Banking/Financial Institutions

Herbalife responds to Markey’s ‘pyramid scheme’ questions

The nutritional supplement company Herbalife has mounted a defense to questions from Sen. Ed Markey (D-Mass.) about whether it is a pyramid scheme.

Company employees met with the senator’s staff roughly a week after Markey questioned its business practices, and CEO Michael Johnson touted the company as rewarding those with “an entrepreneurial spirit” in a letter sent Tuesday.

“We believe that Herbalife’s model rewards an entrepreneurial spirit and supports the development of successful members, all while providing low risk and easy entry into and exit out of the business,” he wrote.

Markey’s questions are the latest in a long-running controversy over whether the company, which bills itself as a multilevel marketing company where its salespeople make money from their sales as well as the sales of those they recruit.

But some skeptics in Washington and on Wall Street argue the firm amounts to little more than a pyramid scheme whose profits are reliant on the continued recruitment of new salespeople. And some community groups have blasted the company as unfairly targeting low-income people and minorities to join its ranks.

Rep. Linda Sanchez (D-Calif.) has also called on regulators to probe Herbalife’s business.

In his letter, Johnson defended the company’s structure as one that has been recognized by courts and regulators, and that is shared by other companies. He also said that Herbalife workers are not paid simply for recruiting new members and only stand to make more money if those recruits begin selling products themselves.

“Herbalife compensation is driven by product sales, not recruitment,” he wrote.

Furthermore, he staunchly rebutted claims that Herbalife targets low-income or minority groups for sales or recruitment.

“Herbalife does not ‘target’ members of minority or low-income community, or any religious, social, or ethnic group,” he wrote. “We are dismayed at allegations to the contrary.”

Markey sent the company’s stock tumbling in January, when he called on the Securities and Exchange Commission and Federal Trade Commission to explore its business practices. He also sent a letter directly to Johnson, asking him how the company is structured and employees paid.

Among his concerns, Markey said he had heard from constituents who were pushed to recruit family members of buy products themselves to move up the company’s hierarchy.

But Johnson cited a survey that found that 87 percent of respondents said they were not part of the Herbalife network when they bought their products.

Herbalife’s value fell roughly 12 percent in the first hours after The Hill reported Markey’s inquiry. The stock has regained some ground but still stands nearly 8 percent lower.

On a call to discuss earnings with analysts Wednesday, the company’s CFO, John DeSimone, said the company has been “completely responsive” to Markey’s questions.

“It’s in the hands of the staff of Sen. Markey’s office, and they’re reviewing the letter,” he said.

Markey told The Hill in a statement that he appreciated the company’s prompt response but is still waiting for further information from the SEC and FTC.

Tags Business models Edward Markey Herbalife Pyramid scheme

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