FTC: “Herbalife’s business practices are disturbing”
One of the common questions we get here at BehindMLM whenever we call out a company that is not under investigation is that, if analysis of the business model reveals such blatant questions of legitimacy, how come regulators have not investigated the company.
Not being a regulator there’s no clear-cut way to answer this. Affiliates take full advantage of this and use a lack of regulatory investigation as a rubber stamp of legitimacy, with the more extreme examples even citing approval in the absence of action.
Naturally the idea that regulators haven’t stepped means nothing dodgy is going on is about as absurd as claiming murder is legal unless someone catches you. But the fact remains, the manner in which resources are allocated by regulators of the MLM industry are a mystery.
Here at BehindMLM i can report analysis and draw conclusions, but it is only a reactionary response readers get to regulatory action when it occurs. Predicting such action in a timely manner is nigh on impossible given the secrecy that surrounds such investigations.
Earlier this week Hispanic consumer groups and politicians who represent large Hispanic populations met with the FTC to discuss their concerns about Herbalife. At the heart of these concerns is the charge that Herbalife operates as a pyramid scheme and in particular, targets Hispanic communities that these consumer groups and politicians primarily represent.
The FTC slammed Herbalife’s business practices as “disturbing”. Apart from serving up the most damning commentary on Herbalife’s business practices yet from any US regulator, the FTC also revealed one of the primary challenges it faces in regulating the MLM industry.
It’s a question of resources.
The Federal Trade Commission told consumer activists Monday that it finds Herbalife’s practices “disturbing” and is “looking into” the company.
The activists met with top FTC consumer fraud officials, including Jessica Rich, the recently appointed director of the Bureau of Consumer Protection, they said.
“It’s a question of resources,” one activist at the meeting told The Post, saying the regulator feels it may be difficult to launch a probe into the company alone.
Whether that’s because of jurisdictional issues or sheer financial resources made available to the FTC versus the scale of an investigation and subsequent legal action against Herbalife is unclear. But what is clear is that the FTC do appear to be taking concerns raised about Herbalife’s business model seriously.
In the FTC’s recent shutdown of pyramid Fortune Hi-Tech Marketing, the Kentucky Attorney General convinced the FTC to join his case. The possibility that a state attorney general might help the FTC investigate Herbalife was suggested at the meeting.
FTC officials at the meeting were particularly bothered by the high percentage of Hispanic distributors — said by Herbalife to be 65 percent — the vast majority of whom lose money, said Brent Wilkes, the national executive director of the League of United Latin American Citizens.
“The FTC understands this is a problem and that Herbalife is taking advantage of the immigrant community,” said one activist there.
The FTC is also upset that Herbalife quit disclosing its distributor turnover rate, which it last said was 90 percent in 2005.
With Linda Sanchez, a congresswoman from California and Julissa Ferreras, a New York City councilwoman having both written to the FTC with formal complaints, the possibility for co-operation between the FTC and a state Attorney-General is definitely open.
Careful as always, the FTC stopped short of revealing a formal investigation was underway:
As expected, the regulator declined to tell attendees at an hour-long meeting whether it has launched a full-scale probe into the Los Angeles company.
Reading between the lines though, it makes little sense for the FTC to brand Herbalife’s business practices disturbing if they themselves haven’t begun their own investigation.
The comment about not being happy with Herbalife ceasing to report distributor turnover rate since 2005 was particularly interesting, as it is thus likely the FTC aren’t happy about other information being withheld by the company.
Every since Herbalife announced back in February that they were going to better track their alleged wholesale customers, I’ve been waiting for the company to do so.
To date nothing has been implemented as far as the business model goes though, with Herbalife instead releasing completely irrelevant commissioned survey results and withholding the survey data from public scrutiny.
No doubt the FTC are aware that Herbalife attempt to pass off affiliates who do not recruit as retail customers, whilst at the same time acknowledging that under the current business model there’s no way of proving this conclusively.
With no formal acknowledgement of an FTC investigation but the agency clearly showing concern, where we go from here I’m not entirely sure.
If past experience has taught me anything when it comes to MLM companies and regulators, like the rest of you I wake up one seemingly random morning and read about a company being shut down.
With an SEC investigation already confirmed into Herbalife and who knows what else is going on behind the scenes, it appears clear that day is drawing closer.
Ultimately retail revenue vs. that taken from affiliates will decide conclusively whether or not Herbalife are operating as a pyramid scheme.
The company has had ample time to clarify this point and introduce a wholesale customer class but instead choose to operate in the grey area of making claims about retail revenue that are unprovable due to the way they’ve set up their compensation plan.
To be perfectly honest Herbalife have had this coming for a long time and it’ll be interesting to see how things play out.
The New York Post did contact Herbalife for a response to the FTC’s criticism, but they “declined to comment”.