Saturday, July 2, 2016

Herbalife v. Vemma: Pyramid Scheme Analysis

Updated to use 2015 numbers.  Analysis is located here

Saturday, January 2, 2016

$HLF v. Vemma: Pyramid Scheme Analysis; Part 6 of 6

All parts are located here.  Part 6 is also given below.

Sales to Distributors for Personal Consumption

56.  It is possible that Herbalife distributors buy products for the purposes of personal consumption.  In BurnLounge, the 9th Circuit Court noted that distributors could be “ultimate users” for purposes of the Koscot test under a narrow set of circumstances; namely, if they purchased the products for personal consumption based on consumer demand, not primarily for the purpose of participating fully in the rewards under the compensation plan for the business opportunity.  I consider it unlikely that many distributors would qualify as “ultimate users” under BurnLounge given the criteria.

57.  Herbalife’s marketing materials specifically encourage distributors to purchase product to maintain eligibility for rewards and to use as samples in connection with recruitment, and Herbalife's compensation plan strongly encourages this behavior.  People who are interested in purchasing Herbalife's product for personal consumption (including junior distributors) can obtain it cheaper from alternative outlets (see discussion in para 42, above).  Junior distributors are not entitled to any product discounts that are not available to non-distributors, so purchasers have no incentive to become distributors simply to obtain product.  Any purchases by Herbalife distributors for the purposes of internal consumption are likely incidental to the main motivation of maintaining eligibility for rewards.

Data from Actual Operations

58.  The available evidence about how the Herbalife program works in practice comes from Herbalife’s Disclosure Statements from 2013 and 2014.  The information from these sources is consistent with my findings the Herbalife likely operates a pyramid scheme.

59.  The 2014 U.S. Disclosure Statement showed that most participants achieved poor results, as would be expected based on the theoretical models previously discussed.  The Statement shows that 89% of members received a gross compensation of $0 in 2014.

60.  The company assumes that all members who did not receive discount commissions were not interested in the business opportunity and has classified them as discount purchasers.  It seems far more likely, given Herbalife’s marketing and the above discussion of the incentive structure, that many, if not most, of these individuals were interested in the business opportunity but were unable to recruit.  In other words, they are best viewed as distributors who were unsuccessful in the business opportunity, but have been redefined by Herbalife as discount purchasers.

61.  According to page 16 of Pershing Square’s presentation Side-by-Side: A Comparison of Vemma and Herbalife,

The bottom 94% of Herbalife’s U.S. Sales Leaders earned less than $2245 in 2013.
The bottom 83% of Herbalife’s U.S. Sales Leaders earned less than $303 in 2013.
The bottom 49% of Herbalife’s U.S. Sales Leaders earned less than $1 in 2013.

62.  As discussed in paragraph 18, above, pyramid schemes are often characterized by a constant churning of the base, as unsuccessful participants at the lowest level drop out and are replaced by new recruits.  According to page 25 of Herbalife’s 2005 annual report, the last time this disclosure was made, approximately 60% of the supervisors did not requalify and more than 90% of the distributors turned over.  Massive churn indicates that the vast majority of participants cannot make sufficient retail profits and only massive recruiting keeps the scheme going.

63. thru 66. - Paragraphs 63 thru 66 in the Declaration of Stacie A. Bosley Ph.D. are idiosyncratic to Vemma and do not apply to Herbalife.


67.  The Koscot test analysis is critical to the determination of a pyramid scheme, set within a marketing program with multilevel compensation.  The fundamental question, as articulated in the second prong of the Koscot test, is whether participant compensation plans grant participants the right to obtain recruitment rewards that are unrelated to ultimate users.  It is my judgment that Herbalife’s marketing program and business model meets this necessary component of a pyramid scheme and is likely to lead to widespread participant losses.  All forms of compensation are driven by recruitment or purchase volume and there is no direct connection between this compensation and retail sales or market demand.  This structure incentivizes participants to purchase product for the purposes of maintaining eligibility for recruitment rewards (inventory loading) and to encourage their “downlines” to do the same.  Company representatives continue to stress the importance of reaching and maintaining Supervisor level (or higher), and recruiting others to do the same.  Premium pricing and alternative retail outlets undermine Distributor’s ability to resell products or induce others to purchase product directly from Herbalife for personal consumption.  Company safeguards appear insufficient to ensure a minimum level of retail activity and prevent inventory loading.

