herbalife-logoWe’ve been seeing a lot of private industry back and forth on Herbalife, but not alot on the government side of things.

Sure we know that the FTC and FBI are investigating the company, but to date the specifics and status of those investigations remain a mystery.

Now, in a report published by New York Senator Jeff Klein and New York City Public City Advocate Letita James, the first official government-level opinion of Herbalife has been revealed.

And it’s not good.

Titled “The American Scheme: Herbalife’s Pyramid ‘Shake’down”, Klein and James report is an official city of New York publication, hosted on the New York State Senate website.

The report details several complaints from New York residents about Herbalife, and goes on to claim that ‘there are thousands of New York State residents who‘ are victims of the scheme.

One such resident was a Bronx real-estate agent who was pitched Herbalife on a potential $14,000 per month income.

Working as a real estate agent in 2007, the Bronxite was invited by a client to attend a meeting where she would be taught how to lose weight while operating a business that could generate $14,000 per month in income.

The Herbalife recruiter promised to assist her in converting her real estate clients into Herbalife members; with time, the recruiter promised, she would be able to earn financial rewards on sales generated by her recruits and continue to move up the Herbalife distribution hierarchy.

She would effectively create her own pyramid sales business by encouraging her recruits to bring in new members, which would provide her with profits based on their sales.

Ultimately, she was convinced to sign up as an Herbalife Independent Member.

To accelerate her path to the supervisory level with extra privileges, the resident made an initial $4,000 investment in product purchases, and after just one month, opened up a nutrition club costing her close to $10,000.

The above is your typical product-based pyramid scheme story, where affiliates are encouraged to spend thousands on products so their upline makes a quick buck.

The only way to recoup their losses is for those scammed to recruit others who also spend thousands of dollars on products when they sign up.

Retail is of course possible, but not viable – as typically revealed by a lack of company-wide retail activity taking place.

After five years of struggling to make her business thrive, the Bronxite had no other option but to give up.

In the end, the resident had suffered close to $100,000 in financial losses and tarnished her reputation as a real estate agent in New York City due to the lies she often shared with her clients for Herbalife recruitment purposes.

Sounding very similar to the FTC’s recently filed lawsuit against Vemma, Senator Klien and NYC Public Advocate James wholly blame Herbalife for these losses.

Herbalife International is an American multi-level marketing corporation that develops, markets, and sells nutritional products for weight loss and health enhancement.

Consumers who are convinced and pursue the business opportunity designed by the company are promised a low start up cost in exchange for inflated future income if they are able to recruit as many new members as possible.

Most vulnerable to this deceptive business opportunity are recent immigrants who came to the United States in pursuit of the American Dream.

New York State has one of the largest Latin American immigrant populations in the country that has been, and will continue to be, disproportionately victimized by Herbalife’s fraudulent practices.

This, from a US state Senator and the City of New York.

Compiling data from 56 victims, “key findings” found in the report are identified as follows:

  • Since 2004, only 56 Herbalife victims in New York have been brave enough to file complaints against the company. Most victims are afraid of betraying family, friends, and neighbors.
  • The 56 victims that have filed complaints reported nearly $1 million in financial losses ranging from $90 to $100,000. The average amount loss was approximately $20,000.
  • Over 60 percent of new members make initial investments larger than the required $60 to $100 for the new member kit. The average initial investment is $1,800, but some are as high as $10,000.
  • Herbalife distributors purport that supervisors can make as much as $20,000 in monthly income.
  • Of 56 complaints analyzed, only eight victims received a check directly from Herbalife for their royalty claims. The average amount was $100.

To me, over 60% of new members spending large amounts of money on products is a dead give-away.

If one were to extrapolate that data company-wide, it’s pretty much a given that the flow of funds into Herbalife is by and large sourced from affiliates, as opposed to bona fide sales to retail customers (none of this self-reporting garbage Vemma tried to get away with).

But seeing as Herbalife refuse to make public their retail sales data (because they themselves intentionally refuse to track it), details from ‘undercover work performed in The Bronx, Queens, and Brooklyn‘ will have to suffice.

Once lured into a nutrition club or the distributor’s home, the customer is offered a tasting of three Herbalife products for approximately $6.

First, the customer drinks an aloe-based drink to “clean out the digestive system,” then a tea to “help cut fat,” and lastly a shake that “contains a person’s daily need of nutrients.”

While consuming the products, the distributor shares testimonials describing ways in which Herbalife products have changed her life.

Often, distributors mention ways in which Herbalife products have helped them alleviate the effects of diseases and illnesses including chronic asthma, diabetes, and “rare ailments from Asia.”

After sharing superficial information about the products, Herbalife distributors transition into a discussion about the company’s business opportunity. At this time, the distributor describes the two primary forms of earning income as an independent member and eventually a supervisor:

(1) purchase the product at a discount and sell at a higher retail price to family, friends, and neighbors, and

(2) recruit new members into the business and earn royalties paid by Herbalife International based on their recruits’ sales.

Of course genuine sales to retail customers are not mentioned.

During the information session, current Herbalife members as well as new recruits sit through two to three hours of various presentations.

Each presentation is conducted by an Herbalife member that claims to have experienced enormous success.

The speakers share their testimonials, which often start with an immigrant story.

They inform recruits that after five years of hard work as an Herbalife distributor, they can earn up to $20,000 in monthly income if they can commit to start a membership and recruit new members.

What follows is the product-based pyramid hard-sell, apparently otherwise known as the “90 Day Plan”.

