It's a little surprising that it took this long for someone to sue Herbalife, isn't it? Whether or not Bill Ackman is right about Herbalife being an illegal pyramid scheme, he did take the trouble of writing like 300 pages about it, which is usually more than enough to inspire some intrepid class action lawyer to cut and paste the most damaging claims into a complaint and see where it goes. Perhaps they were stymied by converting from PowerPoint. Anyway here you go:
California resident Dana Bostick is suing Herbalife under racketeering and corruption laws, accusing the company of being an “inherently fraudulent pyramid scheme.” ...
While Herbalife has settled suits brought by former distributors in the past, Bostick is the first to go to court since Herbalife became a battleground of hedge fund titans. Ackman has faced off against Dan Loeb and Carl Icahn, who owns a 15 percent stake in Herbalife. ... The suit, which also seeks class-action status, claims around 88 percent of Herbalife’s 500,000 US distributors do not make any money.
The complaint is here and it's ... mostly it's just sad. On a first reading it's not entirely clear how you should apportion blame for the sadness; I don't know if this says more about Herbalife or Dana Bostick:
Bostick worked hard to build his business. He bought and used products himself so he would know what he was selling. He set up three websites. Two were set up to sell Herbalife products to the public and one was to recruit downline distributors. He paid for “coaching” sessions where the coaches “taught” him how to recruit downline distributors to build a downline. In spite of his hard work, the only recruit he made was a long-time friend.
That's basically my derivatives sales career, and I'm not suing anyone, even though my mother is not happy with the total-return swap that I sold her. Of course I got paid for doing it; Bostick claims he's out of pocket $3,000 for products that he can't sell. Though, again, it's not clear what products he could sell?
The complaint is long and full of pyramid-scheme technicalities about 70% rules, 10 person rules, and allegedly misleading statements about how rich you can get selling Herbalife products. This is ... I mean, my sympathies are sort of against a company that fills glossy magazines with success stories,1 with just a tiny footnote saying "results not typical, no guarantees," but I used to be an investment banker so who am I to talk?2
Whether or not Herbalife is a "pyramid scheme," it certainly is an organization where new members are recruited by current members, and those members seem to be subject to somewhat less oversight than, say, the average Barclays swaps trader. Here's how Bostick came into the fold:
Dana Bostick responded to an internet advertisement for a “trial offer.” It offered an “Internet Business Starter Pack” where Bostick paid $9.95 in Shipping and Handling and would be charged an additional $39.95 if he did not return the package within fourteen days. Interested in earning monthly and residual income, Bostick signed up for the pack. The Internet Business Starter Pack was mailed to Bostick sometime between late-March and early-April 2012.
Bostick reviewed the pack, which is attached Exhibit D, and the DVD video enclosed in that pack, which revealed the “business” as Herbalife. ... On the video, Beneficiary and Promoter Maurice Smith reiterates that “position determines the pay” and that “you determine your position.” Smith tells viewers that an average Herbalife distributor earns “between $100 and $300 per month - part time.” And Success Builders “have the opportunity to earn between $400-$600 - part time.”
In the United States of America lies a large, industrial city. A site of one of the world's largest slave labor camps. Near the center are community settlements where slaves live. Each morning, people move "herd-like" from these quarters into the industrial camp. Each one is in his or her station by 7:30 a.m. Here, they report to their masters for their day's duties. Then they remain chained until 5:00 p.m. when they are released. They have no choice on how many hours they must labor - sometimes they are required to work overtime until their master tells them when they may leave.
This precisely describes working with Bess, by the way. It goes on in this apocalyptic vein for a bit3 before getting to the point:
I know these slave camps really exist, for I am a free man who lives among the slaves. I am in business for myself. I am truly free. I rise in the morning called for by my schedule. ... There is a ray of hope for the slave, though. He or she can buy his or her own freedom. The cost is not high, yet it seems high to those who don't have the courage to pay the price. What is the price? One must be willing to be one's own master!
Amazingly this is attributed to "Author Unknown." (If it's you, drop us a line!)
So one fun thing is to imagine a $4 billion public company producing marketing materials like that. The slave stuff, and also the pyramidal pile of money at the top of this post, which is from page 9 of that brochure. I feel like at Herbalife HQ they're sensitive to the p-word, and to images, done in blocks of cash, that could be mistaken for pyramids. Thus Exhibit D - the not-at-all-produced-by-Herbalife marketing materials that nonetheless brought Bostick to Herbalife - not only doesn't identify the author of that slave quote, it doesn't identify Herbalife, either.4
It's hard to read that brochure and not feel a little dirty, though, to be fair, it does have the requisite results-not-typical disclaimer. Feeling a little dirty doesn't make it a pyramid scheme. And the brochure isn't Herbalife, either: it's just some guy. Selling Herbalife. Recruiting people into Herbalife. Like he's supposed to. I dunno. Is he Herbalife's problem, or is he just an independent contractor whom they can freely disclaim if he ends up looking too unsavory? Perhaps Dana Bostick will find out.
1.The complaint has some good ones:
In one video taken from the Herbalife 2010 Extravaganza in Los Angeles, California, Beneficiary and Promoter Geri Cvitanovich, in minutes 1:40-3:00, tells a convention hall filled with distributors that the Herbalife plan “is a confidence plan … to take you from where you are to wherever you want to go,” grooming them to become multimillionaires:
all of us are getting groomed to become multi-millionaires. That is an awesome opportunity. Now you can take advantage of it. Or you only want to make $60,000, $100,000, couple $100,000. But the fact that we are all here getting groomed to become millionaires in today’s marketplace to me is an awesome privilege to be a part of. And I just want those of you who are new to know that you are in the right place at the right time. The fastest amount of growth in the shortest amount of time in our history. And we are doing nothing but going up.
So? Is that, like:
- Would be fraud, but is saved by a disclaimer saying "we are not all getting groomed to become multi-millionaires" in the footnotes or whatever, or
- Just a perfectly reasonable Glengarry Glen Ross motivating of the troops?
2.Disclaimery footnotes, man. I feel you, Herbalife.
They remain in their chains with great fear because the masters can punish them with the "lay-off" whip. It is said that even some slaves that are good and faithful, have felt the sting of the whip. Day by day, year-by-year they toil until the master decides that it is time for them to stop working.
He then releases them to the retirement camps, where they are forced to sit idle and wait for death. It's a well-known fact that the old slaves that try to work are sometimes whipped with the "stop-your-pension" whip.
4.It just says:
The Online Business Team is an independent marketing system that is affiliated with one of the largest wellness companies in the world. With annual sales of $4 billion in 76 countries worldwide, this nearly 30 year industry leader has developed innovative products with mass appeal that are affordable, consumable and 100% guaranteed.