68.  The anticipated result of Herbalife’s program is an endless recruitment chain, with strong emphasis on recruitment over sales to ultimate users.  At any moment that the scheme is analyzed, analysis indicates that the vast majority will be in a loss position.  U.S. disclosures corroborates these conclusions.  Internal data from Herbalife would provide additional detail on how the program operates in practice and would assist in calculating the scale of consumer injury, but I am confident it would confirm my judgement that Herbalife is a pyramid scheme.

$HLF v. Vemma: Pyramid Scheme Analysis; Part 5 of 6

Please read part 1, part 2, part 3, and part 4 before reading part 5 below.


51.  Having found that Herbalife's program grants rewards that are unrelated to actual sales to ultimate users, and encourages and incentivizes participants to seek those rewards, I next consider whether the company has “safeguard” policies and procedures that are sufficient to ensure that adequate retail sales to ultimate users exist and inventory loading is prevented.  As noted in Omnitrition (1996): "Where, as here, a distribution program appears to meet the Koscot definition of a pyramid scheme, there must be evidence that the program's safeguards are enforced and actually serve to deter inventory loading and encourage retail sales."  Such safeguards are necessary, as a structure with insufficient retail sales will inevitably generate a pyramid scheme that relies on ongoing recruitment to fund commission payments, matching the general economic characterization of of scheme described in paragraph 17.  As established in paragraphs 19-20, the Koscot test also hinges on the existence of significant sales to ultimate users.  In Amway (1975), the FTC found that Amway was not operating a pyramid scheme because it had adopted and enforced certain procedures to prevent inventory loading and to ensure that actual retail sales existed.  As noted in Omnitrition (1996), the safeguard “policies adopted by Amway were as follows: (1) participants were required to buy back from any person they recruited any saleable, unsold inventory upon the recruit's leaving Amway, (2) every participant was required to sell at wholesale or retail at least 70% of the products bought in a given month in order to receive a bonus for that month, and (3) in order to receive a bonus in a month, each participant was required to submit a proof of retail sales made to ten different customers.”  These safeguards must be stated, enforced, and effective.

52.  In the Amway case, the company’s retail sales were in the form of re-sales by distributors.  In Herbalife’s model, many retail sales outside the organization will likely not come from Distributor’s inventory, but will be in the form of direct sales to non-Distributors, induced by and credited to Distributors.  Because of this difference in business models, an effective Amway-type safeguard for Herbalife may look slightly different than the specific rules in Amway.  However, the objective would be the same - to encourage sales to ultimate users who purchase for the purpose of personal consumption.  I see no evidence of any safeguards in place that would be effective to deter inventory loading and encourage retail sales to ultimate users.

53. Herbalife’s 10 customer rule and their 70% rule are based on self-certification and includes stipulations to allow for downline sales / internal consumption to count as retail sales.  Moreover, not all distributors have to comply with the rules (the rules are required for Sales Leaders to qualify for commision payments).  In a July 5, 2012 letter to the SEC, Herbalife states that it does "not rely on the '70% rule' in any meaningful way" and believes it is “not material” to their business. In the Deposition of Jacqueline A. Miller in Herbalife v. Ford, Ms. Miller testifies that between 2006 and 2009, Herbalife disciplined fewer than 25 distributors for violating the 70% rule (fewer than 1 out of every 100,000 distributors).

54.  Return policy
Herbalife’s repurchase policy creates a cumbersome process and acts to limit distributors from returning product and thus fails to adequately protect distributors from losses.  As shown below, the return policy is not significantly different from Vemma's.

Source: Page 21 from Pershing Square’s presentation Side-by-Side: A Comparison of Vemma and Herbalife

55.  To summarize, there is no evidence that Herbalife has enforced and effective safeguards that would ensure sufficient sales to ultimate users and prevent inventory loading.  The absence of enforced and effective safeguards compounds an existing problem within the Compensation Plan, namely that compensation is based on purchase volume, regardless of whether the purchases relate to retail sales to ultimate users.  By encouraging participants through its marketing materials to purchase product for the purposes of bonus eligibility, and by basing its compensation on purchase volume, Herbalife has created a system that incentivizes inventory loading.

