Report: Online Business Systems, Global Online Systems, Herbalife
Category: On-Line Business
Online Business Systems, Global Online, Herbalife Deceptive Business Practices Work At Home Scam Loretto, Ontario Canada
*Consumer Comment ..I am glad to hear all your opinions:
Online Business Systems, Global Online Systems, Herbalife
Fax:
Loretto, Ontario, L0G 1G0
Canada
Submitted: 2/21/2005 10:23:57 PM
Modified: 4/14/2007 7:52:37 AM
D
Akron, OhioI recently read with ambiguous emotions of dismay and gratitude that Global Online Systems was fined $150,000 for operating an illegal pyramid scheme. I was personally bilked for about $13,000 and I 'recruited' many others who lost a great deal of money as well; in fact one client accrued $15,000 worth of debt over this 'lucrative' home-based business opportunity. We were continuously told to invest more and more and more money into advertising, and advised that our businesses were failing because 'we weren't spending enough on advertising.'
I want to advise people that in September of 2004, a large group of Global Online Systems members branched off as Online Business Systems; this group is spearheaded by Shawn Dahl and Glenn Kirkpatrick. They have a new website, but utilize the exact same tactics and scripts that Global Online Systems used. Verbatim.
I started this business with Global Online Systems around August 2003 and got out of the business in October 2004. Basically, I was forced out by a key member, namely Phil Keogh, because 'my organization was complaining too much' about the inordinate expenses each month for leads (getting forced out was actually a blessing in disguise). For example, giving $1000 in advertising to these clowns at the beginning of each month, we would receive 8 to 10 leads (at the most 12), some of which weren't even legitimate credit card numbers to process. (They now have a clause on their website indicating the 'advertising is not guaranteed' in any way shape or form, which protects them from any liability.)
Many, many, many people have lost thousands and thousands of dollars given to these scam artists at the beginning of each month for what they call 'group advertising' or the 'internet marketing wheel.'
I just thought that perhaps people might want to be made aware of this, and that Online Business Systems should be part of the ongoing investigation into illegal pyramid schemes as well. These people are representing Herbalife International, and I have found that these products are extremely overpriced and difficult (if not impossible) to reasonably market. In addition, in order to participate in certain Fast Track or Focus Groups (which is where the awesome training occurs that is supposed to practically guarantee business success), they require that a client be classified as a 'Supervisor' with Herbalife (this is typically a $3,800 investment) and also have at least one internet wheel slot (cost of $500 per month for each slot; they strongly encourage us to buy three per month for a total investment of $1,500!!). Plus, you are required to purchase those Decision Package kits ($180 in lots of ten) and Operations Manuals ($120 in lots of 5) and Training Tickets ($150 in lots of five) in order to do the friggin' business. Furthermore, Herbalife dings the hell out of you for shipping, handling and tax for every order that you place!
In hindsight, this whole scheme is utterly ridiculous! Where are all those advertising dollars going each month??? There is absolutely no accountability financially for these invested dollars. It's based on a factor of trust and faith. What a scam! No one that I know of made any money (and several of us tried really, really hard); rather, we all accumulated a massive amount of debt.
Many of the people that I recruited, including myself, genuinely tried to make this business work. We believed in the system and what we were being told, however, we all lost a lot of money. Most of the debt we incurred ranges between $7,000 and $15,000!! It's bad enough that I got myself into a very serious financial crisis, but frankly, I'm living with a lot of guilt now because I got many other people in the same exact boat. And for that I'm very sorry. I was just as naive as them and certainly didn't intentionally try to hurt anyone. I am now a very cynical person because of this experience, and I never was before. I was always sought out the best in people, tried to help everyone in any way I could, and generally believed that the majority of folks were decent.
Furthermore, all of the clients that I was ever involved with were from the U.S. Perhaps these guys are protected under some international guidelines, which is why they typically dealt with people out of Canada. I don't know.
Bottom line: Don't get wrapped up in this deceptive business!! It's not a business really, just brainwashing tactics to get you in deep enough financially; then you are compelled to stick with it, hoping to get out of debt and achieving those ambitious financial goals that you're continuously promised will happen with perseverence and consistency. This is a really bad business venture!! Take my word for it. All you really need to do is objectively (the operative word here is 'objectively') consider the tactics that are being employed. In hindsight, it's very evident. Frankly, I can't believe I was affiliated with a group like this for so long. I have a master's degree in business management and considered myself business savvy.
D
Akron, Ohio
U.S.A.
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Updates & Rebuttals:
- I'm so sad for you Raymond J [2/22/2005 11:35:46 AM]
- Read and comprehend! This business was found to be operating an illegal pyramid scheme and fined for such. D [2/23/2005 6:27:47 AM]
- Unfinished business.... Howdy Raymond, remember me? William [2/24/2005 12:59:16 AM]
- I Would like to see some proof and documentation. Jacquelyn [3/12/2005 7:17:18 AM]
- hey jackie... I love hearing sheep like you claim that this scheme is not only a business, but YOUR business M [3/12/2005 12:07:54 PM]
- Absolutly Amazing........ I am the one that does the marketing for the product Jacquelyn [3/15/2005 12:13:29 PM]
- Herbalife Marketers Plead Guilty to Pyramid Selling Global Online Systems Inc. Fined $150,000 for Operating Illegal Pyramid Scheme D [3/15/2005 2:46:18 PM]
- I'LL SHOW YOU MY RESEARCH, IF YOU'LL SHOW ME YOURS. WHAT THE HELL...I'LL SHOW IT ANYWAY!!! William [3/16/2005 12:55:31 AM]
- Thank You I would just like to personaly thank you for answering my questions directly. Jacquelyn [3/16/2005 5:59:29 AM]
- No need for name calling now. Jacquelyn [3/16/2005 1:14:23 PM]
- OBS is the same as GOS D [3/16/2005 6:45:36 PM]
- So where's the extensive research that you said was done? William [3/17/2005 1:31:27 AM]
- 2 seperate companies? Randy [6/1/2005 4:06:49 PM]
- Zealots...another name for Closed-Minded Stubborness Raymond J [8/31/2005 5:12:26 PM]
- I am a member of OBS Casey [11/16/2005 9:51:41 AM]
- Good business is what you make it. Kenn [1/25/2007 6:29:15 PM]
- There's a lot of money out here people.. and herbalife is not it. Callie [3/17/2007 5:30:22 PM]
- I am glad to hear all your opinions: Marsha [4/14/2007 7:40:26 AM]
Submitted: 2/22/2005 11:35:46 AM
Modified: 3/2/2005 4:55:35 PM
Raymond J
Somerville, MassachusettsU.S.A.
I'm so sad for you
wow...ok, so I've been involved for 3 months...using the system (advertising and all) that you've completely outlined here...I made 3700+ the month of January...and that's take home...now my advertising costs since I've started have not been met, but I'm approaching breaking even...
it's sad that you're looking for something and not willing to work for it...don't you know you own a franchise? don't you know you have to advertise yourself?
don't you know that you shouldn't invest all of your money in one method or simply rely on one person? That's just bad business sense...don't be a freakin' sore loser...if you bought a McDonald's franchise for 500,000 (cash up front),
ALL OF YOUR MATERIALS WOULD HAVE TO COME FROM MCDONALD'S...ALL OF THEM FROM UNIFORMS TO MANUALS TO THE FREAKIN' KETCHUP...get over it...you didn't want to do the work...if you'd made any advances in your business, your people would not have been complaing...
you're just pathetic...sorry to say it but when you complain that 'they made me fail' and don't hold yourself accountable for anything, it's pathetic dude...do us all a favor and just get a 9-5 (which is what you believe to be the best thing) and keep quiet...
Read and comprehend! This business was found to be operating an illegal pyramid scheme and fined for such.
Did you read the first sentence, Raymond? This business was found to be operating an illegal pyramid scheme and fined for such.
And don't even respond with a bunch of assumptions and allegations about work ethics, blame, complaints, etc. You don't have enough facts about me or my downline to even go there!! This is merely factual information regarding the ultimate results of many people who undertook this business venture; nothing more, nothing less.
If you're satisfied reciting those scripts over and over and over each and everyday, dealing with all the hostility and frustration of potential new recruits who are dissatisfied with the Decision Package, dealing with unprofitable, frustrated people in your downline, and you somehow can make a reasonable living, then more power to you.
Let me know how things are going a year from now. Until then, put a lid on it. You're not informed enough to adequately respond to the facts that are cited. You're making a whole bunch of assumptions; I simply stated the facts, all of which I have supporting documentation for. Did you ever break down the word 'assume' into its component parts: ass-U-me.
Furthermore, you better focus all of your efforts on that telephone, not spending an inordinate amount of time surfing the internet. Believe me, you will have to work your butt off throughout this entire venture. The only value-added activity for this business is constantly working that phone. If nothing else, take heed to that advice, and get to work!
Unfinished business.... Howdy Raymond, remember me?
Well, well, well Raymond J., thought you just faded away like Carl, of Clearwater Florida.
You never answered any of my qestions, so I'd like to ask you again, to tell us all, what all you had to do to go big time with Herbalife?
Then furnish some documentation to back-up all your claims of success. Otherwise, don't bother to spew the same drivel that countless other Herbabots have before you, when confronted with questions or statements that would show that Herbalife is nothing more than a pyramid scheme.
Tell us again, how you decided to get in the biz, you pathetic, college math major. (LMAO)
D, of Akron, I cant tell you how refreshing it was to read your post. I beleive you are the first ex-Herbalifer to tell it like it is. You got Raymonds number, as you were not just a dabbler in the biz. You know the the
types. The starrey eyed prospects, with visions of granduer, who will be that special one, who makes the 1% of all distributors who somehow realises a profit after all the expenses have been subtracted from the gross.
You should read the book 'Merchants of Deception' by Eric Scheibeler. He blows the whistle on Amway, and the MLM industry. Its available to read online for free. He was a rep for amway, who made it all the way to the Diamond Level, and never grossed a dollar one. In fact he just about lost everything he had, house, family, friends, sanity. I'm sure you will find his situation parallels much of your own.
Thanks again for your post, it will surely help others, to not buy into the 'Dream' (I know Raymond...I'm a dream stealer, right?)
I'm outta here.
I Would like to see some proof and documentation.
Since we are talking about factual proof, I for one would like to see the actual proof of the pudding so to speak about this fine that GOS had received for being a Pyramid Scheme. I find it really hard to believe that the New York Stock Exchange would allow such a type a of company that you are outlying to be publicly traded. I also don't think that Michael O Johnson would be the CEO of such a company.
I have been with Herbalife since August of 2003, so I have the time and experience in this company to properly asses your slanderous allegations towards the company.
I have not been brain washed, I simply work my but off and I absolutely love it. I understand that this is not a job it is a business, its my business. If you started this business thinking that you would not have to work hard and that you would get rich quick then your stupid. There is no such thing as getting rich overnight unless you win the lottery or inherit.
I have been in this business for over a year and I DO NOT have any debt. In fact I have been able to pay off other debts that I had accumulated previously before joining Herbalife. I have completely replaced my income and am very close to replacing my husbands income.
So what does my success tell me about your situation, your full of crap. You complain about every little detail which is a most definitely a formula for the easy way to fail. Some people were just not meant for success because they are to afraid to fail. Some people just don't have the intelligence to make there home based business succeed.
If you would have followed the plan that is outlined for you instead of trying to fight it the whole way and trying to reinvent what has already been proven to work and if you would have spent half the amount of effort in doing the business right as you do complaining, things could have been different for you.
We could sit here and talk about should have, could have, would have, ifs ands or buts. But for now all I can say more for me!..... good luck with the rest of your life.
hey jackie... I love hearing sheep like you claim that this scheme is not only a business, but YOUR business
Jacquelyn I love hearing sheep like you claim that this scheme is not only a business, but YOUR business...BULLS&*T!!! You lazy people decide to sign up for a scheme that's already mapped out and planned FOR you!! You didn't create the product you're selling, you didn't contact marketing and ad agencies yourself to get this 'product' known, you don't have any property that sells this stuff in a window or mall, you have no control over the way it is presented, you probably don't even know what these products are made of.
Does your 'company' even have a legit help line that CUSTOMERS can call and get their valid concerns addressed to their SATISFACTION? People people people, if you want to have your own business, start one with something YOU really believe in, not one that was pitched to you over the internet by some sucker who needed more people under him to make his 'business' work! By the way, any work at home opportunities that are not offered by legitimate companies that have a main location you can visit in person, like a corporate headquarters, BEWARE...some of these bogus companies buy cheap and poorly maintained office space in some part of town, where it looks more like a party room and not a business when you get there.
If the main room you go into when meeting wit this so-called business has no office equipment, desks, phones, water cooler, etc., don't waste your time listening to these young idiots speak from a scripted pitch. Watch their eyes, they have a hard time actually looking at you in the face for more than 15 seconds.
Oh, just look at the enthusiasm they feign!!!!Am i supposed to believe that a young person the same age as me would actually act like that? I know when these presentations are over that they breathe a sigh of relief and change into their jeans and jerseys and roll their eyes. The same thing with these internet based opportunities, except you can't really see the people who are pulling you in, and you can't see them rolling their eyes. SUCKER!!!
Absolutly Amazing........ I am the one that does the marketing for the product
You know it just amazes me that you still just don't understand. No I did not make the products, but yes I DO know what is in them in fact I have done extensive research on the products themselves. Oh by the way, I am the one that does the marketing for the product. I do not rely on 'getting new people to make my business work' I am indeed the ultimate variable as to weather my business works or not. I consistently sell over $3000.00 in retail every single month all by my little self. How? you may ask. Because I do give good customer service, I do have an open door policy for my customers when they need. So you see, you just don't have a valid argument here, with me anyway. Have a great day!
PS Just admit your failure and take resposibility for your losses and stop blaming everyone else for your mistakes.
Herbalife Marketers Plead Guilty to Pyramid Selling Global Online Systems Inc. Fined $150,000 for Operating Illegal Pyramid Scheme
Competition Bureau Media Room News Releases
Herbalife Marketers Plead Guilty to Pyramid Selling Global Online Systems Inc. Fined $150,000 for Operating Illegal Pyramid Scheme
OTTAWA, November 23, 2004 - A Competition Bureau investigation into a Vancouver-based multi-level marketing firm has led to a $150,000 fine and guilty pleas on two counts under the deceptive marketing provisions of the Competition Act. The matter has been resolved with Global Online Systems Inc. (GOLS) voluntarily pleading guilty and signing a Prohibition Order filed today with the Federal Court of Canada.
An investigation by the Bureau revealed that GOLS was operating a scheme of pyramid selling. Participants in the GOLS multi-level marketing plan were selling health-related products marketed by Herbalife Canada Ltd.
Contrary to the Act, participants were compensated for the recruitment of new participants and had to buy specific quantities of products as a condition of joining the plan. In addition, GOLS and its participants - through its Web sites and other promotional materials - recruited new participants by exaggerating income expectations without disclosing the income of a typical participant.
'Those who join pyramid schemes are often enticed by promises of easy money, but only the very few at the top ever see any real benefit,' said Raymond Pierce, Deputy Commissioner of Competition. 'The Bureau is committed to pursuing these offences under the Competition Act and ensuring that Canadians do not fall prey to such scams.'
According to the Prohibition Order, Global Online Systems Inc. and its directors, Deborah Jane Stoltz and Marilyn Thom, have agreed to:
pay a $150,000 fine;
disclose the average income actually received by all participants in GOLS; inform all of its existing distributors and participants of the terms of the Order; and not become involved directly or indirectly in any business operation engaged in a scheme of pyramid selling.
Consumers who suspect they have been the victim of deceptive business practices or who want information on the application of the Competition Act should contact the Bureau's Information Centre at 1-800-348-5358, or visit our Web site at www.cb-bc.gc.ca.
The Competition Bureau is an independent law enforcement agency which ensures that all Canadians enjoy the benefits of a competitive economy. It oversees the application of the Competition Act, the Consumer Packaging and Labelling Act, the Textile Labelling Act and the Precious Metals Marking Act.
For media enquiries, please contact:
Maureen McGrath
Senior Communications Advisor
Communications Branch
(819) 953-8982, or (613) 296-2187 (cell)
For general enquiries, please contact:
Information Centre
Competition Bureau
1-800-348-5358
I'LL SHOW YOU MY RESEARCH, IF YOU'LL SHOW ME YOURS. WHAT THE HELL...I'LL SHOW IT ANYWAY!!!
Here is some dirty laundry for the 'Snake Oil Lady' from Texas.
Ephedra Products under Attack in U.S. and CanadaQuackwatch Home Page Herbalife, Other Ephedra Marketers Face Soaring Insurance Rates
David Evans ©2002 Bloomberg, LP
April 11, 2002
Herbalife International Inc. continues to sell weight-loss products containing ephedra, following lawsuits blaming the substance for customer deaths, and a six-fold increase in product-liability insurance expense. Herbalife, which faces two wrongful death suits blaming its ephedra weight-loss products, still includes the herb in its line of diet products, which made up42.7% of last year's $1.66 billion in sales, according to its annual report.
Late yesterday, the company agreed to be taken private for $685 million, or $19.50 a share, by Whitney & Co. LLC and Golden Gate Capital Inc.
Robert Hartwig, chief economist for the Insurance Information Institute, said ephedra insurance premiums have increased along with adverse incident reports and lawsuits. 'You have a situation where the house is on fire,' said Hartwig.
'If your house was already on fire, it's very unlikely we'd write a policy.' More than a half dozen other publicly traded companies also continue to sell ephedra products, while unable to obtain desired levels of insurance.
Herbalife said in its federal filing that its product- liability insurance premium soared from $400,000 in 2000 to $2.5 million last year, even as its deductible increased 10-fold to $5 million, and its coverage limit fell by $10
million to $40 million.
Ephedra is an herbal stimulant also used for bodybuilding. The National Football League banned ephedra last year after it was linked to the deaths of several athletes.
Health Canada ordered a voluntary recall of the products in January, after finding 'these products pose a serious risk to health.' Dozens of Deaths Ephedrine, the active ingredient in ephedra, also called ma huang, is a chemical
cousin of amphetamines and increases both blood pressure and heart rate, say experts. The U.S. Food and Drug Administration has linked ephedra to hundreds of adverse reactions and dozens of deaths.
Herbalife, based in Los Angeles, said in its annual report it might discontinue selling ephedra products because insurance is 'becoming prohibitively expensive.' It said the company had 'substantial defenses' to the lawsuits and
said 'they will not have a material impact on us.' An Herbalife spokeswoman, Tammy Taylor of Sitrick & Co., said Herbalife believes ephedra products are 'safe and effective when used as directed.' Francis Tirelli, company president,
didn't return telephone calls.
Nine other public companies say they sell ephedra products. Advantage Marketing Systems Inc. received 52% of its $28.4 million of 2001 revenue from ephedra. The company's product liability insurance excludes ephedra claims, according to its annual report. The company didn't indicate any ephedra lawsuits in its annual report. Reggie Cook, chief financial officer, said the coverage would be too costly. 'If I paid $100,000, I could get $100,000 of coverage,' he said.
No Complaints Natrol Inc. of Chatsworth, California, has sold ephedra supplements for 18
years, without a single complaint, said Elliot Balbert, president and founder.Still, the company can't find product-liability insurance for the products, which include Natrol High, Metabolfirm and Therma Pro.
'We couldn't even get a damn bid,' said Balbert. 'I don't like the exposure.' He said Natrol might stop selling ephedra products, which generate less than 3% of
revenue. Three other public companies said they are selling ephedra products althoughtheir insurance now provides less protection.
Wrongful Death Suit Twinlab Corp. of Hauppauge, New York, faces a lawsuit over a customer death
following use of its Metabolift ephedra product. Chattem Inc. of Chattanooga, Tennessee,cautioned in its annual report it might not have sufficient insurance coverage to cover sales of Dexatrim after its policy expires on May 31.
Weider Nutrition International Inc., which distributes diet products from its Salt Lake City headquarters, is defending three ephedra lawsuits. Daniel Thomson, Weider's general counsel, didn't return telephone calls. William
Rizzardi, Twinlab's chief information officer, and Scott Sloat, Chattem's controller, declined to comment. Four other companies that sell ephedra products don't indicate any lawsuits in
their annual reports. Nutraceutical International Corp. said its liability insurance excludes ephedra, and the Park City, Utah-based company said it recently halted sales of some ephedra products. Les Brown, chief financial
officer, didn't return telephone calls.
Mannatech Inc. of Coppell, Texas, reported selling ephedra products. Steve Fenstermacher, chief financial officer, didn't return phone calls. Both Nature's Sunshine Products Inc. of Provo, Utah, and NBTY Inc. of Bohemia, New York, sell ephedra supplements. Harvey Kamil, NBTY's chief executive, didn't return telephone calls. Nature's Sunshine Products executives weren't available.
'Natural Reaction'
Among a group of 140 FDA adverse reaction reports, 104 show ephedrine was the 'very likely' cause of a medical problem, according to Ray Woosley, who examined the reports. Woosley, dean of the University of Arizona College of Medicine, said there were 10 reported ephedrine cases of 'sudden death' and 15 severe strokes.
