Herbalife pyramid scheme case to go to trial
Barring any unforeseen events, it the next chapter in the Herbalife pyramid scheme saga will take place in a US Federal court.
Back in April Dana Bostick filed a lawsuit against Herbalife, ‘accusing the company of being an “inherently fraudulent pyramid scheme.”‘ Bostick’s 68 page complaint was filed under Federal corruption and racketeering laws.
Bostick, who became a distributor in April 2012, is suing Herbalife under California’s “endless chain” law that prohibits pyramid schemes, as well as under federal racketeering laws, which allow for triple damages.
Bostick, a 68-year-old retired general contractor, claims he failed to make money because “he was doomed from the start by an Herbalife marketing plan that systematically rewards recruiting over retail sales.”
The company makes “outlandish statements” about potential earnings, but the marketing plan, he charges, “pays millions to those few at the top at the expense of many at the bottom.”
Bostick said he bought and used Herbalife products, set up three websites and paid for coaching sessions where he was taught how to recruit others.
But “the only recruit he made was a long-time friend.” He spent $3,000 in products not consumed by himself or given to family, he claimed.
Bostick’s lawyer, Philip Dracht, said Bostick spent thousands of dollars to purchase Herbalife products but failed to earn much money by selling them. “The retail profits are not there because of all this discounting,” Dracht said.
He added that Bostick was urged by other Herbalife distributors to spend more money to buy leads that would help him earn more money but that he could not afford it.
The suit, which also seeks class-action status, claims around 88 percent of Herbalife’s 500,000 US distributors do not make any money.
Sounds to me like your typical case of self-qualification via purchases, which is evidently rampant in Herbalife affiliate circles and somewhat of an open secret in the MLM industry.
Whereas Herbalife has quietly settled such lawsuits in the past with payoffs, this time around, no doubt due to the increased public scrutiny over Herbalife’s business model, they’ve decided to fight the case.
That resulted in the filing of a motion for dismissal by Herbalife, which was subsequently denied last Tuesday.
U.S. District Judge Beverly Reid O’Connell denied Herbalife’s request to dismiss the case, saying former Herbalife distributor Dana Bostick’s allegations were significant enough to proceed toward trial.
Herbalife appears to have argued that Bostick’s claims were not significant enough for the case to proceed, which Judge O’Connell disagreed with.
“While the court concluded that Bostick had adequately alleged a claim against Herbalife, it expressed no view of the merits of that claim,” a Herbalife spokeswoman said.
She said the company has policies in place to discourage inventory loading and that “Herbalife will establish these facts for the court and seek dismissal of the complaint at the appropriate time.”
High on PR rhetoric and low on substance, the company’s tincan response doesn’t exactly inspire confidence. Least of all when one accepts that, despite not having evaluated the merits of Bostick’s allegations, to certify them “significant” Judge O’Connel has obviously on some level evaluated their merit.
Even if that merit was restricted solely to ascertain whether or not the case was a waste of time it still undermines Herbalife’s blasé explanation.
Furthermore the single defending factor the spokesperson mentioned was Herbalife’s supposed ‘policies in place to discourage inventory loading‘. I personally reviewed the Herbalife business model back in January and found nothing stopping an affiliate from self-purchasing to qualify for commissions, and then profiting off recruiting others who do the same.
Infact if anything, Herbalife’s compensation plan all but tries to hide the source of revenue within the company by failing to differentiate between retail customers and affiliates (distributors).
This is done by counting affiliates who fail to recruit and build their business as retail customers, despite them being able to earn commissions via the compensation plan and having signed on as affiliates.
Herbalife announced they were going to address this issue back in February by creating a preferred customer “wholesale class” in April of this year, however given we’re now in October it’s probably safe to assume the company backflipped on the issue.
One can only conclude that Herbalife’s announcement was made prematurely, before company management realised the creation of a wholesale customer class (and the lack of affiliates who join it), would conclusively reveal revenue wise Herbalife was overwhelming affiliate-funded.
A wholesale customer class of course also dismissing the argument that Herbalife’s failed affiliates are wholesale customers only in it for the products and not the business opportunity.
If I was Bostick I’d be making sure this is a core issue brought up by his lawyers when the case goes to trial. Surely affiliate revenue pumped into the company over the past 12 months and retail revenue for the purposes of comparison would be easy enough to obtain via discovery?
Oh and don’t forget to ask for global commissions paid out on the purchase of products by affiliates versus retail too. Those two figures alone being revealed would bury Herbalife under a mountain of pyramid scheme tainted gravel.
Slap the FTC’s definition of a pyramid scheme (generating more commissions from recruited affiliates over retail customers) on top of both of those figures and away you go.
To Philip Dracht and the rest of Bostick’s legal team, you’re welcome.