 Continue to part 6 of 6

$HLF v. Vemma: Pyramid Scheme Analysis; Part 4 of 6

Please read part 1, part 2, and part 3 before reading part 4 below.
Illustration of a Downline and Related Earnings

44.  The 2-4-1 Plan (sometimes referred to as the 4-2-1 plan) advocates monthly binary duplication with each member purchasing 500 volume points per month in order to get to President’s Team (>$8000 per month) in 10 months.  This plan is deceptive.  Herbalife’s 2014 Statement of Average Gross Compensation Paid by Herbalife to U.S. Members states that “During 2014, 31 U.S. Members achieved the level of President’s Team.  They averaged seven years as an Herbalife Member before reaching President’s Team, with the longest duration being 18 years and the shortest being less than three years.”

To demonstrate the implications of Herbalife's promoted 2-4-1 binary recruiting strategy.  Each entrant is assumed to purchase a Mini Herbalife Member Pack for $59.50, make personal purchases of 500 Volume Points (for every month after the month of enrollment), and recruit two individuals to do the same.  Assume the first entrant is Jane, where Jane recruits Bill and Tom within the first month.  Further assume that Bill and Tom then each recruit 2 individuals within a month after their enrollment, those 4 individuals recruit 8 within a month, and so on.  Figure 9 depicts Jane’s growing 2-team organization.

Source: Figure 9 from the Declaration of Stacie A. Bosley

45.  The first page of this Google Sheet depicts the advertised outcomes for Jane after 3 months of ongoing recruitment.  This scenario is modeled after the 2-4-1 plan, promoted by Chairman’s Club member Dan Waldron and others.  This scenario demonstrates that Jane experiences losses until she and her downline acquired substantially more than 8 cumulative recruits by month 3, at which time gains overcome the cumulative loss experienced from prior months.

46.  It can be assumed that members of Jane’s downline following the same strategy will also not reach profitability until they and their downlines accumulate substantially more than 8 cumulative recruits by month 3.  Accordingly, the overwhelming majority of participants are in a loss position at any point in the life of the organization, since participants in the lowest levels have yet to reach a positive cumulative net profit.  Though promotional materials use this illustration to show that a person can receive $8000 per month income by month 6, the materials do not disclose that, at any given point in time, the overwhelming majority of participants will not have achieved this result and will have actually lost money.

47.  The poor results for most participants (89% of distributors receive $0 in “gross compensation” according to Herbalife’s 2014 U.S. Statement of Average Gross Compensation) are predictable because the 2-4-1 plan incentives are based upon recruitment into a binary matrix (and 5x recruitment duplication for Club 100).  Table C1 in Appendix C of the Declaration of Stacie A. Bosley Ph.D.y contains a mathematical analysis of a binary progression, which is applicable to any binary compensation plan.  Table C1 shows that the percent of members in the bottom 3 levels of a binary structure converges to 87.5% after 10 periods.  Given the estimated expenses shown in the first page of the Google Sheet, which prevent participants from acquiring cumulative net profit until month 3, this means that at any given time in the life of the organization more than 87% of participants will need additional recruitment to cover personal investments.  Additional recruitment will be increasingly difficult to achieve as cumulative recruits have already grown exponentially.  It is important to stress that not all binary compensation plans are inherently deceptive or that any MLM that uses such a plan is necessarily a pyramid scheme.  A binary compensation plan that sufficiently emphasis retail sales may not be a pyramid.  My Google Sheet assumes no retail sales to ultimate users and illustrates the effects on participants when compensation is based solely on recruitment.

48.  It should be noted that the Google Sheet is a theoretical model and does not determine how the program actually operates in practice.  A variety of factors may affect the actual results.  For example, some participants may recruit more than two new participants and others may recruit none and drop out of the program.  However, it should be noted that Herbalife’s 2014 Income Disclosures (discussed in paragraphs 59-61, infra), which show that the majority even of Active Sales Leaders made minimal income, are generally consistent with the predicted results from this model.  The model illustrates that the structure of the program itself predictably leads to poor results for the vast majority of participants, regardless of accidental or external factors.  While many new businesses fail because of adverse business conditions, poor management, bad luck, or any number of other reasons, with this type of program, failure for most participants is inherent in the system.  This model provides a useful economic context to explain why courts have condemned pyramid schemes.