Woosley, who joined Public Citizen in its petition for an FDA ephedra ban, said he's not surprised that insurers are shying away from companies selling ephedra. 'That's a natural reaction to reckless behavior,' he said. News Index ||| Quackwatch Home Page This article was posted on April 11, 2002.
Did your extensive research turn any of this up?
How about some of this?
Herbalife International: 1985 Hearings, Part IMLM Watch Home Page Herbalife Criticized at Senate Hearings Odom Fanning
Opening two days of hearings, Senator William V. Roth, Jr. (R-DE), chairman of the Senate Permanent Subcommittee on Investigations, made it clear that their purpose was not to 'get' Herbalife or any other product, but resulted from five months of investigation into weight reduction products and plans of all types.
The Subcommittee is authorized to investigate the efficiency and economy of all branches of the government and also has jurisdiction over 'all aspects of crime and lawlessness within the U.S. which have impact upon or affect the national health, welfare, or safety.'
Roth acknowledged that following announcement of the hearings (held in Washington, D.C., May 14th and 15th), he had received a 'very large number of phone calls and letters from individuals who are very satisfied with the Herbalife products, and have lost large amounts of weight.' Many of these correspondents, and an estimated 3,000 Herbalife distributors who marched on the second day, were obviously on the defensive. So was the Food and Drug Administration, for, as the senator put it, the purpose of the hearings was 'to find out if the public is being adequately protected when it buys and consumes
diet products.' In his opening remarks, Roth made a distinction between 'miracle pills and
creams,' tinted sunglasses, plastic ear forms and other 'patently fraudulent products' and the very low calorie (VLC) products that can actually produce weight loss but may not be safe. His major concern with the VLC products, he specified, 'is with what the Food and Drug Administration is doing and what it is not doing, particularly when serious questions have been raised both within the FDA and outside this agency about the safety of such products....We are dealing with a multi-billion dollar industry which produces items ingested into the human body. Yet the FDA has been reticent to involve itself in low calorie diets. I want to know why, because I think the public deserves to know
conclusively about the safety of individual products now in the marketplace.'
On the first day Roth's subcommittee heard testimony from scientists and VLC product users, all of whom submitted written statements as well. Most of the scientists favored more regulation of such dietary products; the users were pro and con.
One scientific witness was Judith S. Stern, Sc.D., professor of nutrition and director of the Food Intake Laboratory at the University of California, Davis. She conceded: The inadequacy of traditional medicine to provide a permanent cure for obesity has given rise to an entire industry of entrepreneurs who claim to be able to relieve the frustrations of the overweight. The ironic tragedy is that most diets work-at least initially-when they are followed. However, fad diets are usually quite restrictive in their food choices, may have unpleasant side effects, and most people cannot follow them for any length of time. In addition, when daily calories are restricted below 1,200, it becomes difficult
to satisfy all other nutrient needs.
Dr. Stern also made the distinction between 'miracle cures' and VLC products.
Products in the former category include the hormone cholecystokinin (CCK), claimed to decrease hunger, and various amino acid pills, said to release growth hormone. Both have been promoted with false claims based on legitimate
scientific discoveries that were overgeneralized and misrepresented, she noted.
Debunking claims that grapefruit or grapefruit extract can act in a catalytic manner enhancing breakdown of fat, Dr. Stern described her testimony last year which helped the U.S. Postal Service stop sales of Super Grapefruit Pills by a California company.
Noting that these pills contained glucomannan, she reported that in 1980 she had conducted a double-blind study in which the test group
received one gram of glucomannan while the control group was given a placebo.
Both groups were placed on a behavior modification program. Both groups lost
weight, she noted, but there were no statistically significant differences in
hunger ratings or weight loss between them.
Dr. Stern also zeroed in on kelp/lecithin/cider vinegar/vitamin B6 combinations found in dietary products since 1974. Iodine-rich kelp is potentially harmful to a small number of individuals in whom high amounts of ingested iodine can cause thyroid trouble. The other three ingredients are worthless, she noted.
Another expert witness was Varro E. Tyler, Ph.D., professor of pharmacognosy
(the science of medicines from natural sources) and dean of Purdue University's School of Pharmacy and Pharmacal Sciences. Here is my summary of Dr. Tyler's detailed analysis of various Herbalife products contained in the lengthy packet of written material released by Roth's subcommittee to the press:
Slim and Trim Formula #1 (46 cents per day), described in the sales literature 'as a balanced protein powder made from natural vegetable soy, casein and whey protein.' Tyler said the product is falsely represented in company literature
because there is nothing about a protein powder, per se, that will curb the appetite any more than an equivalent amount of protein derived from eating lean meat, nuts, or the like.
Further, no protein powder will 'cleanse the
system' or facilitate 'burning excess calories.' It will supply needed daily nutrients, but no more effectively than a low-calorie diet, carefully balanced for carbohydrates, minerals, and vitamins-as well as protein.
Slim and Trim Formula #2 (21 cents per day), described by the Herbalife organization as a special blend of 14 herbs plus kelp, lecithin, vitamin B6, and cider vinegar designed to cleanse the digestive system and naturally help
curb the appetite. Tyler said that, of its many herbal ingredients, none is actually present in sufficient quantity to produce significant physiological effects by itself.
But he noted that four ingredients-senna, cascara sagrada,
dandelion root, and kelp-might work together to exert a laxative effect in
sensitive individuals.
Slim and Trim Multivitamin and Multimineral Formula #3 (23 cents per day) is a
fairly standard vitamin/mineral preparation with some herbal products added in
such tiny amounts that they exert no significant effect. Unless vitamin
deficiency was present, Tyler noted, the product would be a complete waste of
money.
Slim and Trim Linseed Oil Formula #4 (10 cents per day) contains small amounts
of linseed oil but has no advantage over less expensive vegetable oils
ordinarily used in the kitchen of the average home. (Moreover, as noted by the
next witness, the amount found in the formula will be obtained in food
consumed in just one balanced meal per day.)
Cell-U-Loss (43 cents per day) is described in Herbalife literature as a
product designed to attack cellulite, promote circulation, and eliminate
excess fluids, is recommended for use with the Slim and Trim formulas. Tyler
noted that its tiny amounts of herbs would at most cause a slight diuresis
(output of body water), but would have no effect whatsoever on appetite or
body fat.
Herbal-aloe is said to aid digestion and cleanse the system. Although
uncertain of the type of aloe contained in this product-which may be a
laxative-Tyler expressed deep concern over two of its other herbal
ingredients. Comfrey, he said, is a known carcinogen, shown to produce
malignant tumors in the livers of rats when included in their diet. And the
active constituent of chapparal, nordihydroguaiaretic acid (NDGA), was removed
from the FDA's GRAS (Generally Recognized As Safe) list many years ago after
it was shown to cause cysts and kidney damage in rats.
N.R.G. (Nature's Raw Guarana) (80 43 cents per day), claimed to increase
energy, aid in mental alertness and produce a nutritional lift, is sold in
tablets that contain small amounts of granular guarana, the seed of a South
American plant known to contain about 5% caffeine. The amount of caffeine in
the recommended dose of N.R.G. is about the same as that in a cup of strong
coffee-but the presence of caffeine is not revealed in product labeling or
literature. Thus, individuals sensitive to caffeine might be unwittingly
harmed.
Schizandra Plus tablets are said to help combat stress and damage leading to
premature aging. Although he suspected that the dosage of its ingredients was
too low to exert pharmacological effects, Tyler indicated that tests are
needed to determine whether chemicals extracted from schizandra can protect or
harm the liver [see NF 2:29].
Tang Kuei (50 cents per day), said to help establish menstrual regularity and
provide 'herbal nutrition' for the whole body, contains dong quai (also known
as dang gui and pinyan) and chamomile. These drugs -- used in traditional
Chinese medicine -- have not been proved by Western standards. Tyler noted
that even if they are effective, the amounts contained in Tang Kuei are far
below those used in China. Moreover, under federal law, Schizandra Plus and
Tang Kuei are unapproved new drugs that are not legal to sell in the United
States.
Overall, Tyler objected that
Some Herbalife products may well be toxic, at least to some consumers.
Herbalife literature and word-of-mouth recommendations build up false hopes in
consumers, most of whom are not able to benefit from the placebo effect.
It is particularly deceptive because they lead the public to believe that
Herbalife products 'contain a lot of wonderful herbs with marvelous
health-giving properties when the amounts present in the products are too
small to have any significant physiological effects in normal persons.
Consumers are thus paying good money for products which have no proven value.
Many of the same points were reiterated in an analysis of the various Herbalife
formulas by F. Xavier Pi-Sunyer, M.D., associate professor of Medicine, Columbia
University College of Physicians and Surgeons, and a division chief at St.
Luke's Roosevelt Hospital Center, New York City.
'With very rapid weight loss, and particularly with diets low in carbohydrate,
there is an early diuresis, that is, loss of water via the urine. This accounts
for much of the weight loss of crash diets and much of this water is
reaccumulated when the diet is stopped,' said Dr. Pi-Sunyer. 'With this water
loss, great amounts of sodium, potassium, and chloride are lost, as well as
lesser but substantial amounts of calcium, magnesium, and other minerals. These
must be replaced. If they are not, the electrical integrity of biological
membranes may be lost, and one outcome of this may be cardiac arrhythmias.'
Because dieters wish 'to get on with it,' there may be a tendency to take only
the protein preparation, without supplementing it, as sometimes recommended, by
a meal to bring the daily intake to at least 800 to 1,000 calories (of which 300
to 400 may be provided by the dietary product). Consumers also may ignore the
limited period, say four weeks, recommended by some diet purveyors, and incur
added risk by consuming the preparation for a longer time, said Dr. Pi-Sunyer.
He also reported that a colleague, Theodore B. Van Itallie, M.D., had reexamined
data of the victims of the liquid protein diets of 1977-1978 and found that 'the
less fat you are the more dangerous these diets are for you, the more likely you
are to lose life-requiring protein, and the more at risk of dying you are. Since
these preparations are bought without restriction, many people take them who are
not very fat, and these people seem to be particularly at risk.'
Two of the four laypersons who testified were constituents of Senator Roth's-one
for Herbalife, the other against. Patricia Stombaugh, of Smyrna, Delaware, began
taking Herbalife in August 1984. 'After taking it for two months, losing five
pounds and feeling much better,' she was asked by friends 'for more information
about Herbalife.' She soon became a distributor. She and her representatives
since have sold it to over 300 people. 'Herbalife has worked for me and my
customers,' she told Roth and the subcommittee. 'I believe the people who said
they felt better using the Herbalife products are stating the facts: their
health problems improved through weight loss and sound nutrition. They are not
saying that Herbalife is like a medicine that cures a disease. No one I know has
ever claimed this.'
Another user, Greg Martin, of Dover, Delaware, lost about 13 pounds in three
months and 'felt better than I had in years,' after starting on Herbalife
products in September 1984. He and his wife began selling the products in
October, eventually building a customer list of 100 with ten distributors. But
most of his customers suffered from constipation when using Slim and Trim
Formulas, and 10 -15%t had other problems, he reported. One man who had had two
previous heart bypass operations was taking Herbalifeline because Martin
'understood from the literature that it was good for heart problems. This man
became extremely constipated.'
Because he was unable to get answers to his questions from Herbalife
headquarters, Martin stopped selling its products to retail customers at the end
of February. 'I do not want to be associated with a company who claims its
products are safe for everyone to use and then will not deal with [health]
problems,' he testified. He expressed the conviction 'that diet products and
food supplements can do a lot of good. I would not want to see them prohibited.'
He suggested, however, that standards be established and that the FDA 'enforce
these standards so that the public can be confident that these products are
safe.'
The final two lay witnesses testified to personal tragedies. Bernard Lehman, of
Anaheim, California, formerly from a town near Nashville, Tennessee, said that
he is not able to work because he has Hodgkin's lymphoma, a form of cancer. A
few months ago, while 'basically bedridden,' he claimed that a distributor in
Tennessee told him and his wife that she could lose weight taking Herbalife
products, that both could earn needed income, and that 'the Herbalife products
would help to cure my cancer.'
Lehman named the distributor and charged, 'He told us this orally and showed us
some brochures which said this' in writing. 'However, he gave us different
brochures without this information and said that he only had one copy of the
special brochure, and he had to keep it for his use.' Lehman summarized by
saying that the distributor 'basically said that the Herbalife products would
act as a cure-all.'
Although he and his wife had 'bad reactions' to the Herbalife products, they
continued taking them 'because we believed that we could make lots of money and
we thought our own bad reactions to taking the products were unusual.' They
spent about $1,800 for inventory and publications and sold about $100 worth of
Herbalife products before asking to get out and get their money back. They
eventually received $1,000 from the distributor and still have $700 worth of
product they 'would just like to get rid of...and forget about.'
Cynthia Guillaume Lee, of New Orleans, told the pitiful story of her late
husband, Bivian Lewis Lee, Jr., who had retired as a National Football League
player in 1976. He became a Herbalife distributor in October 1984 because 'the
extra money sounded real good,' said Mrs. Lee. Although he was not overweight
and 'was very much against taking any kind of diet product,' he began taking a
Herbalife product because 'he said that if he was going to sell it, he would at
least try it out.'
Two weeks later, Bivian, age 35, was dead. His widow testified:
I know that I'm not a doctor. I know that I'm not qualified to give medical
opinions. But I do know that my husband was a perfectly healthy man. I saw him
deteriorate from the perfectly healthy man to his death. And it all began when
he started taking Herbalife. I want to tell what happened to me-it's not easy
for me to do this-because I want this subcommittee, or the Federal Food and
Drug Administration or somebody to investigate why my husband was alive and
well until he started on the Herbalife products and now he's dead. I want to
encourage the subcommittee to look into this so that other young mothers won't
find themselves in my position.
Mrs. Lee submitted an affidavit by Dr. Van Itallie, who had reviewed the autopsy
protocol prepared by the Orleans Parish Coroner's Office and other records
relating to Bivian Lee's death. The affidavit cites an article Van Itallie
co-authored, entitled 'Cardiac dysfunction in obese dieters: a potentially
lethal complication of rapid, massive weight loss' [American Journal of Clinical
Nutrition 39:695-702, 1984]. The article discusses the cases of 17 obese but
otherwise healthy persons on VLCs who died of cardiac arrhythmia. 'Basically,'
the affidavit says, 'severe restriction of caloric intake causes the body to
ulitize and deplete its protein. The heart is a muscle, made of protein, and it
is not spared . . . . depletion of protein from the heart may be followed by
cardiac arrhythmia and death. I refer to this as the 'liquid protein syndrome',
but it may develop from any drastic reduction in caloric intake. My thesis
further holds that persons with lesser stores of body fat are more likely to
experience the cardiac dysfunction. Fatter dieters seem to survive longer
because they are better able to conserve their body protein.'
Van Itallie found this thesis consistent with Bivian Lee's case, particularly
because he was 'persuaded by Lee's Body Mass Index, indicating that he had
lesser stores of body fat.'
______________________
This article was published in the September 1985 issue of Nutrition Forum, when
Mr. Fanning edited and published a newsletter called Con$umer New$weekly. Before
that, he was a science writer for The Atlanta Journal and director of
information for the U.S. Centers for Disease Control and Prevention. Bivian
Lee's lawsuit was settled out of court for an undisclosed sum which was
undoubtedly substantial.
Herbalife Hearings, Part II
Index to Information about Herbalife
MLM Watch Home Page
Here's some good info...I suggest you read it.
Ten Big Lies of Multilevel Marketing
1. Robert L. Fitzpatrick
The multilevel marketing (MLM) field grows, and its member companies multiply. Solicitations to join seem to be everywhere. Its promoters would like you to believe that it is the wave of the future, a business model that is gaining momentum, growing in acceptance and legitimacy, and will eventually replace most other forms of marketing. Many people are led to believe that success will come to anyone who believes in the system and adheres to its methods.
Unfortunately, the MLM business model is a hoax that is hidden beneath misleading slogans. Calling it a 'great business opportunity' makes no more sense than calling the purchase of a lottery ticket a 'business venture' and winning the lottery a 'viable income opportunity for everyone.' MLM industry claims of distributor income potential, its glorified descriptions of the 'network'' business model, and its prophecies of dominating product distribution have as much validity in business as UFO sightings do in the realm of science.
The very legality of the MLM system rests tenuously upon a single 1979 court ruling on one company. The guidelines for legal operation set forth in that ruling are routinely ignored by the industry. Lack of governing legislation or oversight by any designated authority also enables the industry to endure despite occasional prosecutions by state attorneys general or the FTC.
MLM's economic scorecard is characterized by massive failure rates and financial losses for millions of people. Its structure in which positions on an endless sales chain are purchased by selling or buying goods is mathematically unsustainable, and its system of allowing unlimited numbers of distributors in any market area is inherently unstable. MLM's espoused core business -- personal retailing -- is contrary to trends in communication technology, cost-effective distribution, and consumer buying preferences. The retailing activity is, in reality, only a pretext for the actual core business, which is enrolling investors in pyramid organizations that promise exponential income growth.
As in all pyramid schemes, the incomes of those distributors at the top and the profits to the sponsoring corporations come from a continuous influx of new investors at the bottom. Viewed superficially in terms of company profits and the wealth of an elite group at the pinnacle of the MLM industry, the model can appear viable to the uninformed, just as all pyramid schemes do before they collapse or are prosecuted by authorities.
The growth of MLM is the result of deceptive marketing that plays upon treasured cultural beliefs, social and personal needs, and some economic trends, rather than its ability to meet any consumer needs. The deceptive marketing is nurtured by a general lack of professional evaluation or investigation by reputable business media. Consequently, there is widespread belief that MLM is a viable business investment or career choice for nearly everyone and that the odds of financial success in the venture are comparable or better than other employment or business ventures.
MLM's true constituency is not the consuming public but hopeful investors. The market for these investors grows significantly in times of economic transition, globalization, and employee displacement. Promises of quick and easy financial deliverance and the linking of wealth to ultimate happiness also play well in this market setting. The marketing thrust of MLM is directed to prospective distributors, rather than product promotions to purchasers. Its true products are not long distance phone services, vitamins, or skin creams, but the investment propositions for distributorships which are deceptively portrayed with images of high income, low time requirements, small capital investments, and early success.
Here are ten lies I have identified during more than 20 years of observing the MLM marketplace:
Lie #1: MLM offers better opportunities than all other conventional
business and professional models for making large amounts of money.
Truth: For almost everyone who invests, MLM turns out to be a losing financial proposition. Fewer than 1% of all MLM distributors ever earn a profit and those earning a sustainable living at this business are a much smaller percentage still.
Extraordinary sales and marketing obstacles account for much of this failure, but even if the business were more feasible, sheer mathematics would severely limit the opportunity. The MLM business structure can support only a small number of financial winners. If a 1,000-person downline is needed to earn a sustainable income, those 1,000 will need one million more to duplicate the success. How many people can realistically be enrolled? Much of what appears as growth is in fact only the continuous churning of new enrollees. The money for the rare winners comes from the constant enrollment of armies of losers. With no limits on numbers of distributors in an area and no evaluation of market potential, the system is also inherently unstable.
Lie #2: Network marketing is the most popular and effective new way to bring products
to market. Consumers like to buy products on a one-to-one basis in the MLM model.
Truth: Personal retailing -- including nearly all forms of door-to-door selling -- is a thing of the past, not the wave of the future. Retailing directly to friends on a one-to-one basis requires people to drastically change their buying habits. They must restrict their choices, often pay more for goods, buy inconveniently, and engage in potentially awkward business relationships with close friends and relatives. In reality, MLM depends on reselling the opportunity to sign up more distributors.
Lie #3: Eventually all products will be sold by MLM. Retail stores, shopping malls,
catalogs and most forms of advertising will soon be rendered obsolete by MLM.
Truth: Fewer than 1% of all retail sales are made through MLM, and much of this is consists of purchases by hopeful new distributors who are actually paying the price of admission to a business they will soon abandon. MLM is not replacing existing forms of marketing. It does not legitimately compete with other marketing approaches at all. Rather, MLM represents a new investment scheme couched in the language of marketing. Its real products are distributorships that are sold through misrepresentation and exaggerated promises of income. People are buying products in order to secure positions on the sales pyramid. The possibility is always held out that you may become rich if not from your own efforts then from some unknown person ('the big fish') who might join your 'downline.'
MLM's growth does not reflect its value to the economy, customers, or distributors, but the high levels of economic fear, insecurity, wishes for quick and easy wealth. The market dynamics are similar to those of legalized gambling, but the percentage of winners is much smaller.
Lie #4: MLM is a new way of life that offers happiness and fulfillment.
It provides a way to attain all the good things in life.
Truth: The most prominent motivational themes of the MLM industry, as shown in industry literature and presented at recruitment meetings, constitute the crassest form of materialism. Fortune 100 companies would blush at the excess of promises of wealth, luxury, and personal fulfillment put forth by MLM solicitors. These appeals actually conflicts with most people's true desire for meaningful and fulfilling work at something in which they have special talent or interest.
Lie #5: MLM is a spiritual movement.
