Two former Herbalife independent distributors called on Illinois Attorney General Lisa Madigan to probe the controversial company’s business practices and marketing techniques Wednesday, claiming the company operates a pyramid scheme that exploits Latino immigrants. Progress Illinois took a look at the allegations.
Honduras-native Jose Garcia said that after several years of unemployment, he was filled with optimism when he made his first payment to Herbalife International, Inc. in 2008 and became a salesman for the nutritional products company.
But less than two years after he first paid $100 to purchase Herbalife products, the 54 year-old Zion resident said he found himself not only with an excess of unsold merchandise, but also without the $25,000 he had managed to save before he bought in to the multi-level marketing company.
He said he invested his savings in Herbalife inventory based on the company’s promises that he would make a profit, but was unable to sell the various diet and protein shake powders, vitamins, drinks, snacks and energy supplements, and subsequently never recovered his losses.
Garcia, a father of three who came to the U.S. more than 25 years ago, called the company a pyramid scheme that targets Latino immigrants to exploit their lack of understanding of when it comes to American rules and regulations.
On Wednesday, he was one of two former Herbalife independent distributors to call on Illinois Attorney General Lisa Madigan to look into the controversial company’s business practices and marketing techniques at the James R. Thompson Center, 100 W. Randolph St., in Chicago.
“I was told that if I would invest in this, that I would make back three times the money that I invested very quickly,” Garcia said, speaking through an interpreter at a press conference held Wednesday, moments before he met with a representative from the attorney general’s office.
“I believe this is fraud, because you are promised that you are going to buy in to a business that’s going to be very profitable and at the end you are left in debt and a failure,” he said. “I am calling on Attorney General Lisa Madigan to investigate this fraud because so many Latinos have invested in Herbalife and they’re all being made fools of because this is not something you’re able to make a living off of.”
Garcia and another former independent distributor, 68 year-old Miguel Calderon, a Waukegan resident who is originally from El Salvador, submitted a request for the attorney general's office to conduct an investigation shortly after Wednesday’s press conference.
Their efforts are backed by national and local Latino advocacy organizations, such as the Waukegan council of the League of United Latin American Citizens (LULAC) and the Illinois Hispanic Chamber of Commerce.
“It is not fair for us to stand by while Latino families are victimized and their hard-earned money taken by Herbalife’s predatory business practices,” LULAC of Waukegan wrote in a letter to Madigan in November.
“Herbalife is actively recruiting and misleading Latinos in this get-rich-quick scheme,” said Julie Contreras, president of LULAC of Waukegan, who attended Wednesday’s press conference. “Many people enter thinking its an entrepreneurial opportunity, but at the end the rug is pulled out from underneath them and it leaves them broke.”
Distributors purchase products from the company and can profit from selling them to their own customers at an escalated price. Profits can also be generated through additional commissions based on sales by distributors they’ve recruited to the company.
According to a 2012 Herbalife earnings statement for independent distributors in the U.S., 73 percent buy in to the business only to receive a discounted price on its products. Some 29 percent of sellers have recruited others to become Herbalife distributors, and a whopping 88 percent only earned income from their product sales and did not receive a payment from the company.
Garcia said he lost money because he was never in a position to recruit a new distributor and he claims the person who enlisted him to the company pressured him to reach certain inventory benchmarks each month.
Under the threat of expulsion from the company and being forced to accept a total loss, Garcia alleges he was bullied into purchasing new products every month regardless of whether he had sold his old merchandise.
Although Herbalife has a repurchase of inventory policy, Garcia also claims his recruiter told him the company does not buy back or exchange any products.
“The people on the bottom are constantly at a loss,” he said. “You have somebody that’s looking over you telling you that you have to continue to invest or else you’ll be out of the business.”
Contreras announced at the press conference that Latino advocacy groups launched a 24-hour hotline, at (855) 701-5437, for Illinoisans who feel they been deceived by Herbalife to share their story with the attorney general's office.
Here's more from Wednesday's press conference:
Founded more than 30 years ago, the California-based company operates in at least 88 countries and reported net sales of $4.1 billion in 2012, an 18 percent increase over 2011, and a net income of $477.2 million, a 16 percent increase over 2011.
But the business reports that majority of its distributors make little or no money from Herbalife itself, inciting accusations that the company is operating a "sophisticated pyramid scheme" from hedge fund manager Bill Ackman.
Ackman’s firm, Pershing Square Capital, estimates that salespeople at the bottom of the Herbalife chain have collectively lost more than $3.5 billion since the company’s founding. In December 2012, shortly after he publically criticized the company, Ackman bet $1 billion that Herbalife’s stock price would fall if investors were informed about the company's alleged fraudulent tactics. The company's stocks did indeed fall until a few other billionaires got in the game in support of Herbalife. Read more about the ongoing battle in this Washington Post report.
For its part, Herbalife issued a statement to Progress Illinois denying all allegations that the company engages in a pyramid scheme:
We are disappointed that the Waukegan chapter of LULAC and the Illinois Hispanic Chamber of Commerce sent a letter to the Illinois Attorney General without reaching out to Herbalife first to discuss their concerns regarding Herbalife’s business model and address any questions they have about the company.
Over the past several months, Pershing Square has launched a well-funded, aggressive lobbying campaign in Washington to support Bill Ackman’s reckless $1 billion bet against Herbalife, which according to recent media reports represents a loss of approximately $500 million for his firm Pershing Square.
In response, Herbalife has actively engaged with many members of Congress and leading Hispanic organizations to correct the misinformation Pershing Square has been spreading to support its short position in Herbalife’s stock. We are committed to full transparency and continuing this constructive dialogue.
Herbalife is not a pyramid scheme. A pyramid scheme involves people paying money to participate in hopes that they’ll earn money based on later participants paying to play. It is all about recruiting and like a chain letter it requires unlimited, exponentially increasing recruiting; when recruiting stops, all those still in the system lose their money.
In contrast, Herbalife and other legitimate multi-level marketing companies provide high value products to distributors and consumers. Rewards to its distributors are based on the sale of these high value products to the consumer. There is no gain merely from recruiting or being recruited.
Over its 33-year history, Herbalife has helped change people's lives by providing first-in-class nutritional products and an excellent income opportunity to individuals around the world and in every community in the United States. Herbalife has long had and maintains close ties to the Hispanic community, and values its relationship with Hispanic distributors.
Meanwhile, Calderon joined Garcia at Madigan’s office Wednesday to share a story that was very similar to his counterpart’s.
“[My recruiter] told me I was investing in a very good business and that I was going to be profitable, but it just came out the complete opposite,” he said, speaking through an interpreter at the press conference. “All we saw was losses every day.”
Calderon, a father of two who immigrated to the U.S. more than 30 years ago, said he was charged every month for new Herbalife inventory, amounting to a loss of more than $22,000 after roughly 18 months.
The attorney general's office received the request for an investigation and will review the information further, according to LULAC of Waukegan.
“We are hopeful that with this investigation others will not suffer the way we have suffered,” Calderon said. “The only one profiting is Herbalife, but we hope that this investigation will stop other people from being victims of this scheme.”