Dear Herbalife Board of Directors:
As you know, on July 15, 2016, the Federal Trade Commission announced a settlement with Herbalife Ltd. (NYSE:HLF) that requires the company to make certain changes to its business, including restricting commissions on sales unless the products purchased from Herbalife are ultimately sold to individuals with no interest in the business opportunity, and assuring that costs and other requirements of the business are fully disclosed and ending deceptive income claims. We have identified numerous ongoing violations of the Order.
For example, despite an FTC prohibition against the promotion of the Herbalife business opportunity using images of opulent lifestyles, the business is routinely described as leading to financial freedom by distributors posting pictures and videos from penthouses overlooking Miami Beach. At every training and recruitment event, attendees are subjected to income testimonials that distort the income potential of the business by omitting the experience of 96% of all distributors. Part-time Herbalife positions are daily advertised with income ranges that have no basis in reality.
Even though the FTC has banned Herbalife and its agents from imposing minimum product purchases, distributors are bombarded with these requirements. They are asked to make minimum purchases to participate in weight loss transformation, such as those organized by "Team Beauty," an Herbalife distributor group that has recruited thousands of members in the US. The popular "Quick Start Program" has also been used as a way to impose minimum product purchases - a violation of the Order.
Herbalife business opportunity seekers are expected to buy tickets and make minimum purchases as a condition of attending training - something the company assures new members is provided at no cost and with no product purchase strings attached. At these events, promoters promise to reveal the secrets of the business and describe attendance as "non-negotiable." Even Herbalife CEO Rich Goudis has been enlisted to push qualification volume on distributors: this month any distributor who can show 3,000 volume points in "Documented Volume" will be permitted to listen in on a January 5 call with Goudis, during which he has promised to provide leadership tips for "sustainable success" - a goal that eludes the vast majority of distributors.
While Herbalife management insists that its distributors have documented millions of legitimate Retail Sales transactions (sales made to those NOT pursuing the business opportunity), one can find distributors in Oklahoma running from Nutrition Club to Nutrition Club, buying shakes from other distributors and having these sales count as Documented Volume. In Spanish-speaking Nutrition Clubs, the controversial Club 100 program is back under a new name. Its operators require those hoping to open their own Nutrition Clubs to first attend classes and events, work at unpaid internships in Nutrition Clubs, where they enlist family members and friends to visit, and tour Nutrition Clubs to purchase and consume shakes. All of the volume generated by this program should be disqualified from commissions.
It is also worth noting that the Herbalife events system became the subject of a RICO (Racketeer Influenced and Corrupt Organizations) lawsuit this year. The events system not only interferes with the FTC Order's ban on Herbalife paying commissions on qualification volume but it also imposes ongoing costs in the form of tickets and travel expenses, which are not disclosed when distributors sign up.
Meanwhile, Herbalife says its business is compliant. "The success of the FTC order gives our distributors an amazing amount of confidence that they can live under these new rules," Herbalife CEO Rich Goudis said during the company's second-quarter conference call on August 1.
