BULLETIN: New York State Senator Calls Herbalife A ‘Pyramid Scheme,’ Says Its ‘House Of Cards Is Tumbling Down’

The cover page of the report.

5th Update 8:04 p.m. EDT U.S.A. New York state Sen. Jeffrey D. Klein of the Bronx has called Herbalife a pyramid scheme whose “house of cards is tumbling down.”

Klein’s comments came in the context of an “undercover investigation” conducted by his office into Herbalife nutrition clubs in “The Bronx, Queens, and Brooklyn,” according to a PDF report released today. It is titled, “The American Scheme: Herbalife’s Pyramid ‘Shake’down.”

Partners in the probe, according to the report and a statement by Klein, were the New York City Office of the Public Advocate Letitia James and Make The Road New York, an advocacy group that consists at least in part of former Herbalife distributors.

Said Klein, in perhaps the most hostile words to date directed at Herbalife by an American politician (italics added):

“Herbalife’s house of cards is tumbling down. This fraudulent company’s efforts to lure in vulnerable New Yorkers and recent immigrants in pursuit of the American Dream is downright shameful. With false promises of wealth and extravagance, a disproportionate number of Hispanic families are falling prey to these schemes and sacrificing their hard earned dollars.”

Klein added that he intended to sponsor legislation that “will significantly boost protections for consumers and distributors, drastically strengthen financial reporting requirements for Herbalife independent members and increase oversight of this deceptive company in New York.”

Herbalife has been under investigation by the FTC for more than a year. No charges have been announced, and the Klein report raises the prospect that Herbalife has found a way to hoodwink regulators.

From the report (italics/bolding added):

As applicable to Herbalife International, the FTC does not classify the organization as an illegal pyramid scheme because the required $60 to $100 fee to receive a membership kit is not money used to compensate higher up distributors who recruit. Furthermore, once an Herbalife member becomes a supervisor, she is allowed to maintain the title and royalty collecting privilege for an entire year before having to re-qualify. However, our research and investigation reveal that Herbalife distributors do not follow the rules set by the FTC and are in fact running an illegal pyramid scheme. Our analysis demonstrates that higher up distributors encourage recruits to make large first-time product purchases, which the recruiters stands to gain on. And once the new members are unable to sell off their inventory, recruiters encourage them to recruit other members to increase their compensation claims and maintain operation. By contractually following FTC guidelines, Herbalife International has managed to skirt the law, but in reality their lack of proper financial disclosure and supervision over their members allows distributors on the ground to operate illegal pyramid schemes to the benefit of Herbalife International.

Read the statement on Sen. Klein’s website.

Read a PDF of the report.

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