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Herbalife: A Pyramid Scheme Disguised as a Business Opportunity

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There has been much written recently about Herbalife and allegations about whether it is a pyramid scheme or a legitimate business. While most of the focus has been a battle between hedge fund titans, what is often overlooked is its actual impact on the low income, often minority, individuals who are lured into "the business opportunity." However this is beginning to change. In particular, there have been many Latino leaders who have become increasingly concerned with Herbalife's predatory business practices and how the company targets the Latino community in a methodical and calculated manner.

If Herbalife is profitable, why should anyone be concerned? What does it matter if the company is a pyramid scheme, some wonder, so long stock price keeps going up? Aside from the fact that pyramid schemes are illegal, the real problem with a pyramid scheme like Herbalife is that the company's profits are generated by committing massive fraud against the company's own distributors. From the standpoint of a civil rights organization like the League of United Latin American Citizens, this is wrong no matter what the company's stock price is.

Herbalife's business model is far different than every other legitimate business in America because at Herbalife, a distributor's compensation is driven not by how much product they sell to retail consumers, but on how successful they are in recruiting other distributors into the "business opportunity". The vast majority of income generated by the company is from the products purchased by new distributors duped into buy their way into the business. At Herbalife, the company's end users and distributors are one in the same.

I have spoken to many of Herbalife's Latino distributors, both at the company's recent "Extravaganza Latina" held in Los Angeles for thousands of their Latino distributors, as well as in the Latino neighborhoods that the company's 550,000 U.S. distributors have saturated. And the stories they told me present a truly alarming picture.

These distributors have told me that the only way a distributor can succeed in Herbalife is to recruit new distributors and that the most successful distributors are the ones that become "recruiting machines."

The distributors are trained about how to tell a-rags-to-riches story such as "I used to wash dishes for minimum wage and now I sell Herbalife and make $150,000 per year, drive a luxury car, and live in a fabulous mansion." If a distributor is not yet a success they are told that they need to "fake it, until you make it" -- a favorite saying of Herbalife's founder Mark Hughes.

While Herbalife claims it only costs $59 to get started with the company, the distributors I have spoken to said they always start out asking for far more than that... typically $4,000 so the newly minted distributor can began at the supervisor level which confers a bigger discount on the wholesale cost of Herbalife's overpriced products. In Herbalife's pyramid scheme, distributors building their downline are incentivized with bigger commissions to lure new recruits to come in at the highest level possible.

Yet to stay at the supervisor level the new distributor must continue to purchase $2,500 worth of product every month. The vast majority are not able to sell much at all and most are never able to recoup what they spent to get into the business and maintain their level.

Eventually they realize that it is pointless to keep throwing good money after bad and 90 percent quit within a year. According to the distributors and former distributors that I have spoken to, most loose between $1,000 and $10,000 with the average distributor losing $3,000. Some have lost much more and these figures do not count the hours they spend trying to sell the product and recruit new distributors and the expenses they incur beyond purchasing Herbalife's product.

While it's true that starting your own business is fraught with risk and many if not most small businesses fail, the difference with Herbalife is that the losses suffered by their failed distributors fuel the company's profits because the losses are incurred by company incentives and policies that force their distributors to purchase more product than they can sell.

Ninety-nine percent of Herbalife's distributors will lose money in the scheme. Unfortunately, the few "successful" distributors are those that have learned how to become recruiting machines -- deceiving their friends, family members, co-workers, and just about anyone who will listen to them into paying money to join a "business opportunity" that is destined to become a financial loss for the vast majority.

Herbalife, for its part, refuses to report how much of its product is sold at retail to non-distributors and how much revenue they generate from signing up new distributors. They refuse to disclose the average net profit or loss of Herbalife distributors. They even have the gall to reclassify 73 percent of their distributors that were lured into the business with get-rich pitches into retail consumers saying that these distributors "primarily join us to receive a wholesale price on products they and their families enjoy."

The scale of the scheme is breath-taking. There are 550,000 Herbalife distributors in the United States. Somewhere between 60 to 83 percent of them are Latino. 300,000 to 400,000 Latino distributors will quit this year alone only to be replaced by another 300,000 to 400,000 new Latino distributors. If left unchecked, Herbalife could recruit, defraud and dispose of as many as 4 million Latino distributors over the next 10 years. To more and more Latino leaders and advocates, this reeks of predatory ethnic targeting of epic proportions.

I have asked Herbalife to make six common sense reforms that could help it become a better company, where distributors might have a chance to make an honest living selling their product. Yet the company has refused to consider even one of them.

So at the end of the day, is Herbalife a legitimate and effective business model for Latinos or an illegal pyramid scheme that targets and preys on them? According to the Federal Trade Commission, there is an easy way to tell. If distributor income is primarily based on sales to the public, the company may be legitimate. But if distributor income is primarily based on the number of people recruited and the sales to them, it's a pyramid scheme.

I believe that the evidence is overwhelming that the compensation of Herbalife distributors is primarily based on the number of people each distributor recruits and their sales to them. Furthermore, I challenge Herbalife to report their retail sales to the general public (people who are not distributors) and their sales to new recruits so that we can settle this issue once and for all.

Continuing to hide these figures from the public, their investors and regulatory bodies can only mean one thing in my opinion: that Herbalife's promise of a business and economic opportunity is really a pyramid scheme that has locked onto the Latino community like no other that we have seen before. As a Latino organization with an 85-year history of defending the Latino community, the League of United Latin American Citizens (LULAC) has once again chosen to stand up to defend our community from a powerful threat. We encourage other organizations and people of good will to join us in this fight.