49.  Herbalife's claims that substantial wealth is available for participants are deceptive.  This is true whether the representations involve specific income claims ($42,000 per month as described in paragraph 5), or are more general (passive income as described in paragraph 9).  The pay plan depends on continuous recruitment, which results in the vast majority of participants not having sufficient “downline” activity to make any significant amount of money.  Herbalife's Disclosure Statements (discussed below) confirm that whole it is possible for some participants to make large amounts of money, the vast majority do not.

50.  It is clear from pages 80-150 of the Pershing Square presentation Who Wants to be a Millionaire that earnings received as rewards for recruitment are much greater than rewards for sales to ultimate users, and that an equivalent promise cannot be made and satisfied for each new Herbalife distributor given the dramatic exponential recruitment required.  The ability for the most recent Herbalife distributors to reach a positive cumulative net profit relies upon an ongoing and consistent ability to recruit new Herbalife distributors.  Returning to the economic definition of a pyramid scheme, the Herbalife business model, marketing materials, and Compensation Plan do appear to create a perpetual recruitment chain that dooms the vast majority of participants to financial loss.  As demonstrated, the business model requires ongoing recruitment as new entrants must recruit others in order to cover their own personal investment.  In terms of the Koscot test, I conclude that Herbalife's program, including its marketing, encourages and incentivized participants to seek rewards through recruitment rather than sales of product to ultimate users.

Continue to part 5 of 6

Friday, January 1, 2016

$HLF v. Vemma: Pyramid Scheme Analysis; Part 3 of 6

Please part 1 and part 2 before reading part 3 below

Limited Incentives for Retail Sales

38.  While the company claims to focus on product sales, personal statements, company literature, and the Compensation Plan minimize retail sales activity, whether through resale or through development of direct-sale customers.  Instead, the company focuses its guidance on encouraging members to purchase product for the purposes of qualifying for recruiting rewards and recruit down-line members to do the same (duplication).  This emphasis on a duplication approach, centered on recruitment and bonus-qualifying purchases, is demonstrated by Herbalife’s 2-4-1 plan (also known as the 4-2-1 plan).  According to senior distributors, a new member can reach President’s Team in 10 months and earn >$8000 per month.  Note that all instructions center on two actions: 1) purchase 500 volume points per month, 2) recruit and train two new members every month who will do steps 1 and 2.  Also note that this plan is unrealistic.  Herbalife’s 2014 Statement of Average Gross Compensation Paid by Herbalife to U.S. Members states that “During 2014, 31 U.S. Members achieved the level of President’s Team.  They averaged seven years as an Herbalife Member before reaching President’s Team, with the longest duration being 18 years and the shortest being less than three years.”

39.  If new entrants follow the aforementioned system of duplication, suggested by Herbalife’s top distributors, firm growth will rest entirely on ongoing recruitment and bonus-qualifying purchases.  Monies paid, derived from behavior that follows this suggested pattern of growth, are not significantly connected to sales to ultimate users and are, instead, effectively rewards for recruitment.

40.  This paragraph contrasts earnings made through recruitment with the earnings associated with a retail sale.  Pershing Square demonstrated that the percent of participants’ income from recruiting rewards exceeds that from retail profit in slides 93-150 in their presentation Who Wants to be a Millionaire?

41.  Distributor training discourages retail sales.  Chairman’s Club member Stephan Gratziani stated "[S]uccessful people in retailing in our business, it’s a very small percentage. . . . The majority of our people have a difficulty in selling products, in general.”

42. In addition to incentivizing distributor recruitment over retail sales and discouraging retail sales in distributor training, Herbalife places significant limitations on distributor’s ability to re-sell the product to ultimate users.  It prohibits sales in business/retail outlets (e.g. eBay, Craigslist, etc.), or home shopping networks.  Herbalife Nutrition Clubs are required to abide by an onerous set of restrictions and rules, including: (i) no exterior signage at residential locations, (ii) no mention of Herbalife on the Club exterior, (iii) windows and doors must be covered, (iv) no advertising or promotion, (v) no attracting walk-in customers, and (vi) Club Operators may charge membership fee only to cover operating costs - prohibited from earning retail profit.  In videos of Herbalife meetings, little time is devoted to helping distributors learn to retail the product to those outside the organization.  Pricing issues also make re-selling to retail customers difficult.

