Herbalife’s $200 million settlement with the government didn’t quite squash all of the nutrition-shake company’s fraudulent business practices, a new Miami class action claims.
The lawsuit is the first to go after the Los Angeles-based multilevel marketing company’s top distributors, claiming they misled hundreds of thousands of people into paying for “success training seminars” and other events by saying attendance would ultimately make them rich. Herbalife and nearly four dozen distributors are named as defendants in the racketeering and fraud case.
“These people will get up on stage for a pretty long time, and they’ll talk about how ‘I was in debt and I didn’t think I could go to any other events … but I pulled myself up by my bootstraps and borrowed some money and I attended the next event, and that was the event that changed my life,’” said Miami attorney Etan Mark, who filed the federal lawsuit Sept. 18 with Ohio lawyer Jason Jones.
Some of the plaintiffs spent thousands of dollars on tickets and travel, believing distributors who touted high profits from shake sales. The plaintiffs were presented with graphics representing the “Circle of Success,” depicting participation in events as central to a virtuous cycle leading to higher sales, the lawsuit alleges.
Plaintiffs were “berated” and “alienated” when they tried to get out of attending events, Mark said.Herbalife’s 2016 settlement with the Federal Trade Commission requires prominent income disclaimers, but many Herbalife events are technically run by individual distributors and still include misleading claims, Mark said. The events often targeted immigrants and other non-English speakers.
“Once you get into those off-the-grid events, all bets are off,” said Mark, a founding partner of Mark, Migdal & Hayden. “The income claims become more grandiose, the disclaimers get less prevalent, and I believe that many of the defendants in this case use that as an opportunity to prey on people who are particularly vulnerable.”
The top-level distributors, part of the Herbalife “President’s Team,” don’t make their money selling weight-loss products as they claim, the lawsuit alleges. Instead, they profited years ago using “highly aggressive lead generation techniques” later banned by Herbalife, such as “mass marketing the Herbalife opportunity as a ‘work from home’ internet system and … charging distributors thousands of dollars a month to obtain leads generated through this deceptive advertising,” according to the complaint.
Although the FTC stopped short of calling Herbalife a pyramid scheme, the company’s business model drew regulators’ scrutiny. In a multilevel marketing company, distributors earn commissions for their own product sales and for the sales of the people they recruit into their “downline.”
In some cases, distributors used the business model to launder money, the plaintiffs claim.
“You’ve got, let’s say, about 15 people in a line,” Mark said. “At the top of the line, you have somebody that has a million dollars of cash from some kind of an illicit source. They can take that million dollars, go to their buddy that’s in their downline, buy $1 million of Herbalife product using that cash, and then they get a nice commission check from Herbalife because they’re at the top of that line.”
The lawsuit also details an alleged Miami-based currency arbitrage scheme designed to get money out of Venezuela’s troubled economy.
Herbalife representatives did not respond to a request for comment by deadline. Individual Miami event organizers named as defendants also did not respond to requests for comment.
Mark said his clients described the event cycle as “chasing a ghost.”
Events, from “success training seminars” to larger “extravaganzas,” are mostly hours of testimonials from people who talk about losing weight by using Herbalife products and from those who say they got rich selling the products, Mark said.
“They’re hoping that they’re going to go to an event, and it’s almost like they’re being sold the possibility of an ‘aha’ moment,” he said. “Somebody’s going to say something that’s going to trigger something for you, a shift [in how] you run your nutrition club or recruit members of your downline. Something’s going to click.”
But ultimately, that success never comes, Mark said.
“You don’t get to drive around in a Bugati because you’re selling protein shakes,” he said.
The case was assigned to U.S. District Judge Marcia Cooke.