Herbalife Investigation Part 1: American Dream for Sale?

ABC's Brian Ross gets answers from company under federal investigation.
11:39 | 04/24/14

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Transcript for Herbalife Investigation Part 1: American Dream for Sale?
diet products through an army of nearly 3 million distributors. A huge business that has also create aid huge controversy with high profile supporters and detractors, doubling down. Now, ABC's chief investigative correspondent Brian Ross with details of our undercover investigation. Good evening, Brian. Reporter: Good evening, Dan. We spent six months trying to learn all we could about this company which is now the target of federal investigations and the subject of an epic battle between Wall Street billionaires. Ladies and gentlemen, welcome to the 2013 herbalife extravagan extravaganza. Reporter: The American dream seems alive and well at diet and nutrition product company called herbalife. Let's have a little fun, you know! This is herbalife! Reporter: The CEO Michael Johnson at a convention of its big money earners. The cumulative value of our bonus tonight is $52 million. Give me one of those checks! Reporter: Even more impressive are the highly produced videos posted on youtube from some of herbalife's top independent distributors. If you just dream you also can have everything we have and much more. Reporter: The lore of big homes, private helicopters and fast cars. I step out of the ferrari, people go, what does that guy do for a living? And I go I am an herbalife independent distributor. Reporter: Founded 34 years ago, herbalife produces diet powders and nutrition products not sold in stores only in person by more than 3 million independent distributors in some 90 countries around the world. Hundreds of thousand of Americans have signed up as herbalife distributors or members. But the reality as herbalife well knows is that very few of them lining up here for what's called its yearly extravaganza will ever make enough to be supporting a ferrari lifestyle. Can I ask you question as but herbalife? When we showed up, security guards moved in. And word was passed not to talk with ABC news. Reporter: You don't want to talk about it? There is nothing more to say. Best wife don't taif we don't talk to you. Reporter: For all its success with corporate headquarters in downtown Los Angeles. Herbalife is also a company now under investigation by the FBI and the federal trade commission. In the whack of widely publicized allegations with flashy headlines the company is an illegal pyramid scheme. At herbalife we are proud of the fact that we have an unrivalled business opportunity. The herbalife president, like the CEO used to work at the Walt Disney company the parent of ABC news. Speaking before the federal investigations were made public, Walsh strongly denied its distributors are misled about prospects of getting rich saying most of them only want the product for themselves or little extra income. The reality is that most pele know that this is a wonderful way in which to pay for a $50 or $60 start-up fee to earn a few hundred extra supplemental dollars a month that. Reporter: Is that what you are selling? A part time supplemental income. Appears you are selling you can get rich through herbalife. That is not our message. You will not hear that message on stage. Stand up! Reporter: At last year's extravaganza in Los Angeles, some part time distributors did get a chance to take a bow offstage. I love herbalife. The biggest hoopla at the corporate event was reserved for upper echelons of the distributors, the president's team and chairman's club. I promise you if some one was homeless, lost on the inside could do it, every last person breathing with a beating heart that was born from a mother and a father, can do the exact same thing! If you are misrepresenting what you can realist like expect to earn that's dishonest. Reporter: Appropriate fessor fessor -- professor of business at Georgetown university. Is the representative truthful with the representatives they bring. Reporter: We decided to see for ourselves going undercover with two ABC news journalists suited up with cameras in buttons, watches and water bottle ldz. Recording. Reporter: And became herbalife distributors. Some 60% of the company's American distributors are Latino. Our reporters, William Gallego and ray Montez began in a Latino neighborhood of queens in new York City at an unmarked storefront with green awning and windows covered over as required by herbalife. Herbalife calls this a nutrition club one of thousand across the country where distributors offer diet shakes for a membership fee where we signed up first to become basic members and jumped to supervisor by buying what they call 4,000 volume points for $3,900. This is how it works. For our $3,900 we got a huge shipment of herbalife products. Details on how to make the diet shakes for customers. And specific instructions in the company brochure on how to sell the products using before/after pictures. And then the supervisors training sessions with the topic here in Spanish, how to make money. Others showed off their before/after pictures. There was a lot