Herbalife Nutrition, a multilevel marketing company, entered into a deferred prosecution agreement with the U.S. Attorney’s Office from the Southern District of New York on Friday, August 28, in which the company admitted to engaging in criminal activity for a decade and was forced to pay steep penalties.
“In addition to admitting its criminal conduct, Herbalife has agreed to pay combined penalties of more than $123 million. This case signifies this Office’s commitment to ensuring that companies operating in the United States do not gain an unfair advantage through corruption and illegal bribes of foreign officials,” Acting U.S. Attorney Audrey Strauss of the Southern District of New York said in a press release.
The accusations leveled against Herbalife span from 2006-2017 and the DOJ has said that the company was bribing officials to obtain permits and certifications and lying to investors about the expenses.
These unsealed charges come less than five years after the Federal Trade Commission (FTC) leveled a $200 million penalty on the company for “unfair and deceptive practices” that hurt consumers as well as less than a year after the U.S. Securities and Exchange Commission forced the company to pay a $20 million fine for misleading investors about the business model of its subsidiary, Herbalife China, the New York Times reported.
What Is Herbalife Nutrition?
According to the company’s website, Herbalife Nutrition is a global company that started in 1980 and produces nutrition products that it sells through “distributors.” Distributors make money by buying products from the company and reselling it as well as from the sales of other distributors they have recruited underneath them.
The company claims to have made $4.9 billion from sales in 2018 and also says that it has the “#1 brand in the world in meal replacement shakes” according to a company called Euromonitor International Limited.
According to the Los Angeles Business Journal, Herbalife’s largest shareholder is an activist investor by the name of Carl Icahn, who owns roughly 15.5% of the company. He sold more than $716 million in shares (about 42% of the company) on August 17.
Herbalife Admitted to Bribing Chinese Officials, DOJ Says
The charges were unsealed during a remote proceeding before U.S. District Judge Gregory Woods in Manhattan, Yahoo Finance reported. The Southern District of New York’s Criminal Division’s Fraud Section had charged the company with one count of conspiracy to “violate the books and records provision of the FPCA,” also known as the Foreign Corrupt Practices Act.
As part of the agreement, Herbalife was allowed to plead not guilty but had to make a number of admissions. According to the Department of Justice, some of those admissions included bribing Chinese investigators who were ensuring the company was in compliance with Chinese law, misrepresenting financial information to investors and bribing Chinese media executives to prevent negative media stories.
The DOJ accused Herbalife of bribing Chinese officials so the company could obtain direct selling licenses at its Chinese subsidiaries; after that, the DOJ said that Herbalife “continued to provide improper payments and benefits to Chinese government officials” and “falsely record certain improper payments and benefits as ‘travel and entertainment expenses.’ from 2007-2016”
Penalties for the behavior included a $55 million criminal penalty and approximately $67 million to be paid to the SEC “in a related matter.” Another part of the deal required Herbalife executives to fire and discipline “individuals who orchestrated the misconduct” as well as increasing anti-corruption controls and resources to ensure staff are compliant with those controls. Finally, the company is required to adhere to those guidelines and avoid committing any FCPA violations for the next 3 1/2 years.
Herbalife Drew National Attention After It Was Given a Scathing Critique on ‘Last Week Tonight’
The company website describes distributors as “independent entrepreneurs who set up their own businesses and decide when and where they work and do so on their own terms.”
However, a segment on multilevel marketing platforms created by the HBO show Last Week Tonight painted an unflattering picture of Herbalife’s business model, pointing out how many distributors don’t make money unless they recruit others and describing the business model as strikingly similar to that of a pyramid scheme.
“If distributors’ earnings come primarily from selling products to actual customers outside of the company, that is probably a legitimate business,” the show’s host, John Oliver said. “But if those earnings come primarily from selling product to the distributors you’ve recruited below you and they sell product to distributors they sell below them all within the company, that may be a pyramid scheme.”
The segment also explained the term “garage-qualified,” which describes people who continuously buy products in bulk at a discount to avoid losing their discount qualifications; they are then forced to store their excess product in their garage because they cannot sell it.
In 2016, the FTC forced Herbalife to restructure its business model and pay $200 million to help those who had lost money. Then-FTC Chairwoman Edith Ramirez said:
This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit. Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.
The Last Week Tonight segment featuring Herbalife has been viewed more than 24 million times since it was first posted on Youtube in November of 2016.
Heavy has reached out to Herbalife for comment and will update this story if it is received.