Truth: The use of spiritual concepts like prosperity consciousness and creative visualization to promote MLM enrollment, the use of words like 'communion' to describe a sales organization, and claims that MLM fulfills Christian principles or Scriptural prophecies are great distortions of these spiritual practices. Those who focus their hopes and dreams upon wealth as the answer to their prayers lose sight of genuine spirituality as taught by religions. The misuse of these spiritual principles should be a signal that the investment opportunity is deceptive. When a product is wrapped in the flag or in religion, buyer beware! The 'community' and 'support' offered by MLM organizations to new recruits is based entirely upon their purchases. If the purchases and enrollment decline, so does the 'communion.''
Lie #6: Success in MLM is easy. Friends and relatives are the natural prospects.
Those who love and support you will become your life-time customers.
Truth: The commercialization of family and friendship and the use of''warm leads' advocated in MLM marketing programs are a destructive element in the community and very unhealthy for individuals involved. People do not appreciate being pressured by friends and relatives to buy products. Trying to capitalizing upon personal relationships to build a business can destroy one's social foundation.
Lie #7: You can do MLM in your spare time. As a business, it offers the greatest flexibility
and personal freedom of time. A few hours a week can earn a significant supplemental income
and may grow to a very large income, making other work unnecessary.
Truth: Making money in MLM requires extraordinary time commitment as well as considerable personal skill and persistence. Beyond the sheer hard work and talent required, the business model inherently consumes more areas of one's life and greater segments of time than most occupations. In MLM, everyone is a prospect. Every waking moment is a potential time for marketing. There are no off-limit places, people, or times for selling. Consequently, there is no free space or free time once a person enrolls in MLM system. While claiming to offer independence, the system comes to dominate people's entire life and requires rigid conformity to the program. This is why so many people who become deeply involved end up needing and relying upon MLM desperately. They alienate or abandon other sustaining relationships.
Lie #8. MLM is a positive, supportive new business that
affirms the human spirit and personal freedom.
Truth: MLM is largely fear-driven. Solicitations inevitably include dire predictions about the impending collapse of other forms of distribution, the disintegration or insensitivity of corporate America, and the lack of opportunity in other occupations. Many occupations are routinely demeaned for not offering'unlimited income.' Working for others is cast as enslavement for 'losers.' MLM is presented as the last best hope for many people. This approach, in addition to being deceptive, frequently discourages people who otherwise would pursue their own unique visions of success and happiness. A sound business opportunity does not have to base its worth on negative predictions and warnings.
Lie #9. MLM is the best option for owning your own
business and attaining real economic independence.
Truth: MLM is not true self-employment. 'Owning' an MLM distributorship is an illusion. Some MLM companies forbid distributors to carry other companies' products. Most MLM contracts make termination of the distributorship easy and immediate for the company. Short of termination, downlines can be taken away arbitrarily. Participation requires rigid adherence to a 'duplication' model, not independence and individuality. MLM distributors are not entrepreneurs but joiners in a complex hierarchical system over which they have little control.
Lie #10: MLM is not a pyramid scheme because products are sold.
Truth: The sale of products does not protect against anti-pyramid-scheme laws or unfair trade practices set forth in federal and state law. MLM is a legal form of business only under rigid conditions set forth by the FTC and state attorneys general. Many MLMs are violate these guidelines and operate only because they have not been prosecuted. Recent court rulings are using a 70% rule to determine an MLM's legality: At least 70% of all goods sold by the MLM company must be purchased by nondistributors. This standard would place most MLM companies outside the law. The largest MLM acknowledges that only 18% of its sales are made to nondistributors.
Accountability Needed
An FTC trade regulation rule that forces honest disclosure of potential MLM distributor income is desperately needed. Toward this end, Pyramid Scheme Alert has launched a petition drive urging the FTC to force multilevel companies to disclose the true income of their distributors. The requested data would include: (a) the total number of distributors involved in the company for at least three years (or since the company's founding if less than three years); (b) the average incomes of all distributors who have signed up for a distributorship by percentiles, not just the ones deemed 'active'; and (c) a 'weighted' overall average income of all distributors so that the extraordinary high incomes of the small number at the top are not calculated in with vast majority so as to give a more statistically valid figure.
_________________
Mr. FitzPatrick consults and writes about trends in manufacturer/distributor relationships. He founded and is president of Pyramid Scheme Alert, a consumer advocacy group focused on exposing and preventing pyramid schemes. He has served as an expert witness in several cases involving pyramid schemes and MLM companies. He writings include False Profits (a book about MLM deception) and 'Pyramid Nation' (a booklet that laments the growth and 'legalization' of pyramid schemes.)
MLM Watch Home Page
The article was posted on August 4, 2002.
JUST GETTING STARTED
Nobel Prize Winner Didn't Disclose His Herbalife Contract Bloomberg News/December 6, 2004
By David Evans
Louis Ignarro, who won a Nobel Prize for Medicine in 1998, endorsed a diet supplement for the heart sold by Herbalife International Inc. in exchange for royalties and then touted the ingredients in a scientific journal, without disclosing his financial interest to the publication. Ignarro's consulting company received at least $1 million as its share of sales of Herbalife's Niteworks between June 2003 and September 2004, according to a filing with the Securities and Exchange Commission. The bottles sell for $90 each for a month's supply and display Dr. Ignarro's signature and Nobel Laureate status on the label.
'He's a paid consultant, so it should have been disclosed,'' said Marcia Angell, editor in chief of the New England Journal of Medicine in 1999 and 2000, now a senior lecturer on ethics at Harvard Medical School in Cambridge, Massachusetts. 'He had an interest in the substance he was evaluating.''
Herbalife pays Ignarro's consulting firm - Hermosa Beach, California-based Healthwell Ventures LLC - a share of Niteworks revenue 'sold with the aid of Dr. Ignarro's consulting, promotional or endorsement services,'' Herbalife wrote in a Dec. 2 SEC filing.
Herbalife has 1 million distributors in 59 countries with reported 2003 revenue of $1.16 billion.
Ignarro, 63, is the featured speaker in a one-hour Los Angeles based-Herbalife promotional video in which he claims Niteworks protects against heart disease, strokes, Alzheimer's and other diseases.
Hearts of Mice
The Nobel Prize winner didn't return telephone calls to his office and to the public relations department of the University of California at Los Angeles, where he teaches. Herbalife spokeswoman Barbara Henderson said the company won't comment, on advice from its lawyers, because it's planning an initial stock sale to the public. Ignarro's article, which appeared in the June 8 issue of the Proceedings of the National Academy of Sciences, described positive affects on the hearts of mice fed vitamins C and E, and arginine, an amino acid that produces nitric oxide in the body. All of those are in the Herbalife product.
Ignarro didn't disclose his Herbalife ties to the journal, according to Bridget Coughlin, managing editor of the Washington- based publication. 'There is indeed a conflict of interest that should have been included in this article,'' she said. 'There's a financial disclosure that should have been made.'' She said the journal has decided to issue a correction.
'They Jumped the Gun'
Ignarro formed Healthwell, the consulting company, in January 2003 with David Brubaker to receive royalties from Herbalife, according to state corporation records. Brubaker, 58, said in an interview that he estimates Herbalife has sold $50 million of Niteworks. Brubaker said Herbalife pays Healthwell 1% of Niteworks sales revenue, and it received an advance against royalties in 2003.
Ignarro shared the Nobel Prize for discoveries about nitric oxide's function in the cardiovascular system. Pharmacologist Robert Furchgott, 88, who won the 1998 Nobel Prize with Ignarro for his own, independent research on nitric oxide, said in an interview that Ignarro's claims about Herbalife's effectiveness are improperly founded. 'They jumped the gun,'' he said.' I haven't seen any properly controlled studies. It just seems to me a mouse model isn't transferable to humans.''
Sued in 1985
Herbalife spends less than $2 million each year on research and development, according to its prospectus filed with the SEC on Dec. 2. The company, previously named Herbalife International, was sued by the California attorney general in 1985 for making false claims about its products. It settled the suit in 1986 for $850,000, agreeing not to make misleading statements. It didn't admit wrongdoing.
Mark Hughes, who started the company in 1980, served as Herbalife chairman and chief executive officer until 2000, when he died from an overdose of alcohol and antidepressants, according to the Los Angeles coroner. Michael Johnson, who became CEO of Herbalife in April 2003, was an executive at Walt Disney Co. for 17 years before joining Herbalife. He was president of its Walt Disney International unit when he departed. He didn't answer written questions, referring comment to the company spokeswoman.
IPO This Month
Herbalife has hired Merrill Lynch & Co. and Morgan Stanley, both based in New York, to raise as much as $193 million in an initial public offering later this month. Herbalife is incorporated in the Cayman Islands, with its headquarters in Los Angeles.
UCLA summarized the journal article in a May news release. Vitamins C and E, taken with arginine, along with moderate exercise, significantly reduce the risk of heart disease, the release said. The release didn't name Herbalife and didn't say Ignarro is a paid company consultant. He is a professor of pharmacology at the university's school of medicine.
'It shows that supplements work well even in the absence of exercise,'' Ignarro was quoted as saying in the release, which recommended humans take dietary supplements.' What's good for mice is good for humans.''
UCLA Conflict
Angell, the Harvard ethics lecturer, said UCLA had the responsibility to include Ignarro's financial arrangement with Herbalife in its news release. 'It seems an elementary conflict of interest,'' she said.
Roxanne Moster, director of media relations for UCLA Health Sciences, said the university doesn't research potential conflicts. 'We rely on our faculty members to let us know if there is a conflict,'' she said.
Former New England Journal editor Angell said Ignarro needs more than mouse studies to support his claims. 'There's a way to find out if it works in humans,'' by conducting clinical trials on people, she said. 'Until you do the trial, you don't know. There's a lot more work to do. You can't assume it will work for people.''
Herbalife markets Niteworks as a food supplement, so the Food and Drug Administration doesn't require it to be tested for safety or efficacy. Herbalife hasn't disclosed the results of any human testing of Niteworks.
'I think with the sort of money they're raking in, they could have done some human studies,'' said Ignarro's co-Nobel Prize winner Furchgott.
Clinical Studies Needed
U.S. Senator Richard Durbin, an Illinois Democrat, said dietary supplement companies will twist facts to sell products. 'The actions attributed to Herbalife are yet another example of how the dietary supplement industry is the Wild West of the American health sector - complete with medicine shows,'' he said.
Ignarro's consulting company partner Brubaker, a trustee of the University of Southern California in Los Angeles, sells Herbalife products from his house in Hermosa Beach. He said their consulting company is spending more than $150,000 to fund a clinical trial on the effectiveness of Niteworks. 'Mice are a good indication of the benefit of nitric oxide,'' Brubaker said.' But it goes without saying that human studies are closer to the real world.'' Brubaker said he was aware of Ignarro's article in the medical journal. 'I don't know why it wouldn't have been disclosed,'' Brubaker said. 'Maybe it would have been an oversight on his part.''
'No More Heart Disease'
Ignarro's video was taped during a training session for hundreds of company distributors at Herbalife's Las Vegas Extravaganza in June 2003 at the Mandalay Bay Resort. The video is streamed on Brubaker's Herbalife distributor Web site.
'Guess what - no more heart disease,'' Ignarro said on the tape. 'This is the nitric oxide story. The nitric oxide that is generated by this product is a vasodilator. It lowers the blood pressure. That's a good thing.'' Ignarro also said: 'I really think that soon there will be no heart disease. I really believe that.''
His Nobel Prize co-winner Furchgott said unproven claims like these shouldn't be used to sell the product to the public. 'I'm worried that Lou has gone into making a big thing of it before it's been thoroughly shown by controlled studies,'' Furchgott said. Furchgott said he regrets Ignarro has become a pitchman for an unproven product, linked to their shared prize. 'That's sad,'' he said. 'Sometimes I get angry. Right now, I'm just sorry.''
I HOPE YOU LIKE TO READ, BECAUSE THERE IS PLENTY MORE WHERE THAT JUST CAME FROM.
Herbalife: Sells but Weeds and Illusions
The Belgian consumer protection magazine: 'Test-Achats' sues the company for multi-level-sales practices forbidden by the law.
Test-Achats/November 1, 2004
Herbalife, a well-known multinational specialised in the sale of slimming products and food supplements, benefits mainly from its far reaching network of hierarchically organised independent salesmen. As in the past, Test Achats draws the attention of consumers to the ineffectiveness of the slimming products of the Herbalife range. What is new, however, is that Test Achats has decided to sue this company for its practice of multi-level-sales which is illegal.
The diet products of Herbalife: expensive and not good - For various reasons (not enough proteins, low energy value, too expensive), 'Test- Achats' was always very critical with regard to the diet products of the Herbalife range. Their usefulness in weight control is far from proven.
The reasons for the ineffectiveness of Herbalife's diet treatment are the following: no education to better food practices, products are systematically hypocaloric with health risks, a medicalisation of the way of life by the absorption of special products, disproportionate price compared to results obtained. All the indices of an inadequate approach of the diet coincide to create doubt as to the effectiveness of these supposedly miracle products.
Herbalife, a multi-level-sales network
These last months, 'Test-Achats' has scrupulously analysed the techniques used by the firm. The principal objective of the Herbalife system is to recruit new distributors who must work with a statute of independent. No direct sales to the consumer occur. The methods of recruitment and distribution are varied. However, lately, and in a very aggressive way, disguised 'offers of employment' (insofar as Herbalife does not appear as such) flower on the Internet and in the 'employment' columns and in free for all letter box distribution. 'Budget et Droits' recently carried out a fully fledged investigation (B&D 175, July 2004).
Once attracted, the interested people must take part in training courses which are real brain washing operations. During these courses a distribution contract and a basic parcel (Business pack) are proposed for a sum of 100¬. However, at this stage, the sale of these products is not of primary importance. The supervisors and other members of the 'PRESIDENT'S TEAM' are quick to make the trainees understand that in order to rise within the hierarchy they may find it very beneficial to purchase large volumes of products and resell them to other new distributors whom they will have had the good taste to recruit. The higher the level one reaches in the hierarchy, the higher the commissions and the no-claims bonus and the cheaper the purchase price of the products. Regularly, consumers approached to buy products are in fact pushed to become distributors themselves, for example, to obtain reductions on the price of the products for themselves or their family. But obviously the market soon becomes saturated, and the promotion and recruitment campaigns then become increasingly aggressive.
'Test-Achats' wants to put an end to these dangerous and illegal practices! 'Test-Achats' reckons that the sales system founded by Herbalife is an infringement of article 84 of the law on trade practices.
All the signs of pyramidal sales are cumulated: each member of the network grows rich primarily thanks to the purchases made by the new recruit in a completely closed sales circuit. The most important benefits are obtained not by the sale to the ultimate consumer or by the royalties obtained on the sales of the hierarchically low distributors but by the sales being carried out in a closed circuit. The benefit is mainly due to the extension of the system and this is expressly forbidden by the law. The consumers' organisation has therefore recently instituted Court proceedings against Herbalife, in the form of an action in ceasing of trading under the terms of the law on trading practices.
'Test Achats' thus wants the law to be respected in the interest of consumers. These latter are too often exposed to such harmful practices. They are unfortunately influenced by unrealisable promises, and this in a precarious economic context where more and more consumers are the faced with financial difficulties and unemployment.
AND WHILE WE ARE STILL ON THE SUBJECT.
'An emotional and financial trap'
August 2002
By a former Herbalife distributor
I am an Herbalife distributor, but am currently sending back inventory and resigning from the company.
My husband and I spent over $8,000.00 in this business through inventory, promotions, 'trainings,' travel, and marketing. We blame ourselves for our ignorance, but feel that it was the obligation of Herbalife International and our upline support, to inform us of all the costs. That means the marketing costs, and before having us sign on the bottom line.
Herbalife's promotional materials are clever. The costs are in the decision packets behind all the wonderful testimonials, but the numbers were either played down about costs and/or over inflated for profits. It is our fault for not reading everything more carefully.
We don't even have the means to go up against Herbalife, even if we could prove false disclaimers. How clever is that?
When we first thought about backing out of the business, when hidden costs started to surface, we asked our upline. Big mistake. We asked if we could get our money back. But we were told, 'No' or 'I don't know.' Uplines need your monthly HAP order commitment, to get the commissions to cover their own costs.
We then asked Herbalife Distributor Relations for our money back. They said, 'No.'
So we went forward and worked harder, thinking, 'It will work, it will work.' And that all we needed to do was improve ourselves. You see we felt it was our fault, when things didn't work out.
But I was not getting results and our marriage was falling apart.
We were having trouble selling and recruiting. We poured our hearts into personal development. I even started to have anxiety attacks over finances. Our monthly business meeting felt more like a confessional, than a business discussion. There was nothing professional about it. Just talk about hard times and personal stories. And everyone was high on 'personal development tapes.' I really felt emotionally trapped.
We are good people and we wanted to believe that there might be a better way to make a living. We wanted out of the 'rat race.'
We finally closed it all down. At last I got the correct information about product return, but our savings is gone and we are starting from scratch again. And it seems that we were no big loss. Our upline didn't even care. But they sure cared when we had the money!
So now we eat humble pie. We are definitely looking at EVERYTHING now before leaping.
My advice to anyone considering Herbalife is don't fall for the emotional testimonies. And don't allow your money to fly away the way we did. Be smart and research all the facts independently by yourself first.
Copyright © 2002 Rick Ross.
HOW ABOUT SOME STUFF ON MARK HUGHS?
Death and Denial at Herbalife
The Untold Story of Mark Hughes' public image, Secret Vice and Tragic Destiny
Los Angeles Times/February 18, 2001
By Matthew Heller
There's a star on the stage of the Great Western Forum. Immaculately dressed as always, 6-foot-1, tanned, not a hair out of place, he is a veteran of such very public appearances. In seminar after seminar, convention after convention, he has captivated thousands of people around the world with his charisma, sincerity and enthusiasm.
But this appearance, on Feb. 19, 2000, is something special for Mark Reynolds Hughes. It's part of a five-day celebration of the 20th anniversary of Herbalife International, the company he started in a former Beverly Hills wig factory. There is a lot to celebrate. At 44, Hughes is the ruler of a $956-million business empire that sells weight-management and personal-care products through a network of more than 1 million distributors in 50 countries.
So-called multilevel or network marketers are lucky to stay in business for several years. Hughes has racked up 20--and become extremely rich in the process. In the preceding fiscal year, he earned more than $2 million in salary and bonuses; he controls 60% of Herbalife stock, worth about $250 million, and has interests in suppliers of the company's products. In 1998, he collected a tidy $43 million in a leveraged buyout of one manufacturer. He owns homes in Beverly Hills, Malibu and Maui, and is planning to build a veritable San Simeon on a mountaintop above Benedict Canyon.
From the Forum stage, Hughes looks out on an audience of acolytes, about 4,000 Herbalife distributors who have followed his prescription for health and wealth with almost messianic fervor. To them, he is the manifestation of how a flair for salesmanship, hard work and a belief in your product can make just about anyone a millionaire. Like his followers, he sports one of the ubiquitous 'Lose Weight Now, Ask Me How' badges--the slogan that also adorns telephone poles and car bumpers everywhere. 'The dream he had has helped so many people like me,' says Paco Perez, a distributor who was a hotel bellboy when he first met Hughes.
The faithful focus their attention as the Forum Diamondvision displays a video montage of highlights from Hughes' past, from the early days of selling a protein powder out of his car trunk to his current status as chairman and chief executive of a multinational corporation headquartered in a Century City high-rise.
There, on screen, is Hughes crying at Herbalife's fourth anniversary rally--'I can't believe what's happened with all of this,' he sobs--hobnobbing with the likes of Milton Berle and Merv Griffin, handing out $1-million bonus checks to distributors, globe-trotting in the company's private jet, promising to 'take Herbalife around the entire world.'
On the Forum stage, moved by the nostalgia, Hughes again allows a tear or two to roll onto his cheeks. 'I will never forget that moment,' recalls Perez. 'It was emotional for him and me.'
Three months later, on May 21, Mark Hughes is lying on the four-poster bed in the master bedroom suite of his beach retreat, a Mediterranean-style mansion on 71/2 acres with 300 feet of Pacific Ocean shoreline that he recently bought for a Malibu-record $25 million.
It is late in the morning after another celebration. The 87th birthday party for Hughes' beloved maternal grandmother, Hazel, known affectionately as Mimi, had been a private affair, just a few family members joining him at home for the evening. Out of the public limelight, Hughes drank white wine, smoked a cigar and played his drum set, protected by security gates, round-the-clock guards and surveillance cameras.
From an adjoining part of the suite, Darcy LaPier Hughes--his fourth wife and, like her three predecessors, a former beauty queen--enters the master bedroom. Her husband's back is facing her. He is wearing only a black T-shirt and black bikini briefs. Something about him doesn't look right. Darcy calls the guards, who realize something is very wrong. They carry him to the floor and lay him on his back to perform CPR. Unsuccessfully.
The Los Angeles County coroner's office concludes he died of a toxic combination of alcohol and Doxepin, an antidepressant he was taking to help him sleep. His blood-alcohol level was measured at 0.21, more than 2 1/2 times the legal limit for driving.