Below are the titles of memos describing various violations that we have submitted to the FTC. Full memos detailing each violation can be found here:
Events: Qualification Requirements and Undisclosed Costs
Memo #1: Herbalife's Events System, Subject of a Florida Racketeering Lawsuit, Also Violates the FTC Consent Order
Memo #2: Millionaire Team Member David Najera Tells Distributors Attendance at STS Events is "Non-Negotiable," Despite FTC Requirement That All Training Costs Be Disclosed Upfront
Memo #3: Top Distributor Garrain Jones Says Events "Amplify" Business, but Herbalife Events are a Hidden Cost Not Disclosed to Potential Recruits, in Violation of FTC Consent Order
Memo #4: President's Team Members Alan Rodriquez and Fabiola Barinas Urge Distributors to Buy Tickets to Learn How to Grow Their Businesses, in Violation of FTC Order
Memo #5: President's Team Member Bill Garvey Says Paying to Attend Training Events is THE Way to Grow an Herbalife Business, Yet Herbalife Tells New Members No Paid Training is Necessary
Memo #6: Top Distributors in Boston, Phoenix, Denver, Salt Lake City, San Diego, Oklahoma and Delaware Link Training to Qualification Purchases, Directly Violating and Interfering with Implementation of the FTC Order
Memo #7: "Active Supervisor" Designation Forces Monthly Minimum Purchases on Struggling Distributors Seeking Training, Which Violates and Interferes with FTC Order
Memo #8: Leadership Development Weekends, Promoted as Providing Tools to Enhance a Distributor's Business, Are Restricted to Those Who Purchase a Ticket and at Least 4,000 Volume Points of Products, Violating FTC Bans on Minimum Purchase Requirements and Undisclosed Costs
Memo #9: Herbalife CEO Rich Goudis to Offer Leadership Tips for Distributors, But Only If They Can Prove Purchases of 3,000 Volume Points in December, Violating the FTC Order's Ban on Qualification Buying
Transformations: Minimum Purchases and Mandatory Participation
Memo #10: Herbalife Fitness Transformations are Used to Impose Qualification Purchases, Violating and Interfering with the FTC Order
Memo #11: Team Beauty Transformation Program was Created by Top Herbalife Distributors with Mandatory Minimum Purchase Requirements, a Violation of the FTC Consent Order
Memo #12: According to a Team Beauty Distributor in Puerto Rico, Transformation Participants Must Become Herbalife Members and Spend as Much as $113 on Herbalife Products, in Violation of the FTC Order
Memo #13: Mexican President's Team Member Angelica Cruz Says Team Beauty Participants Must Make Minimum Product Purchases, a Violation of the FTC Order
Memo #14: Team Beauty Recruitment Expanding Into Oklahoma, Where It Is Promoted With Minimum Purchase Requirements, Leading to Violations of the FTC Consent Order
Memo #15: According to a Team Beauty Distributor in New Mexico, Aspiring Coaches Must First Undergo a Transformation and Make Minimum Product Purchases, Violations of the FTC Order
Quick Start and Personal Consumption: Minimum Purchases Imposed
Memo #16: Coach Training Program Run by President's Team Member Sheriff Taiwo Requires Business Opportunity Seekers to Make Minimum Mandatory Purchases, Even Testing Recruits to Assure They Understand the Requirement, a Violation of the FTC Order
Memo #17: President's Team Member Candyce Johnson Tells Distributors to Buy $200 of Products a Month for Personal Consumption, in Violation of FTC Order Prohibiting the Requiring of Minimum Purchases
Nutrition Clubs: Creating Questionable Retail Sales Volume
Memo #18: According To An Oklahoma Distributor, Herbalife Nutrition Club Operators Are Reporting "Profitable Retail Sales" When They Sell Shakes To Distributors, Leading to Violations of the FTC Consent Order
Memo #19: Herbalife Nutrition Club Operators Are Encouraging Business Opportunity Seekers To Consume In Clubs, Causing Personal Consumption By Distributors To Be Misidentified As Retail Sales, A Violation Of The FTC Order
Memo #20: Herbalife Distributors Are Buying Shakes For Prospects In Nutrition Clubs, Where Other Distributors May Be Counting Such Transactions As "Profitable Retail Sales," A Violation of FTC Order
Memo #21: Herbalife Distributors Are Offering Shakes With A Paid Workout, Raising Questions About Whether "Profitable Retail Sales" Are Being Inflated Under the FTC Consent Order
