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Pyramid Schemes Are Illegal… but Herbalife’s Still at It 

This is a syndicated repost published with the permission of Money Morning. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

 

 

roduct” — and a business model that emphasizes the process of recruitment and promotion over the actual sale of a product.

What’s suspicious about HLF — and what’s caused people like Bill Ackman and John Oliver to criticize the company – is the way the company makes its sales.

As we mentioned, in July 2016 the FTC filed a complaint against Herbalife. As John Oliver put it, the complaint “walked right up to the line of calling it [Herbalife] a pyramid scheme.”

The complaint stated Herbalife’s “compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchase of products.”

This means Herbalife sold its products within the company, which looks like this:

pyramid scheme herbalife

As a result of the FTC settlement, Herbalife promised to “revamp its compensation system so that it rewards retail sales to customers and eliminates the incentives in its currency system that reward distributors primarily for recruiting. [The FTC settlement] mandates a new compensation structure in which success depends on whether participants sell Herbalife products, not on where they buy products.”

Per the settlement, within a 10-month period that began tolling in July, the company must have:

  • At least two-thirds of its rewards paid to distributors be based on retail sales that are tracked and verified by an Independent Compliance Auditor that will report to the FTC
  • At least 80% of its product sales be comprised of sales to legitimate end-users. Otherwise, rewards to distributors must be reduced

Under the new FTC restrictions, Herbalife’s future is uncertain, since distributors are now being forced to make a majority of their money from “legitimate end users.” Whether it can stay in business with the forced change to its business model remains to be seen…

Herbalife stock currently trades at $52.26 per share. It’s lost 2.46% so far in 2016 and 11.42% since the FTC settlement in July:

Herbalife pyramid scheme

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