The death was ruled an accident, an eerie echo of the ruling on the drug-related death of Hughes' mother 25 years earlier. Hundreds of mourners grieved the loss of a man struck down in his prime who had helped so many get so rich.
But the real story is even sadder, the tale of a troubled man who grew up amid discord and drug abuse and, as an adult, turned a mythical video version of his past--the Herbalife story--into his reality. It's also the story of how Mark Hughes, the super-salesman, may have become a prisoner of his public image.
Mark Hughes' version of his life story was a remarkable tale of tragedy, resolve and triumph. He said he grew up underprivileged on the gritty streets of a Latino neighborhood in La Mirada, tucked away in the southeast corner of Los Angeles County. 'I was basically brought up by my grandparents,' he said on the Herbalife 20th anniversary video, referring to his mother's parents, Lawrence and Hazel Hughes. And according to the myth, his mother, Jo Ann, who lived off welfare, had this weight problem.
'My mom was always going out and trying some kind of funny fad diet as I was growing up,' he remembered in a speech to a 1985 Herbalife rally that was reprinted as part of an Inc. magazine article on Hughes. 'Eventually she went to the doctor to get some help, and he prescribed to her Dexamyl, kind of a fad diet then. For those of you who don't know about it, it's a drug, a narcotic. It's a form of speed, or amphetamine. You're not able to eat or sleep.' (In fact, Dexamyl combines an amphetamine stimulant with a barbiturate depressant to offset the amphetamine's side effects.)
Hughes continued: 'After several years of using it, she ended up having to eat sleeping pills for her to sleep at night. And after several years of doing that, her body basically started to deteriorate. And she started seeing four or five doctors to keep her habit up.'
Hughes, described by Inc. as 'a tanned and blow-dried California swashbuckler resplendent in black tie and diamonds, brown eyes flashing over a perfect, polished smile,' then reached the climax of his story, mustering a tear: 'I was 19 years old when she died from an overdose.'
As recently as November 1999, Hughes repeated a similar story to a trade publication, Network Marketing Lifestyles. He 'transformed the tragedy into fuel for a higher purpose,' the magazine said, making it his life's ambition to 'develop an organization that would put the kind of reliable information and safe, effective products his mother never had into the hands of millions.'
The real story was a lot more complex, and fit less neatly into an inspirational parable. Jo Ann Hughes did die of an overdose, and Mark Hughes did spend his first years in La Mirada. But he lived in a new tract home in a neighborhood sprinkled with citrus groves and mostly populated by upwardly mobile white suburbanites. And his mother died addicted to painkillers, not diet drugs.
Hughes was raised by Jo Ann and Stuard Hartman, one of two men who claim to be his biological father. Hartman now lives with his second wife in a modest L-shaped house in Camarillo. The retired businessman is tall and handsome, with a weathered face framed by tufts of white hair. He raised Mark, along with two other boys, Guy and Kirk. Tears sometimes well in his blue eyes as he tells his story, but he keeps his composure, arms crossed over his chest as if to ward off the pain.
He shows off photographs of Mark as a young boy. There he is, skinny, bangs of dark hair falling over his forehead, with a protective arm over the shoulders of each of his younger brothers; in another, he is posed with a softball and plastic bat as Hartman holds Guy and Kirk. A third photograph shows Mark smiling as he sits on a sparkling red bicycle equipped with training wheels. Behind him stands a petite, well-dressed young woman, her hands on her hips. This is Jo Ann, Hughes' mother and Hartman's first wife.
In the early '60s, the family moved to Camarillo, which was being transformed from an agricultural community into a suburban outpost of L.A. They acquired a custom-built ranch-style home, and with Hartman prospering as an entrepreneur--he had started a business supplying aircraft parts to the U.S. government--the boys enjoyed more riches than rags. 'They always had the best toys, the best stuff, the best clothes,' says Duane Livingston, a close friend of young Mark.
Of the three boys, Mark was the quietest, the least rambunctious, not academically brilliant but with a certain focus and intensity. He looked the most like his mother, sharing her dark hair and complexion.
His Camarillo lifestyle also included a housekeeper and fishing trips to the Channel Islands in Hartman's Chris-Craft Constellation cruiser. His mother drove a gold-colored Cadillac and spent a great deal of time on her wardrobe and appearance. But friends could detect all was not right. For one thing, there was a tension between Hartman and Jo Ann over disciplining the children. 'It was always an issue--he was too strict and she wasn't,' says Livingston.
Hartman adamantly denies Jo Ann had a weight problem. 'This whole story is not true,' he insists. But she did have a problem. 'She was addicted to pain pills,' Hartman says, singling out the popular painkillers Darvon and Percodan, which have never been prescribed for weight loss. 'She used them in combination to prolong the high.'
In a court declaration filed later as part of their divorce, Hartman alleged that Jo Ann's prescription Percodan habit in the early 1960s cost more than $2,000 a year. Because of her addiction, he said, she neglected her sons, even using money he gave her for groceries to buy drugs. 'The children began to complain to me about being hungry,' he recalled. And the house in Camarillo was 'so filthy dirty it was on the verge of being unsanitary.'
After Jo Ann suffered a seizure, she moved back to La Mirada in December 1969 to stay with her parents and be treated by a local doctor. On the pretext of taking 13-year-old Mark to visit his mother, Hartman alleged, Jo Ann's parents moved him from Camarillo into their own home. A few weeks later, Hartman returned home from work to find that Jo Ann had taken Guy, 12, and Kirk, 11, and cleaned out the closets. In February 1970, court documents show she filed for divorce.
The marital breakup could hardly have come at a worse time for Mark, who, according to a childhood friend, already was experimenting with alcohol and drugs. The source, who asked not to be identified, recalls seeing him at a bus stop one morning before school. 'He had a gallon of cheap red wine. He was guzzling the wine and eating a handful of [pills]. He was just out of control, completely out of control.'
Experts say it wouldn't be surprising if Mark's mother had passed on her addictive streak. 'Genetics is the single most important component [of substance abuse], especially when it begins manifesting early on,' notes Dr. Joseph S. Haraszti, medical director of Pasadena's Las Encinas Hospital and an expert on addiction. Moreover, he adds, the parent's use of alcohol or drugs as a coping mechanism becomes a model for the child.
In La Mirada, Jo Ann spent days in bed, abdicating almost all parental control. 'We ran wild,' Kirk Hartman admits. During that same period, Jo Ann was arrested for passing a bad check. Doctors declared her too ill to attend court hearings in the divorce case.
Hartman was awarded custody of Guy and Kirk, the younger boys, in December 1970; Mark remained with Jo Ann. There was no way Hartman could exert any influence over Mark, the two now completely estranged. 'He blamed me for breaking up the family,' Hartman says with a sigh.
Jo Ann was treated for addiction at the same Lynwood hospital where Mark was born. But on April 27, 1975, her father found her dead in her apartment. According to the autopsy report, several empty vials of prescription drugs were found beside her bed, and her doctor told the coroner she 'was known to overingest her prescription drugs.' Toxicological tests showed potentially lethal levels of propoxyphene in her system--its brand name is Darvon. Jo Ann Hartman died a drug addict, or, as the coroner put it more delicately, of acute drug intoxication.
Mark, then 19, was not with his mother when she died. Instead, having accumulated several drug busts, he was far away in the San Bernardino Mountains, at an institution that paved the way for his success at Herbalife.
CEDU, as the drug institute is called, was the brainchild of Mel Wasserman, a Palm Springs furniture store owner who had sponsored recovering addicts at Synanon, a drug rehab program, at its facility in Santa Monica. In the late '60s, as Synanon developed cult-like trappings, Wasserman founded his own center for troubled teens in bucolic Running Springs, west of Big Bear. Its goals included liberating the 'spirit of the child' and creating 'a safe and healthy environment for making new choices.' Wasserman eschewed Synanon's confrontational approach to therapy.
'We were building character by instilling a strong work ethic,' says Michael Rosen, a former CEDU staff member. 'You would see what you were like through the eyes of other people. You really got strong feedback on how the world perceived you.'
Rosen met Mark Hartman when the boy had been at CEDU for about six months. 'He was the sweetest kid I ever met, but he had no skills,' he recalls. 'He was not sophisticated in any way.' His style of dress was T-shirt and jeans. But Mark was interested in the fund-raising program that Rosen had started to supplement CEDU's meager public subsidies. He accompanied other CEDU students on fund- raising trips to upscale Southern California communities, dressed in a suit and armed with his pitch.
'You say, 'I have a story,' ' Rosen explains. 'You talk about who you are, who you've become. You try to inspire others. It would be no different at CEDU or Herbalife.'
On one trip to Beverly Hills, Mark inspired Ronald Reagan, who had recently completed his second term as governor of California, to part with $500. On a visit to a Beverly Hills lawyer's office, he got a rude reception. 'The lawyer grabbed him by the collar, threw him out the door, and said, 'I don't see anyone without an appointment,' ' says former Herbalife corporate counsel Perry Turner. Undaunted, Mark found a pay phone in the lobby of the building and made an appointment. The lawyer, admiring his chutzpah, duly opened his wallet.
Mark had found his calling as a salesman. 'He could project his energy and feelings tremendously,' says Rosen. 'He was a star at it.' Such a star, in fact, that he stayed on for a while as a staff member at CEDU after turning 18.
Like the other students, Mark was allowed to keep 5% of the money he raised. When he left CEDU, he was eager to apply his new skills and add to his bank balance. 'I asked him, 'What did the program do?' ' recalls friend Duane Livingston. 'He said, 'They help you realize your goals. My big goal is I always wanted to be rich.' '
In 1976, Mark began selling Slender Now diet products for Seyforth Laboratories, a multilevel marketer, becoming one of its top 100 earners. After Seyforth collapsed in 1979, he sold exercise equipment and weight-control products for Golden Youth, another direct-sales outfit. By the time Golden Youth, too, went out of business, Mark was ready to start his own operation that would combine the Eastern philosophy of herbal medicine with the vitamin and mineral technology of the West. With Slender Now manufacturer Richard Marconi, he developed a line of products that promised '100% Satisfaction Guaranteed or Your Money Back.' In February 1980, the 24-year-old entrepreneur--now Mark Reynolds Hughes, having taken his mother's maiden name--unveiled Herbalife.
The products weren't cheap. A weight-loss program alone cost about $30 a month, and, purchased at list price, the full line of vitamin supplements and diet powders would cost about 10 times as much. But Hughes had a way around that. Customers who became distributors would get a minimum 25% discount on everything they bought in lieu of the money-back guarantee; with that discount, you could make a profit selling products to others. You could even get commissions by recruiting other salespeople. The bigger the organization you built, the bigger the payoff.
The payoff for Herbalife, which didn't have to worry about sales-force overhead, was dramatic. In its first five years, sales soared from $386,000 to $423 million, an increase of more than 100,000%; the company progressed from the wig plant to a Culver City industrial complex to a high-rise near Los Angeles International Airport.
Hughes, a multimillionaire well before his 30th birthday, progressed quickly to gold rings and a Cartier watch, to custom-made cuff links and expensive suits, to two Rolls-Royces. He bought a $7-million mansion in Bel-Air from singer Kenny Rogers. Having just divorced his first wife, former Miss Santa Monica Kathryn Whiting, he wed former Swedish beauty queen Angela Mack in 1984, hiring Wayne Newton to entertain their 300 wedding guests.
At rally after rally--many of which were broadcast as infomercials over the USA Cable Network and by TV stations across the country--Hughes projected a boyish enthusiasm and charisma, his thick Prince Valiant hairstyle more appropriate to a rock 'n' roller than a corporate executive. And he perfected the story he had been telling since he started Herbalife, the new story of who he was.
Hughes' appearances were part revival meeting, part Richard Simmons-style pep talk, part the Apostle Paul finding his vocation as a missionary. But Hughes could deliver his rags-to-riches tear-jerker (complete with the death-by-diet-pills myth of his mother's death) so that it resonated with just about anyone who wished to lose weight--or dreamed of becoming fabulously rich like him. 'Against all odds, he made it big,' says one Herbalife distributor. 'It was one of the things that drew people to him. He turned his life around. Maybe we could do it too.'
In 1985, Hughes attracted a lot of attention, much of it from government regulators. That March, the California attorney general and the state Department of Health Services charged him and Herbalife with making 'untrue or misleading' product claims--primarily involving the caffeine content of some Herbalife products--and operating an 'endless chain marketing scheme.'
Prompted by complaints alleging that Herbalife product users had suffered illness and death, a U.S. Senate subcommittee called Hughes before a hearing in May. He had lost none of his bravado. Referring to a panel of nutrition experts who had criticized Herbalife in testimony the previous day, he asked the senators, 'If they're such experts in weight loss, why were they so fat?'
Herbalife seemed constantly to be in the news. People magazine ran a profile of Hughes in which his ex-wife said he was so obsessed with money that he would sit up in bed working out interest rates and finances. 'The sad thing is, it didn't seem to make him happy,' Whiting noted.
Around the same time, Stuard Hartman, now remarried, received a visit from a freelance investigator working for a television news program that was checking allegations that Hughes' story about his mother was false. 'They suspected this was all bogus,' Hartman says.
He, however, refused to cooperate. 'They pretty much told me they wanted to destroy him. No matter what our relationship was, I did not want to have to do that to him.' The story never aired.
None of the stories about Hughes dug deeply into his childhood or his mother's death. And no one at Herbalife was likely to make any waves. From the early days of the company, Hughes surrounded himself with a loyal group of aides. He had known two of them, Rosen and Christopher Pair, at CEDU; Conrad Lee Klein, a longtime Hughes associate at Herbalife, started working for him as outside legal counsel in 1982. Hughes rewarded them handsomely--in 1999, for example, Pair received $3.4 million in salary, bonuses and other payments, plus stock options valued by the company at $382,000. Family members held key posts in Herbalife management, including Hughes' brother Kirk, three sisters-in-law, a brother-in-law and a cousin.
So Hughes' story--and his company--stayed intact. The California charges were settled for $850,000 and nothing came of the federal inquiries. Sales in the United States suffered from the adverse publicity, and some distributors dropped out. But the company still went public in 1986 and, to offset the domestic slump, launched an aggressive expansion overseas. Between 1988 and 1990, it opened operations in New Zealand, France, Spain, Germany, Israel and Mexico.
Personally, Hughes had suffered another upheaval as his second marriage ended after about a year. According to several sources, Angela had a substance-abuse problem that her husband could not tolerate. She would later die, the sources say, of alcohol-related illness. Although there was no formal company policy, substance abuse of any kind was not tolerated at Herbalife. 'It was in effect a health-food company, and you're selling health,' notes Perry Turner. 'One of the last things to be included in a company of that type would be something that is unhealthy.'
Turner once discussed an employee's drug habit with Hughes and other executives. 'I said, 'The one thing you can't have here is a drug problem when you've got this kind of business and these kinds of distributors,' ' he recalls. 'This was something Mark agreed with.' When someone asked, 'If he keeps it private, what's the deal?' Turner insisted: 'Listen, there's no room for it in this kind of business. That kind of thing can't be kept private.' Hughes rebounded from his second divorce, marrying Suzan Schroder, a former Miss Hawaiian Tropics and court reporter, in September 1987. She was petite and buxom, with high cheekbones, long blond hair and a certain Barbie-doll quality. In their appearances together--and there would be many as they threw themselves into charitable endeavors--she would be the most glamorous of escorts.
One of their guests at the wedding was Jack Reynolds, then a plumbing contractor. Mark's maternal grandparents, who had feuded with Hartman, had arranged for Mark to meet Reynolds at least twice during his childhood, introducing him as his real father. At Suzan's urging, they had gone on vacation to Maui together and apparently warmed to each other.
Another addition to the family arrived in December 1991 when Suzan gave birth to Alexander Reynolds Hughes. And the new father made sure they would not be cramped for space, spending $20 million to acquire Grayhall, a historic, 22,000-square-foot Beverly Hills mansion designed to resemble a Tirolean castle. One publication called it a 'storybook home for a storybook couple.'
Relations between the couple could get frosty, though, particularly when Suzan tried to get Mark to open up about his past. Once, says a source, 'Suzan brought up [Hartman] at Thanksgiving. Mark got pretty angry. It was like a taboo subject.' Echoes Kirk Hartman: 'When we got together, the past wasn't talked about.'
Some believe Mark blamed Stuard Hartman for his mother's death. 'He loved this lady,' says Rosen. 'He was torn apart.' Hughes, who referred to Hartman as his stepfather, specifically excluded him as a beneficiary in a 1997 will.
In December 1994, another tragedy--the death of Mark's brother Guy Hartman at age 37, after years of alcohol abuse--brought Stuard Hartman to Grayhall for the first time. During the post-funeral reception, Hartman got a tour of the property, the proof of Hughes' self-made success. As guests were leaving, Hughes approached his brother Kirk and Kirk's wife, Jackie. 'I showed him,' he told Jackie Hartman. 'I showed that bastard what I could do.'
The Hugheses kept up their public profile. In May 1995, D.A.R.E. America honored them with its 'Future of America Award,' praising their commitment to 'teaching our kids how to say no to drugs.' But the marriage was crumbling. And less than 18 months later, Mark did something that suggested he was touched with the same curse as his late brother and mother.
About 11 PM on November 30, 1996, a Hawthorne police officer pulled Hughes over for driving on the wrong side of the road. Hughes, the police report said, was making his way from Los Angeles International Airport to the Bare Elegance strip club. The officer had him exit his Jeep Cherokee and put him through several sobriety tests, which Hughes failed.
Hughes said he had only drunk two glasses of wine. But a field breath test registered a blood-alcohol level of 0.22, almost three times the legal limit. Says Dr. Haraszti: 'On the face of it, that is diagnostic of alcoholism. It is such a high level that an ordinary person would not be able to stand up, much less drive. You have to use a lot to develop that level of tolerance.'
After being booked and released, Hughes was charged with driving under the influence. In April 1997, he pleaded no contest, agreeing to serve three years' probation, pay a fine of $1,501, have his driving license suspended and attend an alcohol-education program. (It has been reported that Hughes also was arrested for drunk driving in Malibu in July 1997. Court documents show he was arrested for misdemeanor driving on a suspended license and cited for various Vehicle Code infractions.)
The DUI conviction went unnoticed, buried in an Inglewood courthouse free of tabloid scandal-hunters. And the possibility that Herbalife's bronzed personification of health might have a serious health problem remained a secret.
Perry Turner, who worked for Herbalife until he retired in 1988, insists he never saw Hughes drink. Hughes continued to function as Herbalife's CEO, the energy and industry he devoted to his company never flagging. But the consensus among sources who discussed his drinking--all of whom asked to remain anonymous--is that he had become a problem drinker by the early 1990s.
According to Hughes' autopsy report, a Beverly Hills psychiatrist treated him with Antabuse, a drug that inhibits the craving for alcohol. 'Dr. [Stephen] Scappa was aware that the decedent had drinking binges,' the report says. But Dr. Drew Pinsky of Las Encinas Hospital notes: 'Antabuse is fairly worthless unless [the patient] is involved in a program of recovery. They use Antabuse as a substitute for recovery.'
According to Pinsky, those who binge on alcohol or drugs 'tend to have more psychiatric pathology' than more continuous drinkers. Experts agree that Hughes, with his genetics, early substance abuse and a pathology of unresolved childhood issues and repressed feelings, fits the profile. 'He resorts to alcohol as a way to numb his feelings,' theorizes Haraszti. 'He finds that to be effective and he is not motivated to change.'
For Herbalife, so dependent on Hughes' cultlike appeal, public disclosure of his problem could have been a bombshell, equivalent almost to the scandals involving televangelists Jimmy Swaggart and Jim Bakker. 'I would have thought it would have a profound effect on the business because the distributors so admired him,' suggests Turner.
With Herbalife's glory days long past, shareholders would not have welcomed the news either. Although sales nearly doubled between 1994 and 1998, net profits increased only 5%. After Hughes registered plans in early 1997 to sell one-quarter of his shares, the stock began to slide from its all-time high of $37. As shares fell as low as $6, the CEO angered investors by discounting stock options for corporate insiders by about 50%. One money manager complained to Business Week that Hughes had 'completely pushed the limits of shareholder boundaries.'
The pressure on Hughes and his aides to maintain his healthy image was 'dramatic,' says a source. One executive who knew of Hughes' problem was not replaced, the source says, for fear of adding to the circle of people in the know.
Richard Marconi, whose company, Global Health Sciences, was one of Herbalife's major suppliers, says he wanted to avoid a possible scandal. So he approached Pair and another Herbalife executive with a plan to take Hughes to a discreet alcohol rehab facility in Switzerland, with each man spending a week as Hughes' overseer. For reasons still not clear, they never followed through.
In September 1997, Suzan Hughes filed for divorce after 10 years of marriage. As part of a settlement that gave her a mansion near Grayhall and alimony, lawyers made sure she would not say anything out of turn. Any discussion of her ex-husband's 'wealth or any other habits that you think he has which are inappropriate' would result in her forfeiting the house and cash, a court document stated. Suzan declined to be interviewed for this article, citing the settlement.