Memo #22: Master de Clubes de Nutricion Business Method, Created by Former Promoters of the Club 100 Program, Requires Mandatory Consumption, Misrepresents Income Potential and Creates Phony Documented Sales, All Violations of the FTC Order
Memo #23: Master de Clubes Program, as Presented by President's Team Member Andres Gutierrez in Online Webinar, Generates Nutrition Club Visitors but Sales to these Visitors Are Inappropriately Recorded as Documented Sales, a Violation of the FTC Order
Deceptive Income Claims and Misrepresentations Continue
Memo #24: Herbalife Distributors Recruit New Distributors By Advertising Fitness Coach Positions With Specific Income Ranges, A Violation of the FTC Order
Memo #25: Herbalife Distributors Frequently Promote The Business Opportunity As Leading To Financial Freedom, A Violation of the FTC Order
Memo #26: President's Team Members Jorge and Disney de la Concepcion Use Expensive Apartment to Promote Business Opportunity, in Violation of FTC Ban on Use of Opulent Lifestyle Images
Memo #27: Distributor Terry Wagner, Who Recently Met with Members of Congress on Behalf of Herbalife, Elsewhere Promotes the Herbalife Business Opportunity as Providing More Retirement Security Than a Job
Memo #28: President's Team Member Mette Hyldagaard Misleads Distributors, Telling Them "Expect $1,000 in Residual Income for Each Person You Bring," While Burying Disclaimer
Memo #29: President's Team Member Disney De La Concepcion says Herbalife Allowed Her to Afford Children and That It's Possible for Other Women to Replicate Her Success, a Statement that Violates the FTC Order by Misrepresenting the Herbalife Business Opportunity
Memo #30: President's Team Members Fabiola Barinas and Alan Rodriquez Post Downline's Photos of Life Before and After Herbalife Success Along with Text Telling Recruits They Will Succeed at Herbalife Simply by Committing to the Business, in Violation of the FTC Order
Memo #31: Herbalife Distributors Erika and Javier Martin Use Social Media to Promote Herbalife as a Business that Allows People to Quit Their Jobs and Live Opulent Lifestyles, in Violation of the FTC Order
Memo #32: President's Team Member Lisa Arnold Tells Distributors that the Herbalife Business Opportunity Allows Recruits to Quit Their Jobs and Stay Home to Take Care of Their Children, Violating FTC Order
Memo #33: Distributor Craig Morehead Uses Offer of "Freedom" to Promote the Herbalife Business Opportunity, Violating FTC Order
Memo #34: Top Herbalife Distributors Say Those Working as Team Beauty Coaches Will Be Taught to Earn 6-Figure and 7-Figure Incomes, a Violation of the FTC Order
Memo #35: Team Beauty Participants Told to Share Video Online that Describes Earning Thousands of Dollars by Recruiting Participants to Purchase $190 of Products, in Violation of the FTC Order
Memo #36: Distributor Income Testimonials at Herbalife Events Misrepresent Profit Potential of the Business Opportunity, a Violation of the FTC Order
Memo #37: In Webcast Organized by President's Team Member Lori Baker, Distributors Told Business Failure is a Personal Failing, a Violation of FTC Order
Further Exaggeration of Documented Sales, Etc.
Memo #38: iPad Promotion Used to Drive and Report Documented Sales, Though Terms Contradict FTC Requirement
Memo #39: Herbalife Ordering System Blocked Undocumented Sales Transactions Shortly Before Herbalife Publicly Released Information on Percentage of Documented Sales
Memo #40: Employee on Glassdoor.com Says Herbalife Ethics Department is a Facade and High-Level Distributors Are Not Held Accountable, Raising Questions About Herbalife's Ability to Effectively Implement Changes Required by the FTC Order
As 2017 comes to a close, distributors are not "living under the new rules," but, in fact, have found ways to ignore or evade them.
Disclosure: Christine Richard is the President of Orion Research LLC, which does investigative research for investors. Pershing Square Capital Management, which has a short position in Herbalife, is a client of Orion Research LLC. Neither Richard nor Orion has a position in HLF.
Though I don't receive compensation per Seeking Alpha article, I have retainer agreements with funds to provide them with research. This article is part of that research.