When describing the recruitment plan, labeled the “90 Day Plan,” the presenters scan over ways in which new members can accelerate to supervisory status.

Becoming a supervisor is heavily emphasized because as a supervisor, members can claim royalty fees on their recruits’ sales.

The speaker educates the audience on the definition of a royalty fee—comparing it to profit schemes used by actors and artists—and shares vague details of the “90 Day Plan.”

While in theory a 90 day plan would only require a new member to purchase the $60 to $100 new member kit, and then provides them with three months to recruit and sell $2,500 worth of products during two consecutive months or $4,000 worth of products in one month to obtain supervisory status, meaning they can claim royalty fees, this is not the case.

In fact, recruiters and presenters use the privilege of earning royalty fees as the sales pitch to encourage new members to become supervisors as quickly as possible.

A combination of overemphasizing royalty fees and sharing exorbitant monthly incomes urges new members to make an initial investment greater than the simple $60 to $100 for a member kit.

While some cannot make the full $4,000 investment that is required to automatically become a supervisor, others take the less financially burdensome route and make an initial $2,500 investment.

With $2,500 to $4,000 worth of products, new members must act fast to sell the products to receive a return on their investment.

Having already demonstrated the lack of retail viability by purchasing their own Supervisor status, you can guess how these Herbalife affiliates seek to recoup their own investment.

Yup, by recruiting new Herbalife affiliates who also spend $2500 to $4000 for Supervisor status.

And then these new recruits have to do he same, their recruit have to do the same and well hey… is that Christiano Ronaldo? Can I have an autograph? Man I love Herbalife…

The other key point that’s eye-opening is that losses between these 56 victims tops out at nearly a million dollars, yet only 8 received a payout check… for an average amount of just $100.

That is utterly ridiculous.

On the back of Klien and William’s report is the conclusion that ‘New York State must act now against Herbalife‘.

We have drafted legislation that would amend New York State General Business Law to better protect New York State residents.

The bill imposes stricter regulations on health product franchisors that will require Herbalife to provide a meaningful financial disclosure to its prospective distributors, require its marketing materials to be approved by the state Attorney General, and calls for Herbalife to increase supervision of its distributors to prevent unlawful and deceptive practices.

Whether all MLM companies in New York will be required to have marketing materials approved by the New York AG’s office or just Herbalife, is unclear.

Furthermore, opining that ‘regulation by (the) FTC (is) not enough‘, Klein and Williams write:

Herbalife International needs to be held accountable. For too long the company has masked an illegal pyramid scheme by advertising rules the company does not enforce.

That is why the Office of Senator Klein, supported by the New York City Office of the Public Advocate Letitia James and Make The Road New York, will introduce a Senate bill that will impose stricter regulations on multi-level marketing corporations that distribute health products using direct marketing strategies.

The legislative proposal is a comprehensive bill that will amend New York State General Business Law in relation to health product franchises.

This bill:

  • Defines “health product” in New York State as nutrition, weight management, energy and fitness, and health improvement products for human consumption.
  • Requires that health product franchisors in the state file an annual financial disclosure statement written in plain and understandable English and Spanish for the Attorney General to review before submitting to prospective franchisees that includes the number of franchisees in the state, average income claimed by franchisees, percentage of franchisees that fall within various amount parameters as determined by the New York State Attorney General, and the reported turnover rate of franchisees.
  • Requires that prospective franchisees receive their offering prospectus in the primary language of the prospective franchisees.
  • Requires that any pamphlets, circular, form letter, advertisement or other sales literature of advertising communication intended for prospective health product franchises be approved by the New York State Attorney General.
  • Calls for health product franchisor engage in supervision of its franchisees to ensure compliance with this bill to prevent fraudulent, deceptive and unlawful acts by the franchisees.

If the bill is passed, what a precedent!

Make no mistake, this isn’t some Wall Street garbage playing out between hired lobbyists.

This is the end-result of an extensive undercover investigation into Herbalife’s business practices. The state of New York are is basically accusing the FTC of failing to adequately regulate the MLM industry, and so are taking matter into their own hands.

New York State must protect its working class Hispanic population who often come to the United States in pursuit of the American dream from predatory corporations like Herbalife International.

Those who immigrate to the United States and make their residence in New York State should be offered legitimate business opportunities to become entrepreneurs, not ones that will demoralize them and scam them of their life savings.

Companies like Herbalife International set up rules and regulations to avoid being categorized as running illegal pyramid schemes as defined by the Federal Trade Commission, but in reality the rules are not enforced and instead the company turns a blind eye to the illegal pyramid scheme it promotes.

The Office of Senator Jeff Klein, the New York City Office of the Public Advocate Letitia James, and Make The Road New York have accumulated evidence to show that Herbalife International is in fact running an illegal pyramid scheme masked behind their product sales.

In an effort to curtail Herbalife’s fraudulent practices, a Senate bill will be introduced that will require Herbalife to provide a more meaningful financial disclosure to its prospective distributors, require its marketing materials to be approved by the state Attorney General, and calls for Herbalife to increase supervision of its distributors to prevent unlawful and deceptive practices.

The significance of New York leading the way here is of particular interest, as earlier this year in March it was revealed a grand jury had been summoned in relation to the FBI’s Herbalife investigation.

The specific details of that grand jury proceeding have to date not been made public.

Whether or not Klein is privy to the details and status of the FBI’s investigation is also unclear.

As to how all of this ultimately plays out? Definitely stay tuned…