At the time of Herbalife's 20th anniversary celebration one year ago, Hughes was under considerable stress. He had made an offer to buy out the public's shares, which had buoyed up the stock, but it had stalled due to financing problems and shareholder lawsuits. The stock was stuck at about $14. Beneath his buff exterior, sculpted by hours of personal training, Hughes' health was brittle. He was recovering from a recurrence of pneumonia, and the treatment involved steroids, which made it difficult for him to sleep.
'He was edgy, more short of temper,' says Rosen. For his sleeping problems, he was taking Doxepin, which Haraszti describes as an 'antediluvian' medication that he would not prescribe to anyone, let alone an alcoholic.
But Hughes still seemed to have plenty going for him. In February 1999, he married Darcy LaPier, another former Miss Hawaiian Tropics with two children and a history of wealthy husbands, including actor Jean-Claude Van Damme. Plans for their Benedict Canyon home--a colossus to be built on 157 acres that Hughes had acquired from Merv Griffin--were proceeding. And he and Darcy had moved into the peach-colored Malibu villa that they purchased in December 1999.
Herbalife's leader, his hair now coiffed in a leaner, sleeker do, shone at the Forum celebration. 'He was hilarious, his usual charming, excited, exuberant self,' recalls Denver-based distributor Leslie Stanford. Nobody could have foreseen the terrible news of that Sunday morning only three months later. Laments John Tartol, a close friend and longtime Herbalife distributor: 'It was unbelievable to me.'
Darcy Hughes told coroner's officials that her husband had been drinking the night of May 20 and had fallen asleep on the living-room sofa. She tried to wake him about midnight so that they could go to bed. But he stayed on the sofa. About an hour later, she failed again to rouse him and went up to bed herself, sleeping in a room adjacent to the master bedroom. She awoke at 10:30 on the Sunday morning to find him dead on their bed.
In the lobby of the Century City building that became Herbalife's headquarters in 1996, the legend lives on. The inscription on a framed poster of Hughes at a rally relates how millions of people 'have become better human beings as a result of his dream, his vision and his precious gift to the world.' It continues: 'Now it's more important than ever to give this life-changing gift to others, because anyone who is touched by Herbalife carries a little bit of Mark inside of them.'
Up on the 15th floor, from the window facing north, you can see the Benedict Canyon property, which is up for sale. Associate Conrad Klein is now an Herbalife executive vice president and a trustee of the huge Hughes estate. He has thinning hair, hooded eyes and a stooped posture. During a two-hour interview, a genuine affection for Hughes comes through. 'He was a very sweet and gentle man,' Klein says. 'He had a very winsome way about him.' With a pang, he adds: 'I loved the guy. He had more joie de vivre than anyone you would ever meet.'
Despite the evidence to the contrary, Klein refuses to amend the official story Hughes created. Mark, he says, was not raised in a two-parent household, and his mother 'did have weight problems.' Klein vigorously denies that Hughes had a drinking problem. 'There is no basis for anybody to tell you Mark was an alcoholic. Mark was a good party animal when he felt like it. Maybe he had too much to drink at a party.To say Mark's an alcoholic, it's absurd.'
At his grandmother's party, Klein says, Hughes 'did in fact have something to drink. He had a lot to drink, everybody had a lot to drink.'
Christopher Pair, the new CEO, also is keeping Hughes' story alive. In a message to distributors posted on the Herbalife Web site, he says, 'Mark's mother died from unsafe dieting practices. This was a tragedy he never forgot.' Distributors call talk of alcoholism a smear on Herbalife. 'The only way our competition can hurt the company is some kind of slur campaign,' Tartol says.
Herbalife stock is trading at about $7.50 a share, meaning Mark Hughes' holdings have lost about half their value since the company's 20th anniversary one year ago. The shares are held in trust for 9-year-old Alex Hughes, the principal beneficiary of his father's estate.
In addition to Klein, the trustees are Pair, who was convicted of shoplifting $400 worth of merchandise from a Beverly Hills department store in 1998, and Jack Reynolds, who may--or may not--be Alexander's paternal grandfather. In July, Reynolds, the former plumbing contractor, was appointed chairman of Herbalife International.
In Malibu, the house where Hughes died is for sale at a price of $31 million, fixtures and furnishings included. His widow, Darcy--whom a judge in January awarded $20 million from the estate--no longer lives there.
Jean-Paul Chiari, a dapper Frenchman who was an estate manager for Hughes, points out some of the mansion's more outstanding features--the set of three Baccarat crystal chandeliers in the lobby and living room, the handmade Aubusson rugs, the manicure station, the walk-in fridge, the computerized lighting-control system, the giant TV screen in the family room that descends from the ceiling. Only Dustin Hoffman has a similar video set-up complete with state-of-the-art projector in his home, Chiari says. 'But Dustin Hoffman's isn't as large as Mr. Hughes' screen.'
Most of the framed photographs on display feature Hughes with his son, whom he saw as often as possible given the demands of Herbalife. They would vacation together at Christmas and Easter and for three weeks in the summer, visiting resorts in the Caribbean and the French Riviera, where they could sail, surf and jet-ski. In the photos, they could hardly look happier. 'He was a very family-oriented man,' Chiari says of the father.
Just a few miles up the coast in Ventura County, another father lives in a house not far from where Mark Reynolds Hughes grew up. Stuard Hartman has volunteered to take a DNA test to prove he is Hughes' father but Herbalife declined the offer. He says he has 'no ax to grind,' no financial motive--a claim on the estate, for example--to make mischief.
With his death, Mark Hughes' estrangement from Hartman is now permanent. Hartman can only wonder what happened to the boy he raised to the age of almost 14, wonder why Mark, despite all his worldly success, would suffer a torment so similar to that of his mother.
'I've always been very proud of him, regardless of our relationship, for the successes he achieved,' Hartman says. 'It's obviously a very rare individual that can do what he did.' But success, he adds, 'didn't give him any satisfaction or happiness. His life was testament to that.'
Herbalife Faces Struggle After Death of Founder Mark Hughes
Bloomberg News / August 11, 2000
Los Angeles, Aug. 11 (Bloomberg) -- Herbalife International Inc.'s Web site still uses a video of Mark Hughes hawking weight- loss pills and nutritional supplements two months after the company's founder died of a prescription drug overdose.
Focusing on the past is one way the 20-year-old company is coping with a future that no longer includes its charismatic leader. By the time of his death at 44, the 6-foot tall, 190-pound high school dropout had attracted one million distributors in 49 nations and generated $1.79 billion in annual sales.
After sales grew at a compound annual rate of 18 percent from 1996 to 1999, they were up just 7 percent in the first quarter. Since the Class B stock hit a 52-week high of 16 1/4 on Jan. 18, it has fallen 40 percent after Hughes' failed effort to bring Herbalife private in a leveraged buyout. The company's price-to- earnings ratio -- one measure of earnings optimism -- touched 16 in early 1998; it is now at six.
There are also new problems: ephedrine, used in Herbalife weight loss pills, has been linked to cardiac arrests, strokes and deaths by the Food and Drug Administration. The new chairman, identified as Mark Hughes' father, is accused of being an imposter. Hughes' assertion his mother died of an overdose of prescription diet pills is contradicted by her autopsy. And Hughes' own image of clean living has been tarnished by evidence he smoked cigars and died after a four-day drinking binge.
'It's very much a cult of personality,' said David Stewart, professor of marketing at the Marshall School of Business at the University of Southern California. 'When you begin to hear things that are inconsistent with the image, that can cause all kinds of problems.' Still Pitching Herbalife
Hughes, who died May 21 in his $27 million Malibu mansion, had led hundreds of sales rallies -- resembling religious evangelical gatherings -- drawing people both to the products and the prospect of getting rich selling them. His pitches are still broadcast on Herbalife's Web site.
'Technology now provides an incredible avenue for me to spread my dream of global health and wealth!' says Hughes. A framed commemorative photograph of Hughes was recently offered to distributors who met certain sales milestones, 'in dedication to Mark's dream.'
But the herbal health entrepreneur, who began selling diet products from the trunk of his car in 1980, may not have led the life of health he had preached. Hughes smoked six to eight cigars a day and died after a four-day drinking binge, according to his autopsy. It found that he suffered an accidental overdose of alcohol and doxepin, an anti-depressant.
Chris Pair, 45, chief operating officer, was named president and chief executive to replace Hughes. Pair said he met Hughes 30 years ago while Pair worked at CEDU, the residential California drug abuse treatment program where Hughes was sent after a series of brushes with the law.
The company's 14 most successful distributors will now be leading major sales meetings. 'They will be stepping into his shoes,' said Pair in an interview at the company's annual shareholder meeting. 'One person cannot do that, but a team of people, I think, can.'
Hughes says he founded the company because his mother, Jo Ann, was 30 pounds overweight, which ultimately led to her death. 'I lost her to an accidental overdose of diet pills. She was only 36 years old,' says Hughes in the introduction to Herbalife's product catalogue. 'That's why I've dedicated my life to finding a better way of helping people manage their weight.'
Concern about the side effects of Herbalife weight loss products has grown, however, after the Food and Drug Administration attributed a 1998 cardiac arrest suffered by a 28- year-old woman to an Herbalife ephedrine product, Original Green.
Ephedrine, a chemical cousin of amphetamines that increases blood pressure and heart rate, has been linked by the FDA to hundreds of adverse reactions and dozens of deaths. On Aug. 8 and 9, the U.S. Public Health Service held public meetings in Washington about the safety of dietary supplements containing ephedrine.
'It does not concern me, because no deaths have been linked to our product,' said Pair. He said Herbalife's products comply with FDA regulations.
False Medical Claims
Herbalife, which a decade ago paid $850,000 to settle California charges that it made false medical claims about its products, doesn't say on its labels that some products contain ephedrine. Instead, it lists Ma Huang, the herb that contains the ephedrine.
The company has done no clinical studies to test the safety of those products, said Robert Sandler, general counsel. 'Our ephedra product is a mild stimulant,' he said. 'It helps you withstand the pangs that sometimes happen when you are dieting.'
That claim is challenged by Raymond Woosley, chairman of Georgetown University's pharmacology department, who recently studied 140 reports of adverse reactions to ephedrine products, including some sold by Herbalife, at the request of the FDA.
'There's absolutely no study that's ever shown ephedrine helps you withstand the pangs,' he said. 'There's a short-term weight loss that's not sustained.' He said ephedrine is chemically 'almost identical' to amphetamines, and has been conclusively linked to deaths, strokes and seizures.
Banned or Restricted
Six U.S. states including Florida and Texas ban or restrict sales of the products.
Herbalife's claim that Jo Ann Hartman was killed by diet pills is contradicted by her autopsy. It indicates she died of an overdose of Darvon, a narcotic. Although 5-foot-6-inches tall, she weighed just 105 pounds at death.
CEO Pair said he was unaware of that information. Sandler, the general counsel, said he'd never seen the autopsy. 'Whether she in fact died of an overdose of diet pills is rather immaterial to the story of Herbalife,' Sandler said. 'It motivated him. It may have been a false belief in his mind, but he believed it.'
The company is also facing controversy because of a dispute between two men who both claim to be Hughes' father.
Paternity Question
Mark's birth certificate lists his father as Stuard Hartman, who was married to Jo Ann until their divorce in 1970, when Mark was 14. The company insists that John Reynolds, who was briefly married to Jo Ann before she married Hartman, is his biological father.
Court documents show Mark and his brothers, Kirk and Guy, were the children of Stuard and Jo Ann's marriage. Kirk works for Herbalife and Guy is deceased. Hughes is Jo Ann's maiden name.
The issue has come to the forefront now because Reynolds, 66, was elected as a director and chairman of Herbalife's board, on June 27. Reynolds, who founded a plumbing supply business, wasn't previously a company employee. 'I have friends and relatives calling me asking what's going on,' said Hartman, a retired businessman. 'It's very upsetting.' He's offered to take a DNA test to prove he is Mark's biological father.
Herbalife Founder on Drinking Binge Before Death
Reuters / August 12, 2000
LOS ANGELES (Reuters) - Mark Hughes, founder of the weight loss and nutritional firm Herbalife International, had been on a four-day drinking binge just before his death in May, final autopsy results showed on Saturday.
Hughes, 44, was found dead in his bed in his Malibu home on May 21. He died from an overdose of alcohol and the prescription anti-depressant Doxepin, the autopsy report said.
The autopsy was released by the Los Angeles County coroner's office on Saturday, and quoted sources close to Hughes saying he was drinking at a birthday party the night before his death and ''had been on a four-day drinking binge.''
''They did not know what alcohol (he) had been drinking,'' the report said, adding that Hughes' psychiatrist was aware of the drinking problem and had been treating him for it, prescribing Doxepin and an alcohol abuse drug.
Three months before his death Hughes had been treated for pneumonia. He also suffered from asthma and was being treated for a stomach problem, according to the report.
On the night of his death, Hughes fell asleep on a living room couch and later made his way to bed sometime after midnight. His wife, Darcy Hughes, called security guards in the morning when she could not wake him
Make money now, ask me how!
Was Herbalife founder Mark Hughes a showy swindler or a dot-com deity?
By Alec Foege
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June 19, 2000 | From his blow-dried good looks to his prodigal California lifestyle, the late Mark Reynolds Hughes was the envy of entrepreneurs everywhere -- particularly those fond of cheesy get-rich-quick schemes. But in what appears to be a fittingly bizarre case of revisionist history, the true legacy of Herbalife International -- the infamous nutritional supplement company -- may be the cutting-edge online marketing strategy of its wealthy but tacky founder.
In his 1980s heyday, Hughes -- who died last month of a just-confirmed overdose at his $27 million oceanfront mansion in Malibu -- was known to sport a diamond-encrusted gold ring and Cartier watch and dress in $1,500 suits; he could often be found motoring around Los Angeles in his Mercedes or in one of his Rolls Royces. By May 21, the day Hughes, 44, was found dead, he had become both wildly rich and internationally famous for building a garden-variety pyramid operation into a public corporation with $1.79 billion in sales.
Creating a high-profile brand seems to have been the key. For the few remaining humans who don't know, Herbalife sells health and dietary supplements primarily through distributors who pitch their friends and neighbors, much in the same way Mary Kay sells cosmetics.
But unlike Amway , the privately held titan in the field commonly known as multilevel marketing, Herbalife is accountable to shareholders and had a highly recognizable figure at its helm. 'The growth of the sales force was cultic,' says William Crookston, a professor of entrepreneurship at the University of Southern California's Marshall School of Business Administration. 'It became very charismatic and grew very quickly.' As in other pyramids, Herbalife customers have incentive to become distributors, which allows them to take advantage of additional discounts offered by the company.
The story of its flamboyant leader was the flypaper that helped attract new business. Not surprisingly, Hughes cast the creation of Herbalife as nothing less than a spiritual awakening. A product of divorce who dropped out of school in ninth grade in Los Angeles, he turned to drugs in his early teens. By 16, he was sent to Cedu, a residential school for delinquent youth in Running Springs, Calif. Here, he apparently discovered his gift while selling hundreds of raffle tickets to raise money for the school.
When Hughes was 19, his mother died. He claimed she ingested a toxic drug meant to reduce her weight.
Sparked by a quest to discover safe, herbal dieting aids for others, he began selling various brands out of his car trunk. In 1980, at age 23, he devised his own line.
By 1985, the company reportedly took in $500 million per year. Distributors wore buttons reading 'Lose weight now, ask me how.'
Along with wildfire success, Herbalife courted its share of regulatory nightmares. Some health experts questioned the effectiveness of the company's nutritional supplements; Herbalife claimed to increase energy and cure a range of illnesses from venereal disease to bee stings. California's state health department determined that Herbalife's self-professed 'natural lift' was deceiving. The reason: 'Defendants misleadingly fail to disclose that one of the product's active ingredients is caffeine.'
Hughes also defended himself in front of a panel of U.S. senators. The fledgling mogul cited an unusual strategy. 'If they're such experts,' he said, 'then why are they so fat? I've lost 16 pounds in the last few years.'
In 1986, Herbalife settled with the state of California, paying $850,000 in fines and agreeing to remove two products from the market: Tang Quei Plus for menstrual cramps, and K-8, which was said to relieve stress. That very same year -- in a feat that may have been far more miraculous than any of his products -- Hughes successfully took his company public.
Make money now, ask me how! | 1 , 2
The move had two benefits. For distributors, who are galvanized at giant rallies that resemble fundamentalist tent shows, Herbalife's NASDAQ posting gave a much-needed stamp of legitimacy. Ironically, the tactic also sweetened the pot for investors.
'Everybody criticized Mark Hughes because of his showy lifestyle,' says Richard Todaro, a portfolio manager at Kennedy Capital in St. Louis. 'But from a distributor standpoint, that's what motivated them.'
In other words, the more Herbalife came to resemble a creepy cult with a garish Shaun Cassidy look-alike at its helm, the larger its revenues grew. At the time, its sales force was estimated to have 700,000 members in the United States, Canada, Britain and Australia.
More surprisingly, Hughes' guru-like status also provided additional financial stability. Multilevel marketing ventures, by their very nature, are fragile structures; they depended heavily on woefully human sales teams. Hughes' visibility insured a steady supply of new converts. He was the Martha Stewart of herbal dieting.
And when the Internet emerged, Hughes' messianic luster sparkled amid infinite bits in a way no banner ad could. Though Herbalife's distributors continued to sell their wares the old-fashioned way (by foisting the stuff on their friends and neighbors), Web customers could go to the company's new site, enter their distributor's PIN number and make purchases on their own.
Unleashed by the Web, Herbalife quickly developed a foolproof way to track commissions and reduce advertising costs. The company's online selling method has other benefits: Since buyers have the option to pay distributors directly, it provides an online buying experience for customers afraid to release their credit card information over the Web. Herbalife also instituted a fairly innovative program of customer-service chat rooms, post-sales service and sales follow-up.
In the wake of its founder's death, Herbalife remains something of a Web success story. 'This company is very advanced in its use of electronic commerce,' says professor Crookston.
'They recognized that, even on the Internet, you're not going to get rid of human contact,' explains Crookston.
Clearly multilevel marketing, whether online or street-level brick-and-mortar, is not for everyone. Some will always consider Mark Hughes -- who at the time of his death was fighting neighbors over his plans to build a 45,000-square-foot Mediterranean villa in Benedict Canyon -- the punch line to a bad joke about natural laxatives. (A joke, by the way, I've yet to hear.)
Still, there is a nutritious lesson in Herbalife's transition to the Web: Traditional marketing methods will not necessarily rule online. A glutted new medium demands fresh ways of getting customers' attention.
Two of Mark Hughes' tenets seem particularly relevant to the Internet: 1) Know your audience, and 2) First impressions are everything.
It's worth noting that even in recent months, as Hughes tried to prop up his company's ailing stock with a $510 million buyout offer, net sales for the 2000 first quarter (after distributor allowances) increased 7.8 percent to $244 million from $226 million in the same quarter a year ago. After it failed in April, some analysts were recommending Herbalife stock as a good, cheap buy. At Friday's market close, it was listed at 8 3/8.
Herbalife seems to understand that as long as it presents a confident face to its main audience -- its distributors -- it can weather plenty of risks, even ongoing legal troubles. Attorney Thomas Littler of the Phoenix firm Warnicke & Littler, who successfully sued Herbalife in 1998 on behalf of a former distributor for breach of contract, says he has three other lawsuits pending against the company. 'I can only address the facts,' says Littler. 'I have to be very cautious because the company has shown themselves to be very aggressive in litigation.'
Herbalife officials were unavailable for comment, according to a company representative.
salon.com
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About the writer
Alec Foege is a New York writer. He is the author of 'The Empire God Built: Inside Pat Robertson's Media Machine.'
Autopsy on Herbalife founder finds death caused by accidental overdose
CNN News, June 17, 2000
LOS ANGELES (CNN) -- Mark Hughes, the founder of Herbalife International, one of the world's leading distributors of herbal products, died of an accidental overdose after mixing alcohol with a 'toxic level' of antidepressants, authorities said Friday.
Scott Carrier, of the Los Angeles County Coroner's Office, said final autopsy results found that Hughes, 44, had high levels of both alcohol and an antidepressant in his blood.
The cause of Hughes' death recalls that of his mother.
Hughes' mother died of an accidental overdose of prescription diet pills when he was 18. He often cited her death as motivating him to succeed in the herbal pruducts industry -- to provide millions with products that were not available to his mother.
Carrier attributed the death to 'alcohol-Deoxpin intoxication.' Doexpin is an antidepressant, which Hughes was taking to 'treat insomnia,' the coroner said.
Hughes' blood-alcohol level was recorded at .21 percent. A 'toxic level' of Doexpin was also found in his system at 2.1 micrograms per milliliter, Carrier said.
Hughes was found dead in his Malibu mansion May 21.
The initial autopsy, conducted on May 23, was inconclusive and required additional tests.
In February 1980, Hughes founded Herbalife International. It has since become one of the world's largest distributors of herbal products, with sales of about $1.7 billion annually.
OH NO!!! NOT ANOTHER LAWSUIT.
Herbalife Lawsuit
WARNICKE & LITTLER, P.L.C.