As described in paragraph 21, Pershing Square demonstrated that Herbalife junior distributors cannot make substantial retail profit because the products are available on eBay and other online marketplaces for prices lower than even the discounted wholesale prices that junior distributors are paying for products.

43.  Paragraph 43 of the  Declaration of Stacie A. Bosley Ph.D. paragraph 43 is idiosyncratic to Vemma's discontinued Customer Referral Program.  I am not aware of an analogy for Herbalife.

Continue to part 4 of 6

Herbalife versus Vemma: Pyramid Scheme Analysis; Part 2 of 6

Please read part 1 of 6 before reading part 2 below.


The Herbalife Compensation Plan & Limited Incentives for Retail Sales

21.  Herbalife gives potential purchasers who simply want to “enjoy the products” the option to purchase products at a 25% discount to suggested retail price (SRP).  Up until a rule change in 2014, Herbalife products were readily available on independent distributor websites for ~40% discount to adjusted SRP (Who Wants to be a Millionaire? pg. 106).  This rule change has not altered the primary reason new recruits join Herbalife (i.e. to pursue the business opportunity), because the products are still available on eBay and other online marketplaces for prices lower than the discounted wholesale prices that Herbalife’s most junior distributors are paying for products (Who Wants to be a Millionaire? pgs. 107-108).  If the retail demand is genuine then arbitrage would cause prices to be nearly equivalent.

Source: page 19 of Pershing Square presentation Side-by-Side: A Comparison of Vemma and Herbalife

22.  Paragraph 22 of Dr. Bosley’s declaration discusses the purchase of Vemma's $499.95 Affiliate Pack which I believe to be comparable to Herbalife distributors inventory loading to achieve Supervisor status.  In just one of many examples Chairman’s Club member Alan Lorenz urges you to “get to supervisor by the end of the month, get your people to supervisor” in this video.   

Source: Page 18 of Pershing Square's presentation Side-by-Side: A Comparison of Vemma and Herbalife

23. & 24.  Paragraphs 23 and 24 of Dr. Bosley's declaration discusses Vemma’s auto-delivery program which I believe is comparable to Herbalife distributors inventory loading to maintain supervisor status.  Inventory loading isn’t just garages full of products as this video demonstrates.  John Tartol states “The more product you take, the more money you make.”

Source: Page 20 of Pershing Square's presentation Side-by-Side: A Comparison of Vemma and Herbalife

25.  Herbalife's Compensation Plan has six ways to “get paid.”  These include retail profit, wholesale commissions, royalty overrides, monthly production bonus, vacations/promotions, and the annual Mark Hughes bonus as summarized by Pershing Square in slide 81 of their presentation “Who Wants to be a Millionaire?”  I will describe each of these forms of compensation below.

Source: Page 81 of Pershing Square's presentation Who Wants to be a Millionaire?

26 thru 37.  As seen in slide 81, nearly all forms of financial compensation from Herbalife require a distributor to be at the Supervisor level or higher.  As described in paragraph 21, even retail profit is largely unavailable to junior distributors because they receive a 25% to 42% discount while senior distributors receive a 50% discount to SRP.  In pursuit of the recruiting rewards, senior distributors to dump product far below SRP and leave little to no retail profit margin for junior distributors.

The key determinant of most distributor’s income is the accumulation of volume points by ordering product from Herbalife (without regard to retail demand) and recruiting others to do the same.

Sales leader must generate ~$2600 of Personal Volume per year to maintain their downlines and Sales Leader status (Who Wants to be Millionaire pgs. 72, 166)

To qualify for maximum commissions and bonuses, Sales Leaders must generate ~$1,600 to ~$3,200 or Personal Volume each month (Who Wants to be Millionaire pgs. 72, 166).

Herbalife claims that 73% of all retail sales dollars go right back to the distributors.  However, this calculation is made from a fictitious Suggested Retail Price that is unrelated to market demand.

In Herbalife v. Ford, District Judge Gary A. Feess stated “Herbalife’s entire business model appears to incentivize primarily the payment of compensation that is ‘facially unrelated to the sale of the product to the ultimate users’ because it is paid based on the suggested retail price of the amount ordered from [Herbalife], rather than based on actual sales to consumers.”

