In Asking Court To Reject Proposed Herbalife Class-Action Settlement, Objectors Point To Clawback Actions Flowing From Zeek Case

EDITOR’S NOTE:  Clients of attorney Douglas M. Brooks object to the proposed Herbalife-class-action settlement on a number of grounds. This story focuses on only one of them: one that cites “clawback” actions flowing from the Zeek Rewards’ Ponzi- and pyramid case. The Zeek clawback actions underscore the litigation dangers MLM distributors may encounter after harrumphing for a mother ship alleged to be a fraud.

Risk may be particularly elevated if distributors emerged with a profit or if they offered deceptive “leads” or “training” programs . . .

The PP Blog accessed the objections of Brooks’ clients through the website of TruthInAdvertising, which also is objecting to the proposed Herbalife settlement.  The link appears at the bottom of this story . . .

At least 18 individuals objecting to a proposed class-action settlement in Dana Bostick v. Herbalife International of America Inc et al say the $17.5 million settlement, as stipulated by both sides, could shield “high-level distributors” from “clawback” lawsuits.

All of the objectors have filed complaints against Herbalife with the Federal Trade Commission, according to their Bostick declarations. They are represented by Massachusetts attorney Douglas M. Brooks.

Brooks has litigated against Herbalife in the past and has advocated the position that “The Multi-Level Marketing Industry Causes Substantial Injury to Consumers.”

In their objections, Brooks’ clients specifically argue that “The Release in the Settlement Stipulation is too broad in that it will release claims against high level Herbalife distributors.” As examples of the types of Herbalife distributors who could be sued for return of winnings, the objectors cite “leads” providers and providers of “training” courses.

Although the Bostick case was not brought by the government, the FTC has been investigating Herbalife since March 2014. “[S]everal state Attorneys General” also are investigating the company, the objectors contend.

Made “under penalty of perjury,” their affidavits in Bostick list complaints to the attorneys general of Illinois, Nevada and Connecticut.

Should one or more agencies bring a case against Herbalife, lawsuits against certain individual distributors could provide an additional compensation remedy. This particular route to recovery would be blocked under the current stipulated settlement agreement, the objectors say.

They also say the current pot of $17.5 million is far too small and that the stipulated agreement is defective in other ways.

Objectors Cite Zeek, Fortune Hi-Tech Cases

“The potential for claims against Herbalife’s high level distributors is not merely theoretical,” the objectors contend. “For example, in an action by the receiver arising out of the SEC’s prosecution of a multilevel marketing firm known as Zeek Rewards, the court recently certified a defendant class comprised of the ‘net winners.'”

The case is known as Bell v. Disner. Kenneth D. Bell, a North Carolina attorney and the court-appointed receiver in the SEC’s Ponzi- and pyramid case against Zeek filed in August 2012, is suing more than a dozen individuals for a combined sum in the millions of dollars. He’s also suing certain alleged shell companies used by distributors to harvest illicit profits from Zeek.

At the same time, Bell is suing more than 9,000 other individuals or business entities in a defendant class-action case that already has been certified by a federal judge. The class consists of U.S. Zeek affiliates who allegedly received sums in excess of $1,000 from Zeek.

These actions combined pursue the recovery of about $283 million Zeek allegedly paid out to top promoters in an environment in which “over 92% of the money paid in to Zeek came from net losers.”

Zeek appears to have created approximately 800,000 losers, according to court filings

“[B]ecause ZeekRewards’ net winners ‘won’ (the victims’) money in an unlawful Ponzi and pyramid scheme, they are not permitted to keep their winnings and must return the fraudulently transferred winnings back to the Receiver for distribution to Zeek’s victims,” Bell wrote in March 2014.

Since that time, he also has sued dozens of alleged Zeek winners with addresses in Australia, New Zealand, the United Kingdom, the British Virgin Islands, Canada and Norway. The actions also seek the return of millions of dollars.

But the Zeek clawbacks are not a unique example of the type of litigation that may surface if an MLM company is accused of fraud, the Herbalife objectors represented by Brooks say.

“In an action by the Federal Trade Commission and four state Attorneys General against the multilevel marketing firm Fortune Hi-Tech Marketing, the court-appointed receiver recently received approval to commence litigation against ‘highly compensated representatives,'” they say.

NOTE: Access objection through TruthInAdvertising.org.