2020 North Central Avenue
Fifth Floor
Phoenix, Arizona 85004-4506
(602) 256-0400
FAX (602) 256-0345
Ronald E. Warnicke/SBN 001791
Thomas E. Littler/SBN 006917
Mark J. Giunta/SBN 015079
Attorneys for the Plaintiffs
IN THE SUPERIOR COURT OF THE STATE OF ARIZONA IN AND FOR THE COUNTY OF MARICOPA
CLINT S. FALLOW, MARY LYNN
FALLOW, and DANIEL S FALLOW,
Plaintiffs,
vs.
HERBALIFE INTERNATIONAL, INC.,
a Nevada Corporation,
TONNI and JAY RILEY,
Husband and Wife,
Defendants.
No. CV 96-03558
AMENDED COMPLAINT FOR:
BREACH OF CONTRACT
QUANTUM MERUIT
INTENTIONAL INTERFERENCE
WITH CONTRACT
FRAUD, CONVERSION
RACKETEERING
(Jury Trial Demanded)
(Assigned to the Honorable
Colin F. Campbell)
Plaintiffs Clint S. Fallow, Mary Lynn Fallow, and Daniel S. Fallow for their amended complaint against Defendants Herbalife International Inc., and Herbalife of America, Inc. (together 'Herbalife') and Tonni and Jay Riley by and through counsel undersigned, hereby allege as follows:
I. PARTIES
Plaintiff Clint S. Fallow is a resident and citizen of Maricopa County, Arizona.
Plaintiff Mary Lynn Fallow is a resident and citizen of Sandpoint, Idaho. At relevant times, Mary Lynn Fallow was married to and then divorced from Dan S. Fallow, Clint Fallow's father. At relevant times herein, she was a resident of Maricopa County, Arizona.
Plaintiff Daniel S. Fallow is a resident and citizen of Sandpoint, Idaho. At relevant times herein, he was a resident of Maricopa County, Arizona.
Defendant Herbalife International Inc. has, and at all relevant times had, its principal place of business in Southern California. Nonetheless, it is a Nevada corporation. Herbalife is the holding company for Herbalife of America Inc.
Defendant Herbalife of America Inc. has, and at all relevant times had, its principal place of business in Southern, California.
Upon information and belief, at all times relevant herein Herbalife of America and Herbalife International Inc. acted in concert and as agents of each other.
Defendants Tonni and Jay Riley, husband and wife, are believed to be residents of Prescott, Arizona, doing business in Maricopa County. At relevant times herein, they were residents of Maricopa County.
Herbalife does, and at all relevant times has been doing, business in Maricopa County Arizona, and collects sales tax for the State of Arizona (which may or may not be paid over to the State, and which may form the basis for a later class action claim). Herbalife has solicited consumer sales in Arizona, shipped large amounts of products to Arizona, and has solicited thousands of Arizona residents to become sales agents for Herbalife.
At all relevant times, Mark Reynolds Hughes, has been and is the Founder and President of Herbalife International.
Mary Fallow began her Distributorship for Herbalife while a resident of Maricopa County, Arizona. Mary operated the Distributorship in Maricopa County from April of 1984 to mid 1987.
Clint Fallow began his Distributorship for Herbalife while a resident of Maricopa County, Arizona. Clint operated the Distributorship in Maricopa County, Arizona, at all relevant times herein.
Dan Fallow began a Distributorship with Mary in Maricopa County, Arizona, and operated that Distributorship with Mary in Maricopa County until 1987.
II. GENERAL ALLEGATIONS
A. Facts Relating To the Business of Herbalife
The Herbalife Promises: Income Limited Only By Individual Effort.
Herbalife sells the idea of success, the ability to get rich quick, and to enjoy a lavish lifestyle and unlimited income. Herbalife recruits Distributors through a series of video tapes, offering the promise of new homes, dream vacations and quick cash designed to lure more and more people into filling out the bottom of the Herbalife pyramid, necessary to support the avarice of the those at the top.
The contrivance for Herbalife's pyramidal get rich quick scheme is the sales and distribution of overpriced herbal weight loss, nutritional and personal care products. The products cannot be purchased through retail outlets. Rather, they are sold exclusively through a network of persons employed as independent 'Distributors.'
Plaintiff Dan Fallow has recently gained information which makes him believe that Herbalife is able to offer its Distributors the promise of large returns because the mark-up on its products is over seven times the cost of manufacturing. For example, its 'Protein Power' weight loss drink is believed to cost approximately $2.50 a can to manufacture. Herbalife sells it for $20.00 a can -- all of which is profit. Herbalife recoups its costs by tacking on other charges, marking up UPS or other freight charges over actual cost, and adding a superfluous 6% packaging and handling charge on every order. Upon information and belief, Herbalife funds its recently announced 'infinite bonus' payments to the highest level of Distributors by the packaging and handling charge. Prior to implementing this bonus system, Herbalife had never charged packaging and handling.
In its promotional materials, Herbalife offers the example of Founder and President, Mark Hughes as someone who became rich selling Herbalife, and drives a Rolls Royce and lives in a $20 million dollar Beverly Hills mansion. However, upon information and belief, a large portion of Hughes' current income is not earned through sales of Herbalife products through Distributorship, but is earned from sales made to Herbalife by supplier companies in which Hughes has an equity interest. According to recent 10-Q report filed with the SEC in May of 1995, Hughes earned almost $5,000,000 in 1994 from these companies, one of which has a requirements contract, obligating Herbalife to purchase all of its products from it.
An applicant for a Herbalife Distributorship becomes a Distributor when the person purchases a 'Distributor Kit' and 'when [his] completed application has been accepted and processed by Herbalife World Headquarters.' Once the application has been accepted, the 'contract with Herbalife becomes effective immediately, giving [the Distributor] all the rights and responsibilities of a Distributor.'
Herbalife induces persons to become Distributors by promising opportunity and income limited only by the Distributor's individual effort. Herbalife promises its Distributors that its 'sales and marketing plan has been designed' to 'maximize his success' if 'he applies dedication, hard work and perseverance.' Herbalife promises that 'the rewards you receive as a Distributor operating your own business will be directly proportionate to the time and effort you put into your business.' By sponsoring others, the Distributor had 'the opportunity to grow as fast as [he] want[s] to' and 'may sponsor people anywhere' and 'earn a profit on their sales activities.'
Herbalife Distributors are also promised the ability to operate his or her Distributorship as their 'own business'. Herbalife promises 'a freedom of choice in [his] earning potential . . . It is our belief that each person should have the inherent right to choose the manner in which they live, the work they perform and the amount of money they want to earn.'
Pursuant to this philosophy that each Distributor operates his or her own business, each Herbalife Distributor is required to bear all the expenses of running the operation, including advertising, travel, entertainment, office or home space, hotel meeting room rentals, etc. Herbalife bears no part of these expenses, regardless of the profit to Herbalife.
Additionally, Herbalife Distributors make sales of 'Distributor Kits' and literature for Herbalife for which they receive no compensation. As royalties are paid only on certain items, sales of non-royalty items are profit to the company, but earn no profit to the Distributor.
Distributors, Herbalife proclaims, earn money by making retail sales to 'all those persons with whom they come into contact.' Additionally, Distributors 'who sponsor others into their specific Distributor network can earn royalty override bonuses based on the individual sales of the persons that they have sponsored.'
In addition to income from personal retail sales, and royalties from sales of others sponsored by the Distributor, Distributors also receive 'bonus' payments tied to a complex system of tiered production levels.
The Reality: Herbalife Arbitrarily and In Violation Of Its Own Rules Takes Away Earned Income.
Despite these representations, after a Distributor has attained some success, quit other employment and has received some large royalty and bonus checks, Herbalife has a pattern and practice of arbitrarily and capriciously taking away income from its Distributors and withholding it, or redistributing that income to other persons more favored within the organization.
Herbalife also has a pattern and practice of arbitrarily reducing checks without explanation and then refusing to account for the deficiencies. Herbalife's accounting is so confusing and unexplained that a Distributor never has all the information needed to determine whether he or she has been paid as promised. This purposeful lack of access to information give Herbalife the ability to arbitrarily withhold income.
Herbalife's Stated Organizational Structure.
Herbalife also promises that '[e]ach and every Distributor begins in the same position with an equal opportunity for success and advancement.
Herbalife's Actual Organizational Structure.
Despite this outward protestation of a meritocracy, the truth is that not all Herbalife Distributors are created equal. In reality, Herbalife is a dictatorship run by its founder and a small group of favored sycophants. As demonstrated by what happened to these Plaintiffs, and as they have observed happen to others, Plaintiffs now know that the chosen few are allowed to violate the stated rules and are given favored treatment.
The Herbalife Rules.
a. Rules Regarding Married Couples.
Married couples who wish to be Distributors must work under the same Sponsor, and cannot sponsor each other. If Distributors marry each other, one must relinquish his or her distributorship, unless either Spouse has achieved 'Supervisor' status, in which case, each may maintain their separate distributorship in the original line of Sponsorship.
Any Herbalife Distributor may resign at any time by submitting his or her notarized resignation letter to Herbalife headquarters. At relevant times herein, Distributors were told that he or she must wait six months before re-applying for another Herbalife Distributorship under any Sponsor other than the original Sponsor. Herbalife later increased the six month requirement to twelve months.
b. The Reality: The Rules Are Bent or Broken To Favor Certain Sponsors.
Despite these written rules, and even if Distributors follow these rules, as demonstrated by what happened to these Plaintiffs, the rules are broken in order to benefit certain favorite sponsors at the expense of Distributors who suffer the misfortune of being targeted by the favorite few.
c. The Rules Barring Unfair Sales Practices.
Rule 8 of the Rules of Conduct for Herbalife Distributors provides that: No Distributor shall attempt to induce any other Herbalife Distributor, whom he does not personally sponsor, to sell Herbalife products. The purpose of the rule is to ensure that the rights of other Sponsors are honored at all times.
d. The Reality: These Rules Are Ignored When It Benefits The Favored Few.
Despite these written rules, demonstrated by what happened to violating Distributors under one of these Plaintiffs, if certain Distributors break these rules, the violations are ignored if enforcing the rules would result in less income for favorite sponsors -- even though the failure to enforce the rules resulted in a huge income loss to Plaintiff.
e. Herbalife Promises Due Process Prior To Cutting A Distributor's Income.
Rule 13 of the Rules of Conduct for Herbalife Distributors provides that: Every Distributor has the duty and responsibility to investigate and properly report any and all violations of the Distributor Rules of Conduct.
The Herbalife Enforcement Procedures provide a 'step-by step summary of the methods by which Herbalife Distributors may deal with violations of the Rules of Conduct.
Step 1. Upon learning of a violation, a Distributor should inform the violator of the appropriate section in the Rules of Conduct and discuss the matter with him. Point out the purpose behind the particular rule. Be sure that the alleged violator knows how his conduct broke the rule and what the proper conduct should have been. Most violations are due to a lack of understanding; a discussion usually settles the matter.
If the violator understands the rule and agrees to comply, then is not necessary to inform the Company of the violation. However, a Distributor should always ensure that his Supervisor is aware of the problem.
Step 2. If the alleged violator shows by word or conduct that he is unwilling or refuses to cooperate, then the Distributor should send a letter to the company stating the nature of the complaint; names, addresses, and telephone numbers of all persons involved; dates; times; places; etc. The letter must be signed by the Distributor(s) reporting the violation. Anonymous complaints cannot be made the basis for disciplinary action.
After the letter has been mailed, the Distributor should maintain contact with the violator and report any changes in the situation. The utmost care must be taken to ensure that the complaint is accurate and truthful -- knowingly making a false complaint is a violation of the Rules of Conduct. The Company considers all complaint information to be strictly confidential.
Step 3. When the complaint is received by the Company, it will be handled accordingly to set Company procedures. All parties will be afforded the opportunity to present evidence and argument in writing to the Company. No decision will be rendered until all parties have been notified and an opportunity to appeal the fairness of the decisions has been made available. Although the Company bears the primary responsibility for enforcement of the Rules of Conduct, Supervisors and occasionally Sponsor may be called upon to implement and enforce these decisions.
f. The Reality: Herbalife Denies Due Process When It Suits It.
Despite this outwardly fair facade, as demonstrated by what happened to these Plaintiffs, Herbalife does not offer due process when it targets disfavored Distributors to advantage favored Distributors. In fact, on at least one occasion, Herbalife conducted a secret, damaging and rumor filled investigation, then withheld income and forced a Distributor out of business, without so much as a chance to explain, much less the process described above.
The Real Rules: Whatever Herbalife Wants At The Moment.
Despite these Rules, as demonstrated by what happened to these Plaintiffs and others, Herbalife, has a pattern of either ignoring them, or making up new ones, in order to withhold income, and/or redistribute income to other persons more favored within the organization. As demonstrated by testimony given by Founder Mark Hughes in a recent deposition taken on November 29, 1995, in Los Angeles, California, Herbalife also has unwritten rules it enforces at will without notice.
Herbalife is no doubt aware that giving large rewards and fast dollars generates loyalty. Apparently, however, even that promise is not enough to generate the kind of control over its Distributors Herbalife insists upon. Plaintiffs have information that makes them believe that, on many occasions, Herbalife has exercised its power to turn off a Distributors' income stream, and/or significantly reduce it, to force successful Distributors to bend to its will, whether or not Herbalife's demand is within Herbalife's stated rules or policies. Herbalife uses this coercion tactic to gain a level of control over its Distributors not afforded by its contractual rights.
In one example of this coercive control, a Southern California Distributor's income was terminated when she began to generate income from selling direct mail literature to her down line Distributors. There is no Herbalife Rule preventing the sale of literature which does not use the Herbalife name or trademarks.
Favoritism also results in broken rules. Herbalife represents that it will now allow Distributors to sell into foreign countries which are not yet 'open' by Herbalife. The truth is that, on at least one occasion, it has allowed a favored Distributorship, John and Susan Peterson, to sell and establish Distributorship in an unopened country, Mexico, prior to allowing competition by any other Distributors. This favoritism allowed the Petersons to gain an immense advantage and a much greater income than the normal Distributor who was bound by the no-selling limitation.
While the favored prosper, the disfavored suffer. In one instance, one Texas million dollar distributor was terminated when he began to sell competing products. Another Southern California distributor was terminated when her husband began to sell competing products. Yet, as described herein, Herbalife has also chosen to turn a blind eye to identical behavior when it benefited the favored. Plaintiffs are currently investigating other such examples of disparate treatment among Distributors.
B. The Fallows Join Herbalife.
Mary And Dan Become a Distributorship.
On or about April 13, 1984, Dan Fallow, Clint's Father, and Mary Fallow, while residents of Mesa, Arizona, signed an 'Application for Distributorship', No. 545212, with Herbalife under the Sponsorship of favored John O. Peterson of Harris County, Texas.
In 1984, the Fallows lived Herbalife, working seven days a week and 12 hour days. Their activities included: paying all their own expenses, advertising for Distributors by distributing flyers on car and telephone poles, posting notices in grocery stores, laundries, placing advertisements in the newspaper, handling calls from people interested in the product or becoming Distributors, setting up to twenty appointments a day with potential Distributors in their home, selling the product retail, holding sales training and motivational meetings three times a week with people who had become Distributors, holding meetings in rented hotel rooms at which as many as 500 people would attend on the weekends, following up on referrals, and having their house constantly filled with people.
That first year, the Fallows earned as much as $30,000 a month and more than $300,000 for the year.
However, the second year Herbalife experienced problems with the FDA which Herbalife represented as the FDA's insistence that Herbalife change its labeling. Herbalife refused and instead instituted suit against the FDA. The negative publicity surrounding the fight made it extremely difficult for the Fallows, despite constant effort. Hotel meetings which had previously been attended by as many as 500 people now dwindled. The Fallows paid for and held a few meetings where no one came. Their income plummeted from $30,000 a months to $30,000 for the entire second year. The Fallows lost their home, their credit rating and their security.
Rather than leave the organization as others began to do, the Fallows remained committed. They agreed to move to Colorado for six months and then to Mexico for six months to follow better markets. Sales and Distributorship were much more difficult, but the Fallows persisted and began to rebuild.
It was in Mexico that the Fallows first noticed how favoritism ran Herbalife. Although the Mexican market was not officially 'open' to Herbalife Distributors, Herbalife allowed the favored John and Susan Peterson to sell and establish Distributorship in advance of allowing competition from other Distributors. Before any other Distributor could make sales, the Petersons were sending product by the plane full to Mexico.
Dan and Mary Divorce, Dan Resigns, His Distributorship Ends, and the Distributorship Becomes Mary's Alone.
As a result of suffering injuries in an automobile accident, on or about March 21, 1988, Dan Fallow sent Herbalife headquarters a notarized letter and resigned his distributorship with Herbalife.
On or about January 16, 1989, Dan and Mary Fallow received a decree of divorce. The Fallows and Herbalife agreed that the Distributorship was to belong to Mary Fallow alone.
Herbalife confirmed that the Distributorship had been reassigned to Mary Fallow alone.
Dan then met the stated Herbalife requirements for inactive Distributorship, severing himself from his former sponsor, the favored John and Susan Peterson. For at least the next twelve months after this resignation, Dan Fallow was inactive in the Herbalife business. He did not become a Distributor. He did not participate in any way in the operation, training, selling or recruiting of Mary Fallow's or any other Herbalife Distributorship.
C. Dan's Son, Clint S. Fallow Joins Herbalife.
Dan's son, Clint had recently gotten out of the Armed Forces. Impressed by the success in Herbalife of Dan and Mary, on or about April 25, 1992, while living in Tempe, Arizona, Clint Fallow applied for and became an Herbalife Distributor. Warned away from Sponsorship of John and Susan Peterson by Dan joined under the sponsorship of David J. Peterman of Spokane Washington.
There is no Herbalife rule which requires the son of a former Distributor to sign with any particular sponsor. Clint, on Dan's advice, chose the sponsorship of David Peterman.
At the time Clint Fallow applied for Distributorship, his father, Dan Fallow was not an Herbalife Distributor.
Clint Fallow followed the Rules to become a Distributor. He paid for and received his Distributor kit. On April 28, 1992, Herbalife sent Clint Fallow an Herbalife Distributor Processor Notice welcoming him to Distributorship.
In paragraph 6 of that Application, Herbalife represented that if a Distributor fails to comply with the terms of this agreement, Herbalife may revoke this Distributorship. There is no provision allowing Herbalife to revoke or terminate a Distributorship for any other reason.
Clint Fallow's sponsor, Dave Peterman, trained and assisted Clint Fallow in establishing and developing his Herbalife Distributorship. Clint Fallow threw himself into the business and sold Herbalife product in Arizona and signed up new Distributors under his sponsorship. Clint Fallow achieved the advanced level of Herbalife 'Supervisor.'
Thereafter, Peterman discussed opportunities in Germany with Clint Fallow. Another Distributor had recently relocated there and was very successful. Clint had been in the service there and believed he could build Distributors. However, Clint also wanted to return to college and finish his education.
When Clint was unable to travel to Germany, Peterman invited Dan Fallow on the trip. Dan Fallow agreed to go to assist Clint. Thereafter, Dan Fallow began to assist his son in the German and later European part of Clint's Distributorship. Dan did not then re-apply to be a Distributor. Instead, he worked solely as an agent of his son.
Upon information and belief, Herbalife was then aware of Dan Fallow's assistance to his son. Dan and Clint were open about the arrangement and explained it to every Distributor they signed up. It was also made public knowledge at the Barcelona Extravaganza Herbalife convention in early 1993.
Despite this awareness, during the time Clint was building his Distributorship with Dan's assistance, in 1992, 1993 and the first half of 1994, Herbalife never objected. Herbalife never suggested that Dan's assistance to Clint would or could affect Clint's right to payment.
The German/European part of Distributorship was extremely successful, resulting in income of $7,000 to $8,000 to Clint per month throughout 1993. Perhaps the Distributorship was too successful, as it then caught the eye of the favored John and Susan Peterson.
In 1994, favored Distributors John or Susan Peterson, the Sponsors of Mary Fallow and former sponsor of Dan Fallow, sent in certified letters to Herbalife and complained to Herbalife that Clint Fallow's Distributorship should somehow be credited to them, and not to Clint's sponsor, David J. Peterman.
In the spring of 1994, Herbalife then conducted an unprecedented 'investigation' of Clint Fallow's Distributorship -- ignoring its own rules of due process. During that investigation, Herbalife contacted several of Clint Fallow's down line Distributors and Supervisors, spreading rumors and implying that Clint was guilty of wrongdoing. The campaign damaged the relationship between Clint Fallow and those persons, upset Clint's Distributors, and resulted in a significant decline of business and loss of income.
As a result of this campaign of misinformation, royalties to Clint Fallow from the German/European part of the Distributorship declined to approximately $1,000 a month.
On or about July 6, 1994, Herbalife wrote to Clint Fallow and informed him that his distributorship 'was in fact a distributorship of Dan Fallow, former husband of Mary Fallow' and required to be under the sponsor, John Peterson.' As a result of this determination, Herbalife transferred the Distributorship of Clint Fallow and the lineage developed under that Distributorship to John Peterson. Herbalife further determined that approximately $79,371.97 would be deducted from the earnings of the Clint Fallow Distributorship to repay John Peterson for adjusted 'Royalty Override and Production Bonus Adjustments.' By the time Herbalife transferred part of Clint's income to the Petersons, Clint's income was down to approximately $1,000 a month. The Petersons are believed to have been making as much as $175,000 a month.