of talk about nutrition and weight loss. And no shortage of substantial income claims. I never believe I would get an extra $1,000. On top of what I make. I love herbalife. Last month I made over $8,000. Because of herbalife. I am able to buy my house. Of a million dollar house, all cash paid for. Reporter: A video from the CEO offered a disclaimer about income expectations. Incomes can vary person to person. Reporter: The final speaker, a member of the president's team told house to make the beg money. Not by selling the actual products part time. But by signing up other distributors. What is called a down line. Then taking a cut of their profits. The secret its to get five other people to do the same thing. Every month. And teach them to get five other people to do the same thing every month. Before you know it. Not only will you be a supervisor, you will have five under you, who will have five uh underneath them. Five supervisorses underneath them. 155 supervisors. If they're each doing 2,000 volume points a month you will make $42,000 a month. Reporter: That would just be over $500,000 a year. Quite the sales pitch. Yet according to this herbalife document, for last year, which all distributors are required to read. Only a fraction of 1% of U.S. Distributors, 199 individuals, were paid $250,000 or more from their down line. If it sounded like here, almost any one could do tit with hard work. You don't have to be a super salesman you. Have to share the opportunity. Reporter: The question many have raised are you selling false hope? Absolutely not. You don't think that is the pitch herbalife makes? It is not the pitch or expectation. The next one, an all American success story. Reporter: Herbalife got in serious trouble in the 80s. Its founder mark Hughes was accused of being dishonest and deceitful, by recruiting distributors with exaggerated claims of getting rich. The second year you will make $125,000. And that's the least amount of money that you are going to make. Reporter: The California attorney general got an injunction against herbalife to prevent it from making false or misleading representations. About guaranteed income for supposed health benefits. As with all companies, Brian, there are some things in ow history we may not be proud of. Reporter: Are you under the provisions of the injunction? We are and we are fully compliant with provisions. Reporter: In its training materials the company tells distributors not to stay herbalife can treat, cure, prevent any disease. Our undercover reporters found a number of herbalife distributors making such medical claims. This distributor in New York City told us the story of a woman who had an inoperable brain tumor. Who regained her health after she began taking herbalife products. Does herbalife cure brain tumors? Absolutely not. Frankly, I am appalled to hear you say this. Because what is happening there is a complete and absolute violation of our rules. Does it happen often? I do not believe soef. Reporter: That does not the only time we caught on tape medical claims being made. At some of the training sessions, new distributors were told, herbalife products help to treat heart disease. 34 years ago -- I had early congestive heart failure. Reporter: In Spanish, treat headaches, anemia. And even helped one woman get pregnant. I am 40 years old. I am pregnant. So, Brian first of all, it distresses me to hear this. We have uncompromising commitment to the highest levels of integrity and consistent message. This is going on right now. This is something we clearly need to address. We will do so. These instances, Brian, ababerrations, anomalies. This is not the herbalife that I know. Reporter: Since our in the view, the company revealed to ABC news that in fact, almost 600 distributors were disciplined last year alone for making medical claims with 12 of them stripped of their distributorships. Of yufs it is distressing to hear criticism. We put them in the context tough the herbal life we know. That of a good company. Doing good in communities. You saw the precipitous drop the stock had. All being closely watched on Wall Street and played out on the cable business channels as big-time investors have taken side. And the herbalife stock price has been up and done look a roller coaster. Much of the recent scrutiny and federal investigations can be traced to this powerful hedge fund operator. Bill Ackman, mounted an aggressive, media and political campaign, claiming herbalife is a fraud. It is up to the government to determine if we are right or wrong. By shorting the stoshgs Ackman could make $1 billion for his fund itch the price of herbalife stock collapses. I said publicly I will pursue this to the end of the Earth. Reporter: As part of his campaign, Ackman, in troep dutroduced us to a former, herbalife executive, to blow the whistle on the economic short comings of the company. It was part of the organization that was exploiting the vulnerable. We would learn later, Ackman's team and the whistle blower did not tell us the whole story. You tried to hide this from

This transcript has been automatically generated and may not be 100% accurate.

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