Galaxy soccer team
• IndyCar drivers Townsend Bell and E.J. Viso in the 2009 Indy 500
• Valencia CF football club

A complete list can be found at the Herbalife Sports Sponsorships website.

Product range

Herbalife's product range includes protein shakes, protein snacks, nutrition, energy and fitness supplements and personal care products. The Formula 1 protein shake, a soy-based meal-replacement shake, is the company's number one product and was one of the first products sold by the company. The range also includes targeted products for heart health, digestive health and skin care. Some products are vegetarian, kosher or halal, and Herbalife provides testimonials and advice from health professionals as part of their product marketing.

In its annual report (SEC Form 10-K) Herbalife declares that most of its products are manufactured by outside companies, except for a small amount of products manufactured in its own manufacturing facility in China. Major suppliers include NBTY (Nature’s Bounty), Fine Foods (Italy), PharmaChem Labs and JB Labs, which together account for more than 40% of its product purchases in 2006. In 2007 the company launched a new product development process to "accelerate the introduction of new products", which involves company employees, outside consultants and testing products with distributors and customers. In 2009 the company acquired a manufacturing facility in Lake Forest, California to "enhance its global product development and supply chain to better serve its independent distributors".

Clinical studies

Three clinical studies have been completed on different formulations of Herbalife's Formula 1 protein shake product. All three studies showed that using Formula 1 meal replacements twice a day led to effective weight loss.

The studies in Germany and Korea were conducted by members of Herbalife's Nutrition Advisory Board, Drs. Marion Flechtner-Mors and Belong Cho, respectively. The results of the UCLA study were published in Nutrition Journal (August 2008), Dr. Flechtner-Mors presented in October 2008 at the annual meeting of The Obesity Society in Phoenix, Arizona and at the European Congress of Obesity in Geneva, Switzerland, and the Korean results appeared in The International Journal of Clinical Practice (February 2009).

Scientific advisory board

Herbalife's Scientific Advisory Board is chaired by David Heber, M.D. Ph.D, F.A.C.P., F.A.C.N., who is professor of medicine and public health and the founding director of the Center for Human Nutrition in the Department of Medicine at UCLA. According to a 2004 Forbes article, Dr. Heber joined the board at roughly the same time Herbalife made a $3 million donation to establish the Mark Hughes Cellular & Molecular Nutrition Laboratory at his Center for Human Nutrition, leading to criticism of Heber's actions as an inappropriate conflict of interest.

Louis J. Ignarro, Ph.D., a Nobel Laureate in Medicine and Distinguished Professor of Pharmacology at the UCLA School of Medicine, is also a member of Herbalife's Scientific Advisory Board. Ignarro worked with Herbalife to develop Niteworks, a dietary supplement designed to boost the body's own production of nitric oxide, and later became a member of the company's Scientific Advisory Board. Ignarro endorsed this product in exchange for a royalty agreement reported to have earned his consulting firm over $1 million in the first 12 months. Ignarro also promoted Niteworks' ingredients in the prestigious Proceedings of the National Academy of Sciences, without disclosing his financial interest to the publication. After Ignarro's ties to Herbalife were revealed, the journal issued a correction to the article, citing Ignarro's undisclosed "conflict of interest". UCLA conducted its own investigation and determined that Ignarro did not act improperly as all the research was done in Italy and no research funds came from UCLA. Therefore, it was not legally necessary for him to disclose anything. Ignarro presents a one-hour Herbalife promotional video for Niteworks.

Nutrition Advisory Board

Herbalife states that its Nutrition Advisory Board consists of "leading experts in the fields of nutrition and health who help educate and train our independent Distributors on the principles of nutrition, physical activity and healthy lifestyle."

• David Heber, M.D., Ph.D., F.A.C.P., F.A.C.N., Director of the Center for Human Nutrition at UCLA.
• Louis Ignarro, Ph.D.
• Luigi Gratton, M.D., M.P.H., Vice President of Nutrition Education at Herbalife
• Alexey Borisov, M.D.
• Joaquim Caetano, M.D.
• Marco DeAngelis, M.D.
• Jorge Dominguez, M.D.
• Marion Flechtner-Mors, Ph.D.
• Julian Alvarez Garcia, M.D.
• Shih-Yi Huang, Ph.D.
• Linong Ji, M.D.
• Patricio Kenny, M.D.
• Rocio Medina, M.D.
• Anoop Misra, M.D.
• Alla Pogozheva, M.D.
• Ralph Rogers, M.D.
• Nikolaos Sitaras, M.D.
• Jean de la Tullaye, M.D.
• Nataniel Viuniski, M.D.
• Yoshio Yoshimoto, M.D.

Controversies

Multi-level marketing

• A 2004 settlement resolved a class action suit on behalf of 8700 former and current distributors that accused the company and distributors of "essentially running a pyramid scheme." A total of $6 million was to be paid out, with defendants not admitting guilt.

• In a California class action suit, Minton v. Herbalife International, et al., the plaintiff is "challenging the marketing practices of certain Herbalife International independent distributors and Herbalife International under various state laws prohibiting "endless chain schemes", insufficient disclosure in assisted marketing plans, unfair and deceptive business practices, and fraud and deceit".

