The next shot in the debate about whether Herbalife Ltd. (NYSE:HLF) is a pyramid scheme has been fired. This time, it’s in the form of a personal story shared by a retired construction worker who only completed education up to sixth grade. Herbalife faces investigations from multiple agencies, including the Illinois attorney general’s office, largely thanks to the efforts of activist investor Bill Ackman and lobbying groups like the League of United Latino America Citizens (LULAC).
Herbalife distributor said he was tricked
Bloomberg Businessweek reports that Miguel Calderon is one of at least 16 Latinos in the Chicago metro area who have filed official complaints with the Illinois attorney general’s office. He said Herbalife tricked him into wasting $30,000 on products he ended up not being able to sell. He reportedly used his life savings to buy the products.
At this year's SALT New York conference, Jean Hynes, the CEO of Wellington Management, took to the stage to discuss the role of active management in today's investment environment. Hynes succeeded Brendan Swords as the CEO of Wellington at the end of June after nearly 30 years at the firm. Wellington is one of the Read More
Calderon said a friend told him about Herbalife in 2008. He reportedly met Cesar Caballero at his nutrition club, a place where Herbalife distributors sell the company’s products, hand out samples, and talk others into signing up to become distributors. He said he sampled Herbalife’s products for three mornings, and then on the third morning, Caballero asked him if he wanted to start a business, so he decided to start his own nutrition club.
Herbalife rules state that distributors receive up to a 50% discount on its products. If they are able to sell them at the full retail price, they can double their money. Calderon jumped at the chance because he was having trouble finding work. He signed an agreement with Herbalife without reading many of the marketing documents or information about the company’s policies and pay structure. He said in the back of his mind, he always had a small amount of doubt but that he wanted to “work and make better.”
Herbalife’s products were expensive
According to Calderon, he paid $1,300 for the first products, which included protein shake powder, a sample pack, and a marketing DVD. Then he said he doled out $7,000 plus an additional $1,500 each month for about a year. He said he “put a lot of spirit into trying to sell the product,” even putting up flyers in the snow. He also received training about how to get others to sign up to be distributors, but he was unable to convince anyone. As a result, he focused on just trying to sell the products.
He said the potential customers who did sample Herbalife shakes didn’t buy any, saying they were too expensive. He said after finally getting out of the business, he had lost $30,000, including supplies and rent. He added that he had lost his house and had to sell the products he had bought for just pennies on the dollar. His story is similar to the stories of many other former Herbalife distributors as well.
Caballero, under whom Calderon signed up, doubts that Calderon lost $30,000, saying, “It’s impossible.” Caballero claims his distributors who work hard enough find success. He belongs to Herbalife’s Millionaire Team and travels on Herbalife trips to exotic places.
Herbalife blames distributors
Herbalife has maintained that not all distributors who sign up to sell its products will be successful. The multi-level marketing company has said that not all distributors work hard enough to turn a profit. Also the popularity of products changes quite frequently. The Small Business Administration says approximately half of all businesses fail within the first five years.
In Calderon’s and other Herbalife distributors’ cases, the main point of the case will be whether the company or its associates made false promises or whether they were unable to turn a profit because they did not follow the company’s marketing plan.
Ackman says Herbalife unfairly targets low income populations
Activist investor Bill Ackman of Pershing Square Capital Management has maintained for nearly two years now that Herbalife is a pyramid scheme. More recently, he criticized the company for allegedly profiting off the backs of low income groups, particularly Latinos who are often undocumented immigrants. Ackman has questioned why Latinos would buy “overpriced nutrition products.”
Calderon was one of those who flew with LULAC to Washington to speak with Federal Trade Commission Chairperson Edit Ramirez. The next month, Herbalife reported that the agency was investigating its business.