Continue to Part 3 of 6

Saturday, December 26, 2015

Herbalife versus Vemma: Pyramid Scheme Analysis; Part 1 of 6

The Declaration of Stacie A. Bosley, Ph.D. was a key document in the FTC’s Complaint against Vemma Nutrition Company which alleged that Vemma was operating an illegal pyramid scheme.  In my 1-Nov-2015 Seeking Alpha article I summarized the basic framework of the declaration and demonstrated how the key points also apply to Herbalife (HLF).

I have generated my own declaration (Part 1 of 6 below) to conclude that Herbalife is also a pyramid scheme by rewriting Dr. Bosley’s expert declaration with as few changes as possible.  I recommend readers print the Declaration of Stacie A Bosley, Ph.D. and print my declaration and compare each paragraph side by side (viewing each declaration on two different computer screens also serves this purpose).  The parallels are ominous.

Before I continue I need the acknowledge that I have relied heavily on the presentations of Pershing Square Capital Management. L.P.  Without Pershing Square's work I would not have been able to generate the following declaration.

The Declaration of Stanley J. Holland

1.  My name is Stanley J. Holland.  I am not a pyramid scheme expert, but I play one on the internet.

Purpose and Materials

2. The purpose of this Declaration is to analyze the Herbalife program to determine whether it is a pyramid scheme.

Company Overview and Promotion

3.  Herbalife offers people the opportunity to purchase and consume various nutrition, weight management, energy and fitness, and personal care products, and offers a business opportunity to people who seek to earn full or part-time income.  Participants are categorized as “Member”, “Senior Consultant”, “Success Builder”, “Qualified Producer”, “Supervisor”, “World Team”, “Global Expansion Team”, “Millionaire Team”, “President’s Team”, “Chairman’s Club”, and Founder’s Circle”.  Lowest level Members can only earn Volume Points.  All other participants can also earn recruiting rewards, but the vast majority of recruiting rewards can only be earned after qualifying for Supervisor (Compensation Plan, discussed infra).

4.  Herbalife CEO Michael O. Johnson presents the company as a solution to these tough economic times, as people around the world are seeking health, wellness, financial freedom and time freedom.  CEO Michael O. Johnson states “Great product, great brand, incredible business opportunity, unlike anything that exists out there, because people can become millionaires at Herbalife” (Source: 2008 Investor Day transcript).  Herbalife President Des Walsh states “Here is the reality.  Our core training is for a new distributor who wants to build a business, if they talk to 10 customers today, 10 people a day about the products, the business opportunity.  I have never spoken to any distributor who is doing that who is actively engaged who is not making money.”  Chairman’s Club member Alan Lorenz states “What other business...without any limits whatsoever that you can get started, with no capital, working from home, part-time, this is it.” The Herbalife business opportunity is repeatedly presented as a way that ordinary people can achieve their financial goals with minimal start-up costs.

5.  This paragraph deals with the magic of duplication.  CEO Michael O. Johnson stated in a 2005 video that “ the most vital part of our bloodstream.”  John Tartol, a member of both the Board of Directors and the Founder’s Circle, states that “the name of the game is duplication...duplication, like I said, is so important here.”  In an ABC News video (6:23), an Herbalife President’s Team member stated:

“The secret is to get five other people to do the same thing every month, and teach them to get 5 other people do the same thing every month.  Before you know it, not only will you be a supervisor, but you’ll have 5 supervisors under you, who’ll have 5 supervisors underneath them, who’ll have 5 supervisors under them.  That’s 155 supervisors.  And if they’re each doing about 2000-2500 volume points a month, you are going to be making somewhere in the neighborhood of $42,000 a month….So, you don’t have to be some super salesman, you just have share the opportunity.”

Source: page 58 of Pershing Square's presentation Who Wants to be a Millionaire?

The 14th generation of 5x duplication exceeds the population of the world.  At any given point in time the majority of the participants are in the last generation and when saturation is reached, the majority of participants are doomed to failure.

Club 100 also promotes a strategy of 5x duplication with each nutrition club operator purchasing at least 2500 volume points per month, and the trademarked Club 100 logo has 5 sided pentagon shape.

