Herbalife, Ackman Respond to 'Nightline' Undercover Report

PHOTO: Herbalife Ltd. products are arranged for a photograph in New York, Jan. 10, 2013.
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The diet and nutrition company Herbalife defended its sales practices Thursday after an ABC News undercover investigation showed independent distributors talking to recruits about the prospects for making big money.

"We provide clear, accurate and timely disclosures to prospective members regarding potential income," a statement by the company said. "Studies have revealed that the vast majority of Herbalife members have realistic expectations of the business opportunity and the effort required to succeed at all levels."

At the same time, the hedge fund Pershing Square, released its own response to the reports on ABC News' "World News With Diane Sawyer" and "Nightline". Pershing Square has for a year been urging regulators to investigate Herbalife.

"ABC’s investigative report revealed examples of the pervasive and fraudulent wealth and health claims that drive Herbalife’s pyramid scheme," the statement said.

Herbalife has been under scrutiny from both federal and state law enforcement agencies, which are reported to be looking into allegations that, among other things, the company and its distributors have misled prospective distributors about their earnings prospects.

Those probes have come as Pershing Square, led by the hedge fund billionaire Bill Ackman, has bet $1 billion on the prospect that the company’s stock will be driven down to zero as a result of the investigations. Ackman told ABC News he has already invested more than $20 million advocating to bring media attention and a government crack-down.

Herbalife President Des Walsh told ABC News the company does not mislead its distributors about their money making prospects, and that Herbalife’s internal surveys show that very few Americans who sign up with the company are doing so to try and get rich.

“That is not our pitch,” said Walsh. “The reality is that most people know that this is a wonderful way in which to pay a $50 or $60 start-up fee to earn a few hundred extra supplemental dollars a month.”

Yet videos posted online by top Herbalife distributors feature the lure of big homes, private planes, and fast cars. In one such video, one of the company’s top distributors pitches the advantage of becoming an Herbalife distributor by showing off his lavish lifestyle.

“I step out of the Ferrari or the Bentley and people say, ‘What does that guy do for a living?’” the distributor says. “And I go, I’m an Herbalife independent distributor.”

“There really is a mystery about this company,” said James Angel, a professor at the Georgetown University Business School. “And that's what makes this so fascinating. Where you see the titans of Wall Street fighting it out over this mysterious company. And you have very smart people who look at it from different dimensions and see very different things.”

That air of mystery prompted ABC News to undertake its own investigation.

Two ABC News reporters signed up to experience -- and at times document using undercover cameras -- the process of becoming Herbalife distributors and then supervisors. They attended entry-level training seminars run by local distributors and national corporate-run Herbalife conferences.

All of the sessions featured numerous personal testimonials from distributors touting the nutritional and weight loss benefits of Herbalife’s products and the business opportunities presented by distributorship.

The sessions included statements, live or on tape, from company executives saying that personal experiences as distributors could vary and that no particular testimonials should be viewed as average or expected.

The sessions also included information about how distributorship or membership could take various forms -- from purchasing Herbalife products for one’s own use, to selling them directly to others, to signing up other distributors and getting paid royalties and bonuses by Herbalife based on their product sales, known as the “downline.”

There was also no shortage of substantial income claims.

During one local training event for newly recruited distributors, an Herbalife distributor said, “Last month, I made almost, almost $8,000.” Another said, “Because of Herbalife, I’m able to buy my house, a million dollar house, all cash paid for.”

At the same training session, a high-ranking Herbalife distributor explained that “you don’t have to be some sort of super salesman” to earn a very large income as a distributor who signs up other distributors.

“Before you know it, not only will you be a supervisor, but you’ll have supervisors under you, who’ll have five supervisors under them, who’ll have five supervisors under them,” the instructor explained at the Herbalife seminar in Flushing, Queens. "That’s 155 supervisors and if they’re each doing about 2,000 to 2,500 volume points a month, you’re going to be making somewhere in the neighborhood of $42,000 a month."

That would be over $500,000 a year.

Yet, according to Herbalife’s “Statement of Average Gross Compensation” for 2013, which every distributor is required to read, only a fraction of one per cent of all U.S. distributors, 199 individuals, were paid $250,000 or more from the company’s “multi-level compensation opportunity” derived from sponsoring others.

In the press release issued Thursday morning in response to the ABC News investigation, Herbalife said it releases “clear, accurate and timely disclosures to prospective members regarding potential income...” The company said further that “studies have revealed that the vast majority of Herbalife members have realistic expectations of the business opportunity and the effort required to succeed at all levels.”

Concerns about the way Herbalife distributors recruit new members have dogged the company from its earliest days. In the 1980s, the California Attorney General’s office took the company to court alleging that its founder, Mark Hughes, and others had deceived new members with false claims about the potential for getting rich.

In a settlement with the state, the company agreed to abide by an injunction which barred Herbalife from “making false or misleading representations … relating to … an amount of money a participant may earn through bonuses and overrides.”

Walsh told ABC News the company responds immediately to reports of rogue distributors who overstate the potential of an Herbalife career. “We believe that we’re fully compliant with those provisions,” he said of the 1986 injunction.

This report has been updated.

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