Herbalife kept links to Canada pyramid scheme for a decade

August 15, 2013 5:58 pm

Herbalife kept links to Canada pyramid scheme for a decade

By Dan McCrum in New York

Herbalife, the direct selling company under attack from shortseller Bill Ackman, allowed an affiliated business to continue operating in its network for almost a decade after Canadian authorities had labelled the operation a pyramid scheme, a Financial Times investigation indicates. Mr Ackman, founder of hedge fund Pershing Square, has claimed that Herbalife itself is a pyramid scheme, while the company has said it is legitimate, prompting a high-profile battle between investors on either side of the argument.The history of Online Business Systems, which until this year specialised in recruiting salespeople for the Herbalife network, raises questions about the practices Herbalife had previously tolerated.

OBS is the successor to Global Online Systems, a company judged to be a criminal “scheme of pyramid selling” by a Canadian federal court in 2004. Both were part of an ecosystem of business built around promoting Herbalife to sell marketing materials and other services such as “sales leads” to the direct seller’s recruits.

GOS was run by Deborah Stoltz and her sister Marilyn Thom. The 2004 judgment required the directors to change their business practices, for instance by disclosing the average compensation made by all Canadian participants in the scheme in all marketing materials.

Herbalife’s disclosure of gross earnings for Canadian distributors each year only includes “active leaders”, a subset representing about one in 10 overall participants.

GOS was also required to notify all of its customers of the conviction. However, before that November ruling, customers were encouraged to move to a new business, OBS, run by Nicole Dahl, the daughter of Ms Stoltz, and her husband Shawn Dahl.

Online archives show that websites operated by GOS – such as www.4u4meletsdream.com – were rebranded as OBS. A website that encouraged GOS participants to register with OBS by September said that they would remain in the network: “Your Herbalife lineage remains the same regardless of the changes to your new marketing system.”

Those recruited by OBS became part of Mr and Mrs Dahl’s network of Herbalife salespeople, and by 2009 the couple were ranked in the company’s top 50 distributors, joining its “Chairman’s Club”. Ms Stoltz and Ms Thom also continued to be prominent Herbalife distributors.

Herbalife said that its “350-strong global distributor business practices and compliance team takes proactive and responsive measures to identify, research, and address each and every infraction of Herbalife’s distributor rules and applicable regulation and law.”

Earlier this year, Herbalife took steps to distance itself from OBS by restricting distributors use of leads and marketing materials provided by the company.

Following that change, Mr Dahl moved to a rival direct seller. Herbalife has since banned the sale of leads to or by distributors entirely. OBS, Mr and Mrs Dahl, Ms Stoltz and Ms Thom did not respond to requests for comment.

Spot the difference, Herbalife edition

Guest writer | Aug 15 19:19 | 1 comment | Share

This guest post is submitted by Dan McCrum, the FT’s US investment correspondent.

Hoisted from the web archives of the wayback machine, lets take a look at what 4u4meletsdream.com had to offer back in 2004.

In February it looked like this:

In October though, there was a subtle change:

Did you spot it? The online system that 2 moms had used to help others achieve financial freedom was still available, it was just now offered by Online Business Systems, totally different you see from Global Online Systems.

Both were promoters of Herbalife, that nutritional supplement direct seller which says claims by a dastardly short seller that it is a pyramid scheme are the stuff of nonsense.

Global Online Systems would recruit distributors for Herbalife, and help the internet beginners build their own empire of diet shakes. Of course a turnkey website is not cheap, but when customers were urged to switch to Online Business Systems in September 2004, there were price cuts!

From the site:

+ Until September 15th, the cost to upgrade to your new OBS business tools (for those currently using GOS) is FREE! Not only that, but your first month’s service fees will also be included for FREE. Your monthly fees in the future will be only $39.99 USD. To the right, you’ll find a link to detailed instructions on how to cancel your old system tools – in order to avoid paying for services you won’t be needing anymore, it’s very important that you do this right away!

+ The costs of all of your new OBS system tools have been greatly reduced so that everyone can take advantage of what we have to offer. Everyone will get a recruiting site, administration system, training site, retailing site, and voicemail system for only $100.00 USD. The costs associated with the Global Online Systems tools were over $300.00 USD and the monthly fees exceeded $60.00 USD per month!

Why the change, a Herbalife man might have asked, well, the Q&A had the reason:

Why did we leave Global Online Systems?

A team of leaders wanted to develop enhanced automated marketing tools to improve our system while decreasing the cost of running our businesses. Our goal was to provide our groups with higher-tech marketing tools so our distributors could manage their businesses with greater efficiency. The Online Business System includes automated lead management technology, advanced recruiting/retailing sites and improved training manuals.

One of the greatest changes we’ve made within our new Online Business System is the superior quality of our Decision Package. Our Decision Package includes an information booklet, a DVD, an audio CD and a Video. It was developed by a team of professional writers, video producers and the Online Business Systems Leadership Team. Once you see it, you’ll understand how this new Decision Package will help you build your business to the next level.

But about those Moms. The Canadian Competition Bureau had taken a look at Global Online Systems and didn’t like what it found:

It was a “scheme of pyramid selling”, and the two directors, Deborah Stoltz and her sister Marilyn Thom paid a C$150,000 fine in November of 2004. A prohibition order also prevented them from taking part in any more schemes of pyramid selling:

For the purposes of this agreement, a scheme of pyramid selling means a multi-level marketing plan that includes any of the following elements:

(a) participants in the plan give consideration, including cash or any other benefit, for the right to receive consideration when others are recruited into the plan who, in turn give consideration for the same right. For greater certainty, consideration may include profit derived from the sale of all marketing material including all videos, audio tapes, distribution packages and promotional booklets.

The rest is in the prohibition order.

That judgement is in line with Canadian Law, but it didn’t specifically apply to Online Business Systems, which has a totally different name and was run by the daughter of Ms Stoltz, Nicole Dahl and husband Shawn Dahl.

Team Dahl went on to become one of the most important distributors in Herbalife’s network, gracing the cover of its 2009 magazine when they entered the elite Chairman’s Club, so we were sure that Herbalife checked it out and made certain everything was above board, before the company took steps to cut Online Business Systems out of its network of distributors in February this year.

The company gave us this statement:

We believe this story is yet another desperate example of Pershing Square’s reckless $1 billion bet against Herbalife, which according to recent media estimates currently represents an approximately $350 million loss for Mr. Ackman’s fund.

Herbalife’s 350-strong global Distributor Business Practices and Compliance team takes proactive and responsive measures to identify, research, and address each and every infraction of Herbalife’s Distributor Rules and applicable regulation and law. Their efforts range from counseling and education to sanctions such as suspensions, fines, and even termination of distributorships. The vast majority of Herbalife distributors are successfully creating long-term customers through the daily consumption of our nutrition products and the unique support they provide.

We’ve asked Online Business Systems, Ms Stoltz, Ms Thom and Mr & Mrs Dahl for comment, but no response has yet arrived.