Christine Richard, author of Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff, reports that Herbalife Ltd. (NYSE:HLF) nutrition clubs are a scam that sell most of their products to would-be distributors and their family and friends instead of real customers. Richard wrote a lengthy expose of this disturbing Herbalife nutrition club scam that was published in Seeking Alpha on Tuesday, September 9th.

Herbalife Nutrition Club

Herbalife Ltd. (NYSE:HLF), a business that sells a variety of nutritional supplements and related products using distributors, has been under fire for some years now, with its detractors calling it a pyramid scheme and a defacto scam.

Herbalife nutrition club training system charade

Richard spent almost three years researching and investigating Herbalife nutrition clubs in the U.S., Puerto Rico,  Mexico, Colombia, Venezuela and Brazil. Based on her research, she says “Walk into an Herbalife Nutrition Club and you enter into a charade created by an elaborate and cynical “training” system that turns distributors and their family members and friends into conscripted consumers.”

How the scam works — Club 100

An  investigation into the “Club 100” Nutrition Club is what led Richard to figuring out the scam. Club 100 or “Club Cien” is a large network of Herbalife Nutrition Clubs in the Hispanic community in the U.S. and Latin America. Richard offers a translation of the rules for visiting an Herbalife Nutrition Club from a Yahoo message board used by Club 100 members in Venezuela. She says these rules are basically a description of how a person visiting a Club should act:

“AVOID MAJOR GROUPS OF 5 PEOPLE BY CLUB TO VISIT.”

“AVOID THE USE OF UNAUTHORIZED PHOTO CAMERAS.”

“AVOID TALKING TO CONSUMERS CLUB, UNLESS YOU ASK THE HOST.”

“CAN BE VIEWED ONLY CLUBS THAT ARE 25 AND MORE ACTIVE IN THE SYSTEM CERTIFICATION WITH SEALS.”

“REMEMBER THE RULE: ALWAYS GOOD ATTITUDE: SILENT, KIND, ASSIGN CONSUMERS CHAIRS. IF TESTIMONY TO HELP AND GIVE WHAT YOU ASK, SEEK TO AVOID SPECIFIC PRODUCTS OR FLAVORS , WITH QUESTIONS TO AVOID HOST STOP OR WHILE STUDENTS ARE RESPONDING TO CONSUMERS.”

After asking herself “when are real customers told to remain silent and instructed not to ask for certain flavors?”, and deciding that this meant they couldn’t be real customers, Richards decided to find out who they really were.

Richard (working with hedge fund manager Bill Ackman) employed a number of freelance reporters and private investigators to visit Club 100 Clubs in cities in the U.S. and Puerto Rico and throughput Latin America. She notes there was extreme secrecy surrounding Club 100’s business methods. “We were often told that only those who signed up with Herbalife through Club 100 were allowed to know how the plan operated. Even those already enrolled in the group were kept in the dark about much of its operation and were told they would be informed about the next phase only after completing the current phase.” Richard said she and ger investigators played along and signed up for Club 100, agreeing to do whatever they were told was required to succeed.

The investigators pulled back the curtain on a scam that forces those seeking to open Nutrition Clubs, and their  family members and friends helping them pursue their dream, into conscripted consumers. These scamming club owners forced aspiring club owners to perform expensive and time-consuming tasks such as touring Clubs and paying to consume at every club, working for free in an upline distributor’s Club and being required to consume while working, as well as “practicing” making hundreds of shakes that family members or friends are expected to buy and consume.

On some occasion “club trainees” were required to make up a story or testimonial about the health benefits of the products and made to tell this story to a number of potential recruits. Only trainees who complete all the tasks, (the completion of which is tracked by upline distributors on an official club form) are eventually certified to open their own clubs.

Aspirants who jump through all the hoops and mage to follow all Club 100’s rules are told they will reach the President’s Team at some point, and that they could anticipate making hundreds of thousands of dollars a year. However, as Richard points out, Herbalife Ltd. (NYSE:HLF) internal data shows that less than one in 10,000 distributors will actually become a member of the President’s Team.

Moreover, Herbalife trainers try to motivate trainees by preying on their desperation and disappointment. The idea is to shame the trainee into doing “whatever is necessary” to succeed.