Prior to this determination, and contrary to the Step 1 of the Herbalife Enforcement Procedures, neither Herbalife or John Peterson made any attempt to contact or discuss the matter with Clint or Dan Fallow, or inform them that anyone believed a Rule was being broken.
Prior to this determination, and contrary to Step 3 of the Herbalife Enforcement Procedures, Clint Fallow was not 'afforded the opportunity to present evidence and argument in writing to the Company' or an 'opportunity to appeal the fairness of the decision' prior to the time this decision was rendered.
This summary 'termination' of Clint Fallow's Distributorship was totally unjustified by Herbalife's Rules or policy. It was in direct contravention of Clint's Fallows rights as a Distributor and Herbalife's representations which induced Clint Fallow to begin and build his Distributorship.
Nothing in Herbalife's Rules, literature or memoranda provided to Clint Fallow prohibited him from using agents to assist him. To the contrary, Herbalife went to great lengths to inform its Distributors that they are 'independent contractors' and not employees, with freedom to run 'their own business.'
At the time Herbalife made this determination, it had no rule or policy which required the son of a former Distributor (who had previously resigned his Distributorship) to become a Distributor under the original sponsor of his father or under the sponsorship of his father's wife who was no blood relation to him.
Just as there was no reason to bind Clint Fallow to sponsorship under the Petersons, there was no reason to bind even Dan Fallow to sponsorship under the Petersons. Under the then operative Herbalife Rules, once Dan Fallow resigned from Herbalife in 1988, divorced, and then waited more than two years becoming active again in Herbalife, Dan Fallow had the right to re- apply as a Distributor under a new sponsor, different from Peterson. Dan Fallow's past relationship with Herbalife was not grounds for 'taking' Clint Fallow's Distributorship.
At the time Herbalife made this determination, Herbalife also had no rule or policy which prevented a Herbalife Distributor from using a former Distributor to assist him in his business, or which would cause the Distributor to lose his Distributorship as a result of that assistance.
Herbalife's arbitrary and sudden taking of Clint Fallow's Distributorship was so without precedent and unprincipled that it apparently confused even Herbalife.
Herbalife first informed Clint that it would take only half of his check to send to the Petersons. However, it withheld entire checks or sent checks for a lesser amount without explanation.
In 1994 and 1995, after Herbalife officially determined that Clint had no Distributorship because it belonged to Dan, Clint Fallow continued to operate the Arizona portion of his Distributorship. Herbalife sent Clint letters recognizing his right to operate his Distributorship -- at the same time they withheld moneys to send to the Petersons.
Dan and Clint also continued work on the German/European part of Clint's Distributorship. In early 1995, through persistent effort, Dan Fallow and a Danish Distributor were able to revive a portion of the German/European part of the Distributorship and increase the royalties and bonuses back up to $15,000 a month (which were sent to the Petersons). But for Herbalife's actions, the value of the German/European part of the Distributorship would have continued to increase.
In 1995, the Fallows hired an attorney to investigate and restore their rights. In response to this inquiry, Herbalife began to manufacture reasons to cut the Fallow's income. Inconsistent with its determination that Clint Fallow's Distributorship had been reassigned to Peterson, and was no longer held by Clint (or Dan, who was not recognized as having any Distributorship), Herbalife sent a notice to Dan Fallow, at his address, that the Distributorship had not generated enough sales volume to qualify for 'Supervisor Status', preferred treatment and greater payments. Mary Fallow received a similar letter regarding her Distributorship. If Herbalife had treated the two entities as one Distributorship, as it claimed it was required to do, both would have been entitled to preferred treatment and greater payments.
Throughout 1995, Herbalife continued their schizophrenic treatment of Clint, deducting payments while recognizing his Distributorship --at both his and Dan's address. Although Herbalife claimed that Clint's Distributorship was in fact Dan's, Clint's name and Distributor ID number were never deleted from the Herbalife Distributor list. Clint's Distributorship was never transferred to Dan's social security number, but remained under Clint's number. On or about February 26, 1995, Mark Hughes, Founder and President of Herbalife sent Clint Fallow, a letter recognizing that he had 're-qualified as an Herbalife Supervisor.' In October of 1995, Herbalife sent another letter to 'C.S. Fallow' at Dan's address, informing him that the Distributorship needed to re-qualify to be considered a supervisor and was in danger of losing all of his down- line organization. To avoid this loss, the Distributorship was forced to buy a large amount of product to again re-qualify.
Events continued to turn for the worse. In the spring of 1995, Herbalife stopped purporting to offset the royalty checks against the moneys purportedly owed to Peterson, and upon information and belief, the distributorship was transferred to Peterson directly. This transfer is in direct contravention of Herbalife rules which provide that any deleted Distributorship is to be merged with the old line, (in this case that of Mary Fallow) rather than given directly to Fallow's sponsor, the favored John Peterson. Upon information and belief, this departure from Herbalife rules was done to benefit John Peterson at the expense of the Fallows.
Simultaneously, Peterson and his wife had contacted some of Clint Fallow's European Distributors and have continued to harm the growth of the German/ European part of the Distributorship. Through a conference call arranged by Herbalife in July of 1994 (at which neither Clint or Dan Fallow were allowed to participate), and through other contacts, the Petersons informed the Distributors that Clint Fallow was no longer their Sponsor, but that they would report to the Petersons. The Petersons stated or implied that Dan or Clint Fallow, or Clint's sponsor, Dave Peterman were guilty of wrongdoing which had necessitated the change in sponsorship. This announcement caused Distributors, who did not wish to be associated with the taint of wrongdoing, to quit Herbalife.
The Petersons further damaged the business when they began implementing a new authoritarian and condescending management style which was not well received. The Petersons humiliated and alienated Distributors, who then left Herbalife.
Despite all efforts to rebuild, Herbalife's diversion of Clint's income proved disastrous. Clint Fallow was unable to maintain the cash flow necessary to purchase the volume of product necessary to keep the Distributorship producing at its prior levels. A drop in production meant an exponential drop in income. As a result, Clint Fallow lost considerable production and income.
Eventually the problems became too much for Clint to overcome. He lost his town home, his credit rating, and his VA loan eligibility. His possessions were put into storage. He later lost them too when he could no longer pay to store them.
To date, Clint Fallow's damages, not including the present value of his future royalty income stream and the damage to the growth of that future royalty income stream, are in an amount exceeding $356,000. His lifetime earnings would have exceeded $3,600,000.
D. Facts Relating To the Claims of Mary Fallow
As discussed above, Mary and Dan Fallow began their Distributorship in 1984, operating in Maricopa County Arizona for the first three years. As discussed above, Mary and Dan parted, and the Distributorship became hers alone.
Mary's 'sponsor' for her Distributorship was John O. Peterson then residing in Houston, Texas and now residing in Denver, Colorado.
While an Herbalife Distributor, Mary sponsored the Distributorship of a couple, Tonni and Jay Riley, then residents of Maricopa County, Arizona. Tonni Riley, then Tonni Lukavics, signed a Distributorship contract with Herbalife which named the Fallows as her 'sponsors' and 'supervisors' or third party beneficiaries of that contract. Tonni Riley later married Jay Riley and her joined her in the Distributorship. At all times relevant herein, the Rileys were acting on behalf of, and as agents for each other and for their marital community.
On or about 1990, Tonni and Jay Riley began violating Herbalife Rule in two ways: (1) by 'cross-sponsoring' persons in Herbalife in violation of Rule 8 of the Rules of Conduct; and (2) by trying to recruit other Distributors in Mary Fallow's Distributorship to another competitive organization selling diet and nutrition products called 'Genesis 2000.' Upon information and belief, the Rileys developed, marketed and distributed the Genesis 2000 products.
Herbalife's long-standing and continuing practice had been to sanction such behavior by deleting the violator's interest in their Distributorship and transferring the interest to the violator's immediate sponsor.
However, when Herbalife learned of the Riley's actions in cross sponsoring, Herbalife merely withheld the Riley's royalty checks until the Riley's promised to stop their violations. Herbalife then resumed payment to the Rileys. This departure from policy cannot be understood, except for the fact that the Riley's presence was extremely profitable to the Petersons.
Almost immediately after promising to behave, the Riley's started a rival enterprise called Genesis 2000 Company and recruited persons in Mary Fallow's Distributorship.
On our about March 24, 1992, Mary Fallow caused a letter to be sent to Herbalife, detailing the complaints about the Rileys, (and attaching inconvertible evidence of the Riley's defection, a flyer with a photograph and testimonial by the Rileys promoting Genesis 2000) and asking that the Riley's distributorship be canceled and reassigned to Mary Fallow as was then Herbalife's established policy.
Despite the complaint and evidence, in contravention of Herbalife policy, Herbalife took no action other than to harass Mary in subtle ways.
Herbalife began to take strange and unexplained deductions from Mary's check. When she attempted to get relief, no one at Herbalife would return her telephone calls.
Mary's financial losses were horrendous. From 1992 through January of 1995, Herbalife's failure to delete the Riley's interest in their distributorship caused Mary Fallow to lose approximately $3,240,000 in monthly royalties and bonuses to date (which was diverted to the favored Petersons), and lifetime earning exceeding $12,000,000.
From June of 1991 to January of 1992, Mary lost monthly royalties of approximately $17,000 a month for a total of $119,000. From January of 1992 to September of 1995, Mary lost monthly royalties of $18,000 a month for those 44 months for a total of $710,000. But for the Rileys, her 'Infinite Level Bonuses' for 1992 would have been $284,000; $800,000 for 1993 and 1994, and $185,000 for 1995. But for the Rileys, her year end bonuses would have been $200,000 for 1993 and $100,000 for 1994.
E. Facts Relating To the Claims of Dan Fallow
At about this time, Dan Fallow discovered that Herbalife had an unwanted competitor in Europe who claimed to own the right to use the Herbalife name in certain countries. Fallow informed Herbalife that this competitor proposed to produce a knock-off product and label it identically or almost identically to Herbalife. At the time, Herbalife estimated that the competitor could cost it tens of millions of dollars.
Herbalife was understandably looking for a way to shut this operation down and was willing to use unethical means to accomplish this. Herbalife, through its 'safety and security department', which was in reality a dirty tricks department designed to solve business problems outside of legal channels, resolved to stop the competitor.
Herbalife proposed to set up a phony manufacturer of products, approach the competitor and induce it to make a large order. Herbalife would then simply keep the money and never deliver product, driving the competitor out of business.
In 1994, Herbalife began to pressure Dan Fallow to assist it in shutting down the competitor. In early September, faced with huge losses to Clint and Mary, and coerced with the threat that these losses would continue unless he cooperated, Dan Fallow agreed to pose as the phony manufacturer and gather intelligence about the competitor.
At the direction of David Addis, Herbalife's head counsel, and Bill Gillespie, its Director of Security, and with Herbalife funding, Dan Fallow traveled to Europe and began the operation.
As conditions of Dan Fallow's coerced cooperation, Herbalife promised to pay him time and expenses, to enforce its policy regarding Distributors Tonni and Jay Riley, rolling up their royalties to Mary Fallow, and to reinstate Clint's Distributorship, and/or restore the lost moneys in the form of a bonus.
During its investigation of the competitor, Herbalife learned that the Herbalife product in Russia was controlled by the Russian Mafia, and that organization could prevent any legitimate Herbalife operations in Russia without payment to the Mafia. Herbalife pressured Dan Fallow to contact the Russian Mafia and gain its permission for product distribution, paying the Mafia if necessary, and/or using the Mafia to put the competitor out of business 'quietly.' Although Dan Fallow feared for his life and asked Herbalife to provide protection for him, it refused to do so.
Herbalife also asked Dan Fallow to work with a U.S. products manufacturer believed to be supplying knock off product. Fallow was able to catch the manufacturer in damaging admissions which formed the basis for a lawsuit which neutralized the manufacturer's threat. In that lawsuit, Herbalife's counsel drafted an affidavit for Dan Fallow to sign, without allowing Fallow an opportunity to add clarification to the statements. Herbalife then used the affidavit to its advantage in the suit.
After Dan Fallow traveled all over Europe for Herbalife, risked his life, and posed as its front man in this distasteful scheme, and signed Herbalife's affidavit, Herbalife broke its promises. Herbalife paid Dan Fallow for his time and expenses only until it no longer needed him. After Fallow ceased to be useful, Herbalife refused to pay time or expenses. It did not enforce its policy with regard to the Rileys Distributorship, or 'roll up' those and the attached down-line royalties to Mary Fallow, or restore the lost moneys to Clint, in contravention of their agreement with Dan Fallow.
III. CAUSES OF ACTION COUNT ONE BY CLINT FALLOW AGAINST HERBALIFE FOR BREACH OF CONTRACT
Plaintiff Clint Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
Herbalife and Clint Fallow entered into a contract in 1992 whereby Clint Fallow would act as a Distributor for Herbalife and Herbalife would compensate him as detailed above. At all times relevant herein, Clint Fallow performed all which was required of him under his contract with Herbalife to the mutual profit and satisfaction of both parties.
Herbalife additionally promised that if Clint Fallow followed the Herbalife Rules, his Distributorship would not be revoked and that he would be able to maximize his income, limited only by his own individual effort.
Herbalife additionally promised that prior to taking action against any Distributorship, it would follow the due process procedure set forth above.
Herbalife additionally promised that Clint Fallow would be allowed to run his own business, and that all Distributors would be treated equally.
Herbalife breached its contract with Clint Fallow in that it did not pay him as promised, did not allow him to maximize his income, withheld income arbitrarily, revoked his Distributorship even though he had followed all applicable Rules, conducted an 'investigation' in violation of its own rules which damaged Clint, revoked his Distributorship without the promised due process, interfered with his ability to run his own business, and failed to treat him equally with other Distributors.
As a result of these breaches, Clint Fallow has been damaged in an amount not less than $356,000 in damages accruing to date, and lifetime damages exceeding $3.6 million to be proven at trial.
COUNT TWO BY CLINT FALLOW AGAINST HERBALIFE FOR QUANTUM MERUIT
Plaintiff Clint Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
At the inducement of Herbalife, Clint Fallow enriched Herbalife by acting as an Herbalife Distributor and by selling product, signing up Distributors and paying expenses relative to that effort.
As a result of this effort, Herbalife has been enriched in an amount not less than $3,600,000 to be proven at trial after discovery.
COUNT THREE BY CLINT FALLOW AGAINST HERBALIFE FOR TORTIOUS INTERFERENCE WITH CONTRACT
Plaintiff Clint Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
Herbalife's 'investigation' of Clint Fallow's German/ European part of the Distributorship, the severing of his ties to Herbalife, the transfer of his Distributorship to Peterson, and Peterson's subsequent meddling and mismanagement of the same, were all a knowing an intentional interference with Clint Fallow's existing valid contractual relationship and business expectancy with his German and European Distributors. These acts caused the termination of many of those relationships.
As a result of these acts, Clint Fallow has been damaged by the loss of royalty payments, the damage to the German/ European part of the Distributorship, and loss of revenues, in an amount not less than $3,600,000 to be proven at trial.
Clint Fallow also suffered further and foreseeable damages as a result of Herbalife's conduct, including the loss of his house, car, credit rating, VA eligibility and possessions in an amount not less than $30,000 to be proven at trial.
COUNT FOUR BY MARY FALLOW AGAINST HERBALIFE FOR BREACH OF CONTRACT
Plaintiff Mary Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
Herbalife and Mary Fallow entered into a contract in 1984 whereby Mary Fallow would act as a Distributor for Herbalife and Herbalife would compensate her as detailed above. At all times relevant herein, Mary Fallow performed all which was required of her under her contract with Herbalife to the mutual profit and satisfaction of both parties.
In that contract, Herbalife promised Mary Fallow that it would follow its own rules and delete offending Distributorship, and transfer the deleted Distributorship and its lineage to the immediate supervisor. Herbalife breached that contract when it failed to delete the Distributorship of Tonni and Jay Riley and allowed the Riley's to damage and interfere with Mary Fallow's Distributorship.
As a result of that breach, Mary Fallow has been damaged in an amount no less than $12,000,000 to be determined at the time of trial.
COUNT FIVE BY MARY FALLOW AGAINST HERBALIFE FOR BREACH OF CONTRACT AS THIRD PARTY BENEFICIARY
Plaintiff Mary Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
In 1994, Dan Fallow and Herbalife entered into a contract for the benefit of Mary Fallow. Dan agreed to perform certain services for Herbalife and in return, Herbalife was to delete the Riley Distributorship and assign the lineage to Mary Fallow. Dan Fallow performed the agreed upon services.
Herbalife breached that contract when it failed to delete the Riley Distributorship and transfer the lineage to Mary Fallow. As a result of that breach, Mary Fallow has been damaged in an amount not less than $3,200,000 to be proved at trial.
COUNT SIX BY MARY FALLOW AGAINST THE RILEYS FOR TORTIOUS INTERFERENCE WITH CONTRACT
Plaintiff Mary Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
Mary Fallow had a valid contract with Herbalife and her 'down line' Distributors (in which she was named as a third party beneficiary 'Sponsor') which entitled Mary to royalties from the sales of those Distributors.
The Rileys were aware of those contracts and intentionally and tortiously interfered with those contracts when they solicited persons to leave Mary's Distributorship and to join a rival multi- level organization.
The Rileys were not privileged to interfere, rather they were contractually bound to refrain from such interference, and tortiously employed the use of confidential information and/or trade secrets in order to accomplish that interference.
As a result of that interference, Distributors left Mary's organization, damaging Mary in an amount to be proven at trial.
COUNT SEVEN BY MARY FALLOW AGAINST THE RILEYS FOR BREACH OF CONTRACT BY THIRD PARTY BENEFICIARY
Plaintiff Mary Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
The Rileys have a written Distributorship Agreement with Herbalife which explicitly names Dan and Mary Fallow as 'supervisors' or 'third-party' beneficiaries of that contract. The contract was especially for the benefit of Mary Fallow in that she was to collect royalties and bonus income based upon the Rileys efforts.
The Rileys breached that contract when they solicited persons to leave Mary's Distributorship and to join a rival multi-level organization and used of confidential information and/or trade secrets in order to accomplish that interference.
The Rileys were contractually bound to refrain from such actions.
As a result of the breach, Distributors left Mary's organization, damaging Mary in an amount to be proven at trial.
COUNT EIGHT BY DAN FALLOW AGAINST HERBALIFE FOR BREACH OF CONTRACT
Plaintiff Dan Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
Dan Fallow had a contract with Herbalife in which Herbalife agreed to pay Fallow a salary and reimburse expenses, delete the Riley Distributorship and 'roll up' the income to Mary Fallow, and return moneys to Clint Fallow, in return for Fallow's services in investigation and shutting down a competitor.
Although Fallow fully performed those services, Herbalife breached in that it did not pay, delete the Riley Distributorship or restore moneys to Clint.
As a result of this conduct, Dan Fallow has been damaged in an amount to be determined at trial.
COUNT NINE BY DAN FALLOW AGAINST HERBALIFE FOR QUANTUM MERUIT
Plaintiff Dan Fallow realleges each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
At the inducement of Herbalife, Dan Fallow enriched Herbalife by investigating and shutting down its competitor.
As a result of this effort, Herbalife has been enriched in an amount exceeding $10,000,000 to be proven at trial after discovery.
COUNT TEN BY ALL PLAINTIFF AGAINST HERBALIFE FOR RACKETEERING UNDER AZRAC
Plaintiffs reallege each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
Herbalife committed racketeering as defined by A.R.S. § 13-2314.04 through the predicate acts of a scheme or artifice to defraud and a theft of services as defined by A.R.S. § 12301(D)(4)(e) and (t).
Herbalife committed a theft of services as defined by A.R.S. § 13-802, on these plaintiffs and others, when it induced them to become Distributors, sell product, and induce others to become Distributors, with the representation that they would be paid, could conduct their own business, and that Herbalife would adhere by its rules and procedures.
Herbalife committed a scheme or artifice to defraud these plaintiffs and others as defined by A.R.S. § 13-2310 when it knowingly obtained a benefit by means of false or fraudulent pretenses, representations promises or material omissions. Herbalife represented Distributors would be paid, could conduct their own business, and that Herbalife would adhere by its rules and procedures. That representation was false in that Herbalife had no intention of paying all that was owed and promised, allowing the Distributors to conduct their own business, or abide by the Herbalife rules and procedures.
That representation was material in that it induced plaintiffs and others to become Distributors and expend significant moneys and effort in doing so. Herbalife intended that plaintiffs and others rely upon these false representations.
As a result of this conduct, plaintiffs were damaged as described herein in that they were not paid as promised, and they provided services to Herbalife and incurred expenses which they were not compensated and are entitled to treble damages.
COUNT ELEVEN BY ALL PLAINTIFF AGAINST HERBALIFE FOR PUNITIVE DAMAGES
Plaintiffs reallege each and every one of the allegations contained in the preceding paragraphs as though fully set forth herein.
