Wall Street investors have been standing behind Herbalife Ltd., but the Los Angeles nutritional products maker can’t seem to shake questions about its controversial business model.
Since hedge fund manager Bill Ackman accused the company in a report in December of operating a pyramid scheme, Herbalife repeatedly has asserted that its multilevel marketing engine is solid and clean.
This week, Latino worker groups and public advocacy organizations met with officials from the Federal Trade Commission to ask for an investigation into Herbalife’s operations, particularly its handling of its huge network of distributors.
Latinos make up at least 60% of Herbalife distributors in the United States, company officials have said. And a key national Latino civil rights group now is accusing Herbalife of misleading distributors.
“I absolutely think they’re being victimized, and I think it’s a really bad idea to become a distributor,” said Brent Wilkes, national executive director of the League of United Latin American Citizens.
LULAC was one of the five groups that met with the FTC in Washington. The others were the Hispanic Federation, the National Consumers League, Consumer Action and Consumers Union, publisher of Consumer Reports magazine, Wilkes said.
At least seven FTC staff members, some of them high-ranking officials, attended the meeting, Wilkes said. FTC officials seemed “really interested,” he said, but they did not say what they planned to do.
“They were there to listen to us and ask questions of us,” Wilkes said. “Honestly, they seemed to be surprised about the average gross compensation” of distributors.
In his December report, Ackman said the vast majority of Herbalife distributors make little or no money, while a handful make big commissions from recruiting other distributors into the business.
Herbalife spokeswoman Barbara Henderson said the company shares “Mr. Wilkes’ desire to protect the Latino community.”
“While his comments are well-intentioned, they are misinformed. His opinions appear to echo those of Bill Ackman and his representatives,” she said. “We would encourage Mr. Wilkes to do some in-depth independent research with his constituency to make sure that his comments are accurate and not actually hurting the constituency he aims to protect.”
FTC spokesman Frank Dorman declined to comment on the meeting with consumer groups and would not say whether the agency is investigating Herbalife.
Founded in 1980 by charismatic salesman Mark Hughes, Herbalife sells a line of diet shake powders, protein bars, vitamins and beauty products through a team of more than 3 million independent salespeople in more than 80 countries. It does not sell its products in retail stores.
Distributors are eligible for discounts on products — and this is what prompts most people to become distributors, Herbalife executives have said.
In December, Ackman took a $1-billion short position on the company’s stock, a strategy that pays off only when the stock falls.
The company’s stock price dived in the days after Ackman’s accusation, hitting a low of $24.24 on Christmas Eve. Shortly after, billionaire investor Carl Icahn started buying shares, saying the company’s business model is legal and profitable.
Herbalife’s shares have soared 65% this year. The stock gained $2.28, or 4.4%, to $54.44 on Thursday, about 27% above its opening price when Ackman first made his accusations.
Wilkes said he met with Herbalife representatives last week in Washington and was concerned the company would not tell him the average compensation for full-time salespeople.
“They said, ‘It’s hard to know because not everybody is working full time,’” Wilkes said. “They said they had no idea what their distributors earned, which was kind of surprising to me.
“What I really want to know is how much the average distributor makes, the average distributor working full-time or even part time, what they’re making hourly,” Wilkes said. “That’s the indicator if it’s the kind of business we’d encourage Latinos to get into — or stay as far away from as they can.”
This year, Herbalife released data that showed 2,321 of its U.S. distributors, about 0.5% of the total in the country, were paid more than $25,000 each last year.
“What I see is 0.5% are making a living wage, and that’s really alarming to me. The majority are going to go away unhappy, with a loss and that’s unfortunately our community that’s being taken advantage of,” Wilkes said. “There’s a lot of scams out there, but not a lot of them have between 60% and 80% Latino market share.”
Herbalife President Des Walsh told The Times that the company’s popularity among U.S. Latinos can be traced to the success of its products in Mexico, particularly the “nutrition club” concept in which distributors offer shakes, juices and teas to customers who pay flat daily rates.
“This wasn’t a company focus on the Latino community,” Walsh said. “This was the Latino community in the United States seeing and hearing of the tremendous success of nutrition clubs in Mexico and then seeking to replicate that here.”
The clubs have popped up throughout the United States in recent years, often in unmarked storefronts. Walsh said the company does not focus on Latinos or other ethnic groups.