Marketing practices

In a West Virginia class action suit, Mey v. Herbalife International, Inc., et al., the plaintiffs allege that some "telemarketing practices of certain Herbalife International distributors violate the Telephone Consumer Protection Act, or TCPA, and seeks to hold Herbalife International vicariously liable for the practices of these distributors. More specifically, the plaintiffs' complaint alleges that several of Herbalife International's distributors used pre-recorded telephone messages and autodialers to contact prospective customers in violation of the TCPA's prohibition of such practices". Herbalife managements insisted they have meritorious defences in both cases and that in the West Virginia case, any such distributor actions also went against Herbalife's own policies. Management also contends that any adverse legal outcomes Herbalife might suffer would not significantly affect their financial condition, particularly since they have already set aside an amount that they "believe represents the likely outcome of the resolution of these disputes". The case was resolved with Herbalife and its distributors paying $7 million into a fund for class members part of the suit. Herbalife International did not acknowledge wrongdoing, or admit culpability for the actions of its distributors.

Product controversies

Some of the original Herbalife weight loss products contained the active ingredient Ma Huang or Sida cordifolia, two herbs containing ephedrine alkaloids. Herbalife stopped using ephedrine in its products in 2002 after several U.S. states banned supplements containing botanical sources of ephedrine alkaloids. The U.S. Food and Drug Administration banned supplements containing ephedra in 2004.

Scientific studies in 2007 by doctors at the University Hospital of Bern in Switzerland and the Liver Unit of the Hadassah-Hebrew University Medical Center in Israel found an association between consumption of Herbalife products and hepatitis. In response, the Spanish Ministry of Health issued an alert asking for caution in consuming Herbalife products. Herbalife has stated they are cooperating fully with Spanish authorities.

In May 2008 the Fraud Discovery Institute, which claims to be a consumer watchdog organisation, reported that laboratory test results of Herbalife products showed lead levels in excess of limits established by law in California under Proposition 65. The Fraud Discovery Institute was founded by fraudulent entrepreneur Barry Minkow, who served seven years in jail for stock fraud, and since disclosed that his company was profiting from the allegations by shorting Herbalife stock. Herbalife responded stating its products met federal FDA requirements and released independent lab tests proving the products did not exceed Proposition 65 limits.

On 10 May 2008 a suit was filed on behalf of a woman who developed lead-related liver complaints that she claimed were a reaction to a combination of Herbalife products. The suit was filed by lawyer Christopher Grell, cofounder of the Dietary Supplement Safety Committee and an associate of Barry Minkow. On 17 June 2008, the suit was expanded to add distributors who had supplied the woman with the Herbalife products, with Grell launching a website to offer persons who believe they were harmed by Herbalife products the chance of redress. In August 2008, Minkow retracted all accusations against Herbalife and removed any mention of the company from his web site.

Crazy Fox commercials

As of April 2008, a series of commercials featuring a large red animated fox advertising home-based business opportunities have been running on US television. The advertisements typically feature a series of testimonials from actors playing individuals who have made sums of money between $5,000 USD and $15,000 USD per month as a result of participating in an undescribed business program. The adverts direct viewers to a website that allows them to purchase a "success kit". The kit also provides no information about how the business opportunity works.

These adverts have been found to be run by independent Herbalife distributors, as a method of recruiting new 'downline' distributors. While it is not illegal, critics of this type of advertising prefer advertisers to be up front about their company associations.

In popular culture

Ugly Betty parody

Herbalife is parodied in comedy Ugly Betty from the first episode. In the Pilot, informally known as "I Am Not Going To Sell Herbalux", Betty's sister Hilda is seen to be a distributor for a company called Herbalux with a logo similar to Herbalife's. Herbalux is the name of a real-life Polish company that specializes in alternative medicine, and has no connection to Herbalife.

In Trust, Lust, and Must when Betty opts to sell Herbalux products due to financial pressure, she wears a tag saying "10 pounds in 10 days", similar to the "Lose Weight Now, Ask Me How" badges often used as a marketing tool by Herbalife distributors.

In La Fea Más Bella, a Spanish-language program with a similar storyline to Ugly Betty, the lead character Lety used actual Herbalife products as she underwent an onscreen "physical transformation" in six episodes of the show. It is believed this product placement in the Spanish show is in response to the Herbalux parody in Ugly Betty.