Herbalife is liable for punitive damages on Plaintiffs' First through Tenth Count in that it willfully and maliciously damaged these Plaintiffs and should be punished for such behavior in an amount to be proven at trial.
WHEREFORE, Plaintiffs request a trial by jury and pray for judgment against Defendant Herbalife as follows:
On his First and Second Causes of Action, Clint Fallow asks for damages against Herbalife in an amount exceeding $3,600,000, in an amount to be proven at trial;
On his Third Cause of Action for damages, Clint Fallow request damages against Herbalife in an amount to be proven at trial;
On her Fourth Cause of Action, Mary Fallow asks for damages against Herbalife in an amount exceeding $12,000,000 to be proven at trial;
On her Fifth Cause of Action, Mary Fallow asks for damages in against Herbalife in an amount exceeding $3,200,000 plus punitive damages to be proven at trial;
On her Sixth and Seventh Causes of Action, Mary Fallow asks for damages against Tonni and Jay Riley jointly and severally and against their marital community in an amount to be proven at trial;;
On her Eighth and Ninth Causes of Action, Dan Fallow asks for damages against Herbalife in an amount to be proven at trial;
On the Tenth cause of action, all Plaintiffs ask for racketeering treble damages against Herbalife;
On the Eleventh cause of action, all Plaintiffs ask for punitive damages against Herbalife in an amount large enough to deter and punish it for its conduct to be proven at trial;
And on all Causes of Action:
(a) for attorneys fees, costs and expenses
(b) for costs of suit
(c) for such other and further relief as the Court may deem proper.
DATED this ________ day of ___________ 1997.
WARNICKE & LITTLER, P.L.C.
By_________________________________
Ronald E. Warnicke
Thomas E. Littler
Mark J. Giunta
2020 N. Central Ave., Fifth Floor
Phoenix, Arizona 85004
Attorneys for Plaintiffs
ORIGINAL of the foregoing mailed
this ______ day of February, 1997 to:
Joel P. Hoxie, Esq.
Sarah Chilton, Esq.
SNELL & WILMER, L.L.P.
One Arizona Center
Phoenix, Arizona 85004
Matthew A. Hodel, Esq.
Sean A. O'Brien, Esq.
PAUL, HASTINGS, JANOFSKY & WALKER
695 Town Center Drive, 17th Floor
Costa Mesa, Ca 92626
Christopher Kaup, Esq.
LERCH, MCDANIEL & KAUP, P.C.
3636 North Central Ave., Ste. 990
Phoenix, Arizona 85012
Office of the Attorney General
1275 W Washington
Phoenix, AZ 85007
Suit looks at seamy side of network sales
The Arizona Republic, November 20, 1998
By Jane Larson
Dan Fallow and his wife, Mary, strolled onto the stage and told a packed house of Herbalife International Inc. distributors how the couple had made $300,000 in their first year with the weight-loss products company.
A few years later, they were back, telling how they had made an 'incredible' $40,000 in just the past few months.
On Thursday, in a Maricopa County Superior Courtroom, the couple shook their heads, swallowed hard and looked grim as a lawyer for Herbalife showed video clips of their accolades and accused them of refusing to play by the company's rules.
The Fallows, for their part, contend that it was Herbalife that breached their distributorship contracts and followed rules only when it suited the company.
They allege that the company suspended their distributorships on false information, cut off their checks and refused to compensate Fallow for risking his life against the Russian Mafia during attempts to expand the business internationally.
What once was a lucrative business for the former Valley residents has turned into a contentious court battle that is providing a glimpse inside the seamier side of the network marketing industry.
The monthlong trial of their lawsuit against the Los Angeles company started by Mark Hughes, a multimillionaire who pitches the company on infomercials, has made news in Forbes, the Wall Street Journal and on the Internet through a Web site posted by Dan Fallow's son, also a Herbalife distributor.
The case went to the jury Thursday afternoon.
The Fallows filed the lawsuit in 1996, charging Herbalife with fraud, racketeering, breach of contract and other misdeeds.
Herbalife countersued, alleging the Fallows breached their contract and asking the court to severe the business relationship.
In the lawsuit, the Fallows say the company arbitrarily withholds income from distributors or gives it to others 'more favored' in the organization.
'In reality, Herbalife is a dictatorship run by its founder and a small group of favored sycophants,' the lawsuit says.
In closing arguments, the Fallows' attorney, Thomas Littler, said the couple had built a business that, including other distributors in their 'down line,' had sold $37 million worth of Herbalife products in 1996 alone.
Then the company says, 'We can do whatever we want,' including terminate them for violating rules even when it failed to enforce them against others, Littler said.
Fallow offered to help the company fight a counterfeiting organization in Europe, Littler said, in exchange for favorable treatment of his wife's and son's distributorships. But the company claims such a deal never existed and refused to pay Fallow for his efforts, Littler said.
The couple are seeking to be compensated for the income they say they should have received since 1990, including bonuses for being top producers and a percentage of the millions their organization members sold.
Herbalife attorney Matt Hodel, however, said the broken promises in the case were the Fallows' fault, and that Dan Fallow was not to be trusted.
The couple never complained when they were making money, he said. But they had agreed when they applied to become distributors that husbands and wives could not operate separate distributorships. They broke that agreement when, during a brief separation, Dan Fallow helped operate his son's organization, Hodel said.
Dan Fallow also was involved in setting up a competing organization in Europe, using Herbalife's name and copying its labels, he said. The company is seeking to be compensated for the costs of shutting down the American manufacturer who was supplying the competitor.
Hodel argued that the company values its good distributors.
'Hughes believes people who work hard for their money and are entitled to money should get money,' he said.
But people who try to cheat good distributors cannot be allowed to stay in the organization, he said.
'This is a case about character, it's about who we are,' Hodel repeatedly told the jury.
Herbalife sells herbal weight loss, nutritional and personal care products. The Fallows' lawsuit claims products are marked up 600 percent and shipping and handling charges are inflated to finance large payments to distributors.
The company pitches distributorships as an opportunity to own one's own business and claims income limited only by individual effort. Members also can sponsor other people into the network and get royalties from their sales.
The Fallows began as distributors in Mesa in 1984.
Herbalife distributor wins suit
The Arizona Republic, November 24, 1998
By Jane Larson
An Herbalife International Inc. distributor won $620,000 in damages and the right to future income from her business when a Maricopa County Superior Court jury returned verdicts Monday against the network marketing giant.
Mary Fallow, a former Mesa resident who now lives in Idaho, put her head in her hands and cried as the verdict was read.
Fallow, her husband, Dan, and her stepson, Clint, had sued California-based Herbalife, alleging it breached contracts and failed to follow its own rules in determining royalties and policing its distributors' networks. That cost them millions of dollars in lost bonuses and potential income, the family claimed in its civil lawsuit.
Jurors also awarded Dan Fallow $22,500 in damages on his claim that the company failed to pay him for a 'sting' operation he said he conducted against European counterfeiters of Herbalife products. Fallow argued in the lawsuit that he had helped Herbalife fight the counterfeiters in exchange for favorable treatment of his wife's and son's distributorships, but that the company reneged on the deal.
That failure on Herbalife's part cost Mary Fallow $470,000 in bonuses and royalties since 1992, Fallow attorney Thomas Littler had argued, and made up the bulk of Monday's jury award.
Mary Fallow had sought future damages, which could have sent the award into the millions of dollars, Littler said. Jurors rejected that request, but giving her the right to her old distributorship could make up for it, he said.
Littler had argued during closing arguments last week that the company did not follow or uniformly enforce its own rules. Monday's verdict sends a message to the company that 'if you make an agreement, live up to it,' he said.
Herbalife's chief counsel, Bob Sandler, called the rules issue a 'red herring' in the case. He said the company's rules are the same ones followed by other big network marketing companies, and that the jury was sympathetic to Mary Fallow as a mother seeking to support her family.
Jurors sided with Herbalife on several of its counterclaims in the suit. Dan and Clint Fallow were ordered to pay $61,000 to Herbalife for breaching its rules against dual distributorships, and the company's request to terminate its relationship with Clint Fallow was granted.
Mary Fallow said the verdict means she will finally get checks from sales by her 'down line' of distributors after 2 1/2 years of no income and mounting debts.
Herbalife will appeal the case, defense lawyer Matt Hodel said.
Well thats about all I could find in just one hour with Google. If you'd like more, please let me know.
Peace...In the middle east.
Thank You I would just like to personaly thank you for answering my questions directly.
I would just like to personaly thank you for answering my questions directly.
I am sooo glad that I am not with GOS but with OBS.
I guess that a few people got a little greedy, and was trying to run the busines as a pyramid which is NOT how the business is supposed to be run.
I make sure to teach all of my new people that it does take hard work and not everybody succeeds, I don't make them buy a certain amount product everymonth, if they want to use it then it is totaly up to them.
Thanks again guys,
No need for name calling now.
Wow....Talk about not having anything better to do. Ha-ha. For Your info None of the Herbalife products have ephedra in them any more. Yes they used to, but once the studies were out that this stuff was bad for you, then they started doing research for a better product that would not harm you. Infact Herbalife continus to do resaerch to make sure that the products are safe.
You do have some good info and it is factual but it is a little out dated. I for one like to move on, and strive to better myself instead of dwelling on the past. Thank you for taking the time to share these articles with anyone who realy cares.
God Bless, and Have A Great Day!
OBS is the same as GOS
Jacqueline:
Just for your information: Online Business Systems (OBS) is a spin-off from Global Online Systems (GOS). It was started in September 2004 by Shawn Dahl and Glenn Kirkpatrick, who were President's Team members and affiliated with Global Online Systems at the time.
OBS employs the exact same tactics, scripts, and business materials that GOS used. They did make some changes to their Decision Package kits and Business Materials, which go along with their new website that they started. But the methodologies employed haven't changed!!
Everything else is the same. Same illegal pyramid marketing scheme. I was involved with both companies, and was active during the transition from GOS to OBS which was mandatory for all people in Shawn and Glenn's downline.
Just be very careful, particularly with advertising expenditures for that internet marketing wheel each month. That's where people typically lose the most money! If you can focus on retailing the products on your own (friends, family, etc.) and employ your own marketing techniques such as flyers, pull-tabs, etc. you'll be less likely to get into insurrmountable debt. It's definitely hard to be profitable in this business, but you really have to be careful with that advertising; it's a scam, and that's where a lot of the money is being made by a few and lost by the masses. Another big money-maker for these clowns at the top are the business materials (Decision Packs, Business Manuals, Training Tickets, etc.) that you are required to purchase; these things are really marked up as well. Just watch yourself.
So where's the extensive research that you said was done?
OK Jackie -
I showed you mine, now its time for you to show us yours. Or were you just B.S.ing us...probably like you do your customers, if you really do have any.
2 seperate companies?
Ok, I am an ex-user of Online Business Systems, and have a great deal of hostility to defenders of the 'proven system'. First, I got a crappy 'coach' and he charged advertising wheel slots to my credit card which he never asked nor told me about. I learned later that what I thought were medical expenses for a surgery I had recently had were instead charges for 'leads' of which I feel crappy that I signed up 3 of the 13 leads I recieved.
I think Herbalife is a semi-legit thing, and I wish I had gotten involved with only them and NOT the 'marketing' company that's out to get all your cash by telling you to do much more advertising than you need and paying extortion high prices for leads and materials that probably cost a penny or two on every dollar if that. I worked very hard, told my 'coach' I had only limited time aspirations at first, and they instead overwhelmed me with leads that I never authorized the purchase of with my card. Not to mention the 'hidden' fees.
You have a basic 40 dollar a month fee to maintain your 'back office' website, and your marketing and recruiting websites. Which are all cookie cutter and the same thing, then you buy materials for a decision pack and send them to people who are just like yourself, in a bind and looking for a way out. At first I thought man, what a great system, all these details on the sites I was sent to told me how it was all perfectly legal, and was governed by both U.S. and Canadian law, which obviously govern very loosely since this stuff is allowed to go on.
I hope the people I signed up can forgive me for getting them into this, I feel worse about that than over the money I lost. Herbalife is the fertile soil for these corrupt marketing companies that can 'affiliate' themselves with it and take themselves along for the ride since every level of the distributors use it they get the best in the end. Notice how the high end people are the ones who do the 'marketing' not the sales.
Well, in the end it can go both ways I think, people get suckered in, because of something that seems legit (Herbalife has some good credentials, since it's a publicly traded company and that sounds like what people who are desperate want to hear) the things that are not legit (GOS, OBS) are swindling and possibly giving a bad name to the company and the people who are in the business. Although Herbalife has it's problems, for example most times when I ordered something one or more items were out of stock.
Submitted: 8/31/2005 5:12:26 PM
Modified: 8/31/2005 5:12:26 PM
Raymond J
Somerville, MassachusettsU.S.A.
Zealots...another name for Closed-Minded Stubborness
Sigh...what can I say? You're obviously convinced that Herbalife and GOS/OBS or any combination/spin-off is from hell and should be destroyed. Yes, William, I read ALL of the information you posted before it was posted by you. I did the same google research before getting involved in this company and industry. Yes, Herbalife has been sued. Name 1 company with high sales that hasn't been. The real question is this, HAVE ANY OF THE PLAINTIFFS IN ANY OF THE LAWSUITS WON ANY CASE? The answer is no! The internet is a wonderful resource of information, it is just unfiltered. You can find anything for which you look. The thing is if you're looking for something disparaging about a company you can find it. Just look up Microsoft or Walmart or Fidelity Investments, et. al. That Pyramid lawsuit filed in Canada, I know all about it and guess what, I KNOW personally the owners of GOS and all the details surrounding that suit. It had nothing to do with Pyramiding (Herbalife's business plan is such that pyramids are not really possible). The reason that lawsuit was filed in Canada and not the US or any of the other 60 countries Herbalife operates in is because of a loop hole in Canadian law that allowed for an unfair competition clause to be exploited. My business coach in this system, is a retired attorney.
Ok, the main thing I want to stress is this business is awesome. You get out what you put in. It works. If it's not then it is something you're doing, not the system. There are way too many people making money than not. And William, before you ask, I've retailed 5600 dollars worth of product. My take from that is 2800 dollars. It didn't come from recruiting other people in the business it came from having people get results on the products. Results for which they've searched and hoped. It's a far better thing to help the millions of overweight-obese people at serious health risk find an effective and safe way to lose pounds and inches.
That's all, I'll come back again to this once I've made GET (if you don't know what it is, too bad). Also, because I don't know you, I'll let that comment relating to my intelligence and being a math major slide. If I did know you, I'd kick your you-know-what. You don't know me personally yet you insult me as if you do. Why? Because I have a different idea about the company with which I'm associated? That's like being upset with some one who works for Microsoft or Wal-mart because you believe their making a mistake with their business ideas and they are duping people into following them. And yet, you seem to believe me to be of lesser intelligence. Try again...
Later until like December or something...
I am a member of OBS
I give much respect to your opinions and feelings!
However I have been affiliated with OBS for more than a year now. I have had excellent results. The system is not for everyone and is NOT a pyramid. The BBB does not invite business' to its forum if they are illegal.
OBS is simply a marketing system that provides tools and resourses to make the Herbalife business easier. It also helps people move much faster in the business.
Need more info. go to www.bbb.com
I am sure you will find more than enough info to make all negative comments about OBS seem false.
I need to clear some things up about OBS! OBS started in september of 04 and has helped many people with NO ezperience in sale become very successful. In order to become successful you need to follow the system. If you are not willing to follow the system it will not work!
Those who fail either do not have a pleasant personality, are not trustworthy or did not follow the system. You cannot rely on one method of advertising to get what you are striving towards, in any business!!
If you put 1000 into 1 method of advertising and get 10 leads, where are the other 10 leads coming from. If you know OBS you know the 20/10 plan should be done EVERY MONTH! If you got 13 packages out why did you not get the other 7 out. Were you solely relying on the wheel??
So if you lost money in the business there is only one person to blame! Its not a flaw in the system, the system works. We all have the same products, resourses and tools, the only denominator is YOU!!
For the person who states they wished they had JUST gotten involve with Herbalife instead of the marketing system, its all the same, you still have the products to sell, selll them YOUR way, stop putting more and more money into advertising if your not making it back!! DUH!!!!!
Next you need to retail the products at the same time as recruiting, because your not going to make a killing from recruiting until your team is exstablished so retailing will help to defer the costs and put money in your pocket quickly!!
I thank god every day for bringing OBS and Herbalifeinto my life, they truly are a blessing!!
Thanks!
Good business is what you make it.
I have recently joined OBS. Please note that WE ARE NOT EMPLOYEES, but independent agents. After having entertained several entrepreneurial ventures without success, I can say that I have been pleased with the results with OBS. Those of you who would rather rail against a company for your failure in it should perhaps spend equal energy looking inwards.
Many have categorized OBS as a 'pyramid' scheme. But, this structure applies to many, indeed most business ventures. Take the auto industry for example. There is the main corporate structure at the top. Numerous manufacturing facilities comprise the next tier. Auto dealerships comprise the next and the salespeople occupy the base of this 'pyramid.' Now, what chance does an auto sales person have at rising to occupy the top spot in the corporation these days? Virtually none. They can hardly hope to make it to the next tier as a dealership owner. With OBS, you can go as far as your desire will take you.
As to the money some say they 'wasted' on advertising, in one of my previous ventures, I spent $9,000 in market research and targeted advertising relying on the opinions of the 'experts' and got zero bang for my buck. The bottom line is, no matter how well you market something, if people don't want to buy it, you can't sell it. And if you don't follow up your leads and offer the BEST in customer service, your customers will soon be someone else's customers.
Herbalife products have a proven track record, and they are still improving them. Lord knows, everything that Herbalife markets is better for your overall health than anything fast food restaurants sell. Herbalife is working to help people live healthier, not just feed their bottom line at the expense of people's well being. Are they making money? Sure! Nobody goes into business to lose money! As to some of the critics on this site, I would like to know what their weights are and what their diets consist of. Often when people are spewing venom, it's to obscure their own unsavory image in the mirror.
There is no perfect business; there are no guarantees. You can work hard at any business and still fail. It's easier to fail if you don't work hard. Herbalife and OBS give people a fighting chance to improve themselves and their lives without having to waste resources on their own trials and errors. As one who is largely skeptical of everything, I have found value in what OBS and Herbalife have to offer.
There's a lot of money out here people.. and herbalife is not it.
William, I'm glad you stayed here at rip it off to continue educating these folks about this scamming company, Herbalife aka OBS. I received an email and thought it may be a good opportunity for my sister, so I decided to investigate. Nope! Another scam...
But, I will tell you this....I am a mortgage broker and I net no less than $5000.00 per deal, average 4 deals per month, spend less than 20 hours per month working, spend $300/per month in advertising, and spent $295 on my Mortgage school. That's right, no bachelor degree needed...just a 48 hour course.
There's a lot of money out here people...and herbalife is not it.
I am glad to hear all your opinions:
And I thank those of you who did research about this, and other, online, work-from-home businesses. You do so many of us a great service.
I, too, started to get involved with Online Business Systems--among other 'make money without lifting a finger' offers.
I had a really well-paying job, with great benefits, up until a few years ago when my body went south and just couldn't handle the physical demands. The company refused to put me into any other position that I could do(been there 19 yrs and know more than just what I did for 11 of those yrs.) With no other skills to fall back on, I grasped at online, work-at-home options.
Multi-Level Marketing 'businesses' come in many forms. They're not always online businesses, and they are often difficult to spot. Beware--- if you THINK they are MLM, and then you are told repeatedly, and adamantly, that they are NOT!---
They just might be. Also, the words Multi-Level Marketing are just a euphenism for Pyramid.
My stepmom, who I consider a fairly saavy person, fell for some. My ex, also intelligent, got us involved in another, and, although I agree with SOME of their concepts and products, it was MLM---pyramid. He lost some good friends by trying to recruit them into the business.
Some questions to ask yourself:
If they tell you, 'You don't have to sell anything', ask 'Then where does the money generated and made, come from?' The answer is you have to get someone UNDER YOU. You have to schmooze other people to buy into the system.
(MLM-PYRAMID)Well, someone has to sell SOMETHING! Right?
'What is the actual product?'
'Do I believe in this product?'
'Will I use this product myself?'
'Has, or is, this product helping me, so I believe it can be of benefit to others?'
Research-Investigate. Try it out for yourself, before you put yourself as the head of the company.
Let's face it, in any business, if you are the one person selling the product, or service, YOU ARE THE PRODUCT OR SERVICE. If the consumer is unhappy with the results, you may have made a couple of bucks, but in the end. you are BUPKUS!
AND If you have to work your butt off to make the $$ 'promised' by the infomercials, they Lied!
The whole premise of these commercials is that you can sit in your bathrobe in front of your puter for a couple of hours a week and make millions!
Yeah, I am envious of the Donald Trumps and Bill Gates of the world. But, they found their niche and made it work. They didn't rely on these fly-by-night schemes to make their billions.
Look out for easily made promises,because, in the words of Mary Poppins,
' Promises are like pie crusts. Easily made--easily broken.'
Find what you're good at, what you enjoy--and make it work for you.
Another question to ask yourself: If it's so easy, and lucrative, why isn't EVERYONE doing it?
M
CT
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