Pyramid Scheme Expert Calls For Herbalife Ltd. (HLF) Crackdown

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The debate continues about whether Herbalife Ltd. (NYSE:HLF) is really a pyramid scheme. This time a pyramid scheme expert who usually does not take sides in these kinds of debate is taking a side. In a letter written to the Securities and Exchange Commission chairperson Mary Jo Write, Professor William Keep, dean of The College of New Jersey’s School of Business, says in light of the BurnLounge ruling, regulators should take note of one possible warning sign about Herbalife. The letter from the professor and prominent MLM expert was first reported by Michelle Celarier of The New York Post

Herbalife and BurnLounge

A copy of Professor Keep’s letter dated June 16, 2014 was recently obtained by with ValueWalk. He notes that the decision involving BurnLounge further defines what a pyramid scheme is. In the decision, the court said handing out rewards mainly because of recruit is a big warning sign and that it’s important for multi-level marketing companies to enforce their policies.

He further noted that Herbalife Ltd. (NYSE:HLF) has a high distributor turnover rate and that there have been documented incidents in which some Herbalife distributors have deceptively marketed the company’s products. In addition, he pointed to a statement in the company’s 10K filing every year for the last ten years that tries to distance the company from what its distributors do.

“As a result, there can be no assurance that our distributors will participate in our marketing strategies or plans… or comply with our distributor policies and procedures,” the filings state.

Warnings about Herbalife… from BurnLounge

Keep states that the decision about BurnLounge warns about multi-level marketing companies that “disavow responsibility for the implementation of effective anti-pyramid schemes.” He then contrasts that decision with a previous case against Amway, which the Federal Trade Commission ruled was not an illegal pyramid scheme.

He said that the main difference between Amway and Herbalife Ltd. (NYSE:HLF) is that Amway enforces certain rules. For example, Amway discourages recruiters from “pushing unrealistically large amounts of inventory onto recruits.”

“When a major MLM company disavows responsibility for distributor actions could we be looking at systemic, industry-wide failure,” Keep asks in his letter. “I believe the answer is ‘Yes.’ The BurnLounge decision specifically relates just such a failure to the possibility of an MLM operating a pyramid scheme.”

Keep calls for changes

He doesn’t stop at suggesting that regulators look more closely at Herbalife Ltd. (NYSE:HLF). He says the SEC should examine the more than 1,000 MLMs operating in the U.S. He also suggests that every five years, all of them be required to submit their anti-pyramid scheme policies and enforcement strategies to regulators for review. If the companies make changes within the five years, he says they should have to submit them for review before enacting them.

The full letter is embedded below

William Keep Letter to SEC Chair Mary Joe White? by ValueWalk

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