Lawmaker concerned nutritional supplement company could be operating outside securities law as a pyramid scheme
Washington (January 23, 2014) After hearing serious complaints of improper pressure and financial hardship, including from a constituent in Massachusetts who lost her entire retirement savings, Senator Edward J. Markey (D-Mass) is calling for more information about the business practices of Herbalife Ltd. In letters sent today to the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC) and to the company itself, Senator Markey queried each for more information about Herbalife’s operations.
Herbalife, which sells nutritional and weight-loss products through individual distributors, promises its sellers significant monetary compensation in the form of additional bonuses and royalties if they recruit new sellers and establish their own network of product distributors. This compensation system appears to strongly favor distributors who focus on selling to other distributors rather than the general public, a common feature of pyramid schemes. Concerns also have been expressed that Herbalife aggressively markets its business opportunities to lower-income and vulnerable communities, many of whom are at greater risk if they invest their savings in business ventures that have little potential to turn a profit. According to 2012 data from the company itself, 88 percent of product distributors received no payments from the company at all.
One family in Norton, Massachusetts reported that it lost $130,000, including the family’s entire 401(K), investing in Herbalife. Another Massachusetts resident claimed that she was encouraged to recruit new members by approaching her family and also received pressure to spend money to buy more Herbalife products so that she could qualify as a so-called “Supervisor” in the Herbalife system. She also stated that she was encouraged to stay in the program even after she said she wanted out.
“There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families,” said Senator Markey, a member of the Commerce, Science and Transportation Committee. “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. I have serious questions about the business practices of Herbalife and their impact on my constituents, and I look forward to receiving responses to my inquiries.”