See also

• Direct selling
• Multi-level marketing

References

1. Herbalife 2008 Annual Report
2. Herbalife calls buyout bids too low
3. ^ Herbalife Annual Report 2008
4. ^ "Nobel Prize Winner Didn't Disclose Herbalife Contract" Bloomberg News report
5. Copage EV. Mark R. Hughes, 44; Founded Nutrition Supplement Concern New York Times, 23 May 2000. Section B, Page 11, Column 5.
6. Herbalife acquisition completed. (Industry News).(Whitney and Co. and Golden Gate Capital acquire Herbalife International)(Brief Article) | Nutraceuticals World | Find Article...
7. Ethical flap forces exit of president: Herbalife executive Probert credited with company's growth.(HEALTH CARE)(Gregory Probert) | Article from Los Angeles Business Journal | ...
8. "Herbalife Sets More Layoffs". The New York Times. 1985-05-30.
9. Statement from Nordic Herbalife Director denying toxicity of Herbalife products, pyramid marketing scheme
10. Skeptoid.com
11. Herbalife Family Foundation website
12. Herbalife Family Foundation Establishes Casa Herbalife Program in St. Petersburg, Russia
13. LA Triathlon website
14. AYSO website
15. LA Galaxy
16. Indystar.com
17. Superdeporte.es Template:Es icon
18. Herbalife Corporate Profile
19. SEC Filing Form 10-K, annual report 2006 Herbalife
20. Herbalife Acquires U.S. Manufacturing Facility
21. ^ A controlled trial of protein enrichment of meal replacements for weight reduction with retention of lean body mass; Leo Treyzon, Steve Chen, Kurt Hong, Eric Yan, Catherine L Carpenter, Gail Thames, Susan Bowerman, He-Jing Wang, Robert Elashoff and Zhaoping Li; UCLA Center for Human Nutrition, Department of Medicine, David Geffen School of Medicine at UCLA, Los Angeles, USA
22. ^ Efficacy of low-calorie, partial meal replacement diet plans on weight and abdominal fat in obese subjects with metabolic syndrome: a double-blind, randomised controlled trial of two diet plans – one high in protein and one nutritionally balanced; Belong Cho; The International Journal of Clinical Practice, February 2009
23. Advisory Boards - Science: Herbalife
24. University of California Los Angeles
25. ^ Herbalife Quarterly Report to SEC, June 2006
26. Herbalife Ltd. - HLF Annual Report (10-K) Item 3. Legal Proceedings
27. Herbalife Ltd. (2005-03-14), "Form 10-K", United States Securities and Exchange Commission, pp. page 15 {{citation}}: |pages= has extra text (help)
28. Evans, D. (2002-04-11). "Herbalife, Other Ephedra Marketers Face Soaring Insurance Rates". Bloomberg L.P.
29. "Sales of Supplements Containing Ephedrine Alkaloids (Ephedra) Prohibited". U.S. Food and Drug Administration.
30. Association between consumption of Herbalife nutritional supplements and acute hepatotoxicity.
31. Herbal does not mean innocuous: ten cases of severe hepatotoxicity associated with dietary supplements from Herbalife products.
32. Spanish Ministry of Health issues precaution on Herbalife brand
33. Herbalife Responds to Spain's Ministry of Health Alert
34. Herbalife lead levels draw attention - Regulation - NutraIngredientsUSA - Food, Beverage & Nutrition - Publications - Decision News Media
35. Second, FDA Registered, Independent Lab affirms Higher Lead Levels in Herbalife Product, reports Fraud Discovery Institute, Children's Herbalife Products contain Materially Excessive Lead Levels affirmed in New Lab Results, Expert reports to Fraud Discovery Institute, New Tests reveal 904 Percent More Lead in Herbalife, NuSkin Nutritional Shakes than Competitors, reports Fraud Discovery Institute
36. ^ Los Angeles Business Journal Online - business news and information for Los Angeles California
37. ^ Herbalife rebuffs lead allegations
38. FOXNews.com - Group Says 6 Dietary Supplements Contain Dangerous Levels of Lead - Health News | Current Health News | Medical News
39. Herbalife Tangles with Prop 65, Testing Company
40. More lead testing confirms product safety, says Herbalife - Industry - NutraIngredientsUSA - Food, Beverage & Nutrition - Publications - Decision News Media
41. Herbalife Sued for Negligence and Fraud by Victim
42. CNN.com
43. Reuters.com
44. Work At Home: The Real Deal - NewsChannel 9 WSYR
45. Herbalux
46. Herbalife Transforms Lead Character in ‘La Fea mas Bella,’ Mexico's Ugly Betty

Notes

• "Nutritional Supplement Seller Feeling Much More Fit These Days". Investor’s Business Daily. Retrieved 2006-07-06.
• "NYSE Group, Inc. Herbalife Ltd". NYSE Group, Inc. Retrieved 2006-03-14.
• "Sales of Supplements Containing Ephedrine Alkaloids (Ephedra) Prohibited". Food and Drug Administration Home Page. Retrieved 2006-03-14.
• "AEG and Herbalife Announce Amgen Tour of California Sponsorship; Agreement Extends Herbalife Partnership as the Official Nutrition Company for Professional Bicycle Race" (Press release). Herbalife. 2006-01-09. Retrieved 2006-03-14.
• Gunn, Eileen (February 27, 2006). "Racing to the top? Try the triathlon". U.S. News & World Report. Retrieved 2006-03-14.

External links

• Official website
• Herbalife Family Foundation site
• Company profile by MarketWatch
• Herbalife Ltd.'s financial reports - Corporate disclosure and financial reports filed with the U.S. Securities and Exchange Commission
• Herbalife Ltd. (HLF) company's profile - Yahoo Finance

• Multi-level marketing
• Companies based in Los Angeles, California
• Companies established in 1980
• Nutrition