Source: page 129 from Pershing Square's presentation The Big Lie

6.  In paragraph 6 of Dr. Bosley's declaration she states “While representations of Vemma’s system might vary slightly, the essential components include (1) purchase of initial product (typically an Affiliate Pack), (2) consistent monthly product purchases (typically an auto-delivery), and (3) recruitment of others to do the same.”  Senior Herbalife distributors urge members to 1) get to Supervisor, and 2) recruit others to do the same.  I agree with page 23 of the Pershing Square presentation Side-by-Side: A Comparison of Vemma and Herbalife which states “Differences between Vemma and Herbalife do not alter the fundamental reality that both systems incentivise distributors to focus their efforts on recruiting rather than making bona fide retail sales to customers outside the network.”

7.  Similarly, the essential components of Club 100 include, after graduation from systemized training, 1) start a Nutrition Club, 2) grow consumptions to 25, 50, 75, 100, etc. per day, 3) duplicate.

Source: page 155 from Pershing Square's presentation The Big Lie

Herbalife CFO John DeSimone states “So it depends on the marketplace, but the clubs can vary from $5000 to $6000 to open to something greater than that.”  Pershing Square estimates that graduation from the systemized training program costs approximately $3000 and states that the trainees are essentially conscripted consumers that go on tours of Nutrition Clubs that have at least 25 consumptions per day.  PSCM also states that Club 100 requires that distributors place set volume point orders every month to back up that they have the claimed 25, 50, 75, or 100 consumptions going on daily at their club.  Nutrition Clubs which fail to requalify as having ‘25 or More’ consumptions are taken off the tour list.  Only clubs with ‘50 or More’ consumptions are allowed to conduct systemized training.  

8.  Chairman’s Club member Doran Andry states in this video (1:59) “All of you, if you you just dream you also too can have everything that we have and much more.”  Founder’s Circle member Susan Peterson states in this video (1:25) “If you are not getting rich today in Herbalife, I’m just going to be honest, it's wrong.  It's really wrong.”  Page 24 of the Herbalife Sales and Marketing Plan quotes founder Mark Hughes “Your success is only limited by your own imagination and your hard work.”  Chairman’s Club member Dan Waldron states in this video (5:21) “The only way anybody’s ever failed in Herbalife, and I’ve been around for over 20 years, is that they dropped out.”  The central message: anyone can do it, stick to the simple system, and success is assured if you don't quit.

9. The Notion of “passive income” is a consistent selling point in Herbalife promotional materials.  Such income is achieved when duplication results in significant downline teams, yielding continuing monthly income without further effort.

Source: slide 55 from Pershing Square's Who Wants to be a Millionaire?

10.  Herbalife documents and videos suggest that the opportunity remains the same for any new member, regardless of economic conditions.  After stating that he and his wife became members of the President’s Team in three years, an Herbalife newsletter quoted John Tartol as follows:

“Distributors can make it even faster today than we did,” says John.  “There are so many more sales and marketing tools now and a support system everyone can plug into.  We’re not only working for ourselves, but for the Company as a whole.  When the team succeeds, there’s more for everyone!”

11 thru 13.  Dr. Bosley used paragraphs 11 thru 13 to describe how Vemma targeted young adults. I will just refer to pages 31-49 of Pershing Square's presentation The Big Lie to show how Herbalife commits affinity fraud.

14.  Company promotional materials devote some attention to product attributes, but do not emphasize sales to ultimate users as a source of compensation and do not typically provide training or support specifically aimed at sales to ultimate users.  The product discussions contained in the presentations appear to be primarily designed to lend credibility to the business opportunity being offered.

15. In sum, it is clear from my review of Herbalife’s promotional materials that Herbalife is primarily promoting a business opportunity that can supposedly generate substantial, even life-changing income.  The business opportunity is presented as a way to capitalize on social networks and word-of-mouth advertising to promote the product, the emphasis is almost exclusively on promotion of the business opportunity and income potential rather than the product itself.  It is also clear that Herbalife emphasizes recruitment of downline distributors as the primary method of obtaining substantial income, rather than retail sales of the product.  As will be discussed in the Compensation Plan analysis, the compensation plan strongly incentivizes recruitment and provides few incentives for a distributor to make sales to ultimate users.

Scope of Assignment and Conceptual Framework

paragraphs 16 thru 20 -   boilerplate - copy  from Dr. Bosley's declaration & replace “Vemma” with “Herbalife”

Continue to Part 2 of 6