David Van Dyke/Metro Herbalife products.

Flyers stapled to the Toronto streetcar shelter promised the opportunity to “WORK FROM HOME!” for “a billion-dollar NYSE-listed company.”

The name of the company wasn’t mentioned, but it’s Herbalife, a behemoth, international, publicly traded multi-level marketing company that’s sold weight loss and health products for more than 30 years.

The flyers didn’t mention allegations the company is a massive pyramid scheme that could one day collapse or be shut down, putting a staggering amount of money — from some of the world’s poorest and richest people — at stake.

A U.S. senator is calling for the Federal Trade Commission to investigate whether or not Herbalife is pyramid scheme, and the FTC chairwoman has responded that — while she can’t confirm if the FTC is investigating — the concerns he expressed “are being carefully considered,” Reuters reported.

Pyramid schemes, which are illegal in most of the world, are a type of fraud that involves participants recruiting more and more participants, where those at the top profit and those at the bottom lose out. The Canadian government describes pyramid schemes as “frauds that are based on recruiting an ever-increasing number of investors … who may or may not sell products or distributorships (and where) recruiting newcomers is more important than selling products.”

The New York Post, citing anonymous sources, reported the Canadian Competition Bureau — Canada’s version of the FTC — has launched a confidential investigation of its own, based on Canadians’ complaints.

I decided to check out Herbalife’s operation for myself.

The pitchman

I called a number on the flyer and agreed to meet Alex Rojas at his small, neat office on the ground floor of a condo building near Bloor and Yonge streets on Jan. 24, a Friday evening.

In the beginning his pitch was vague, but enthusiastic, focused on how much money I can make working from home for Herbalife. Rojas was charming and animated. He peppered his speech with rhetorical questions and repeated phrases — “We have a system that makes money!” — and exclamations of “Oh!” and “Wow!”

“You can have your job and work part time,” he told me. “But, most people, in a few months, equal their income here with us and they leave their job. Most people. Majority.”

Rojas told me many stories about how most of us struggle but can’t get ahead, but by learning the secrets of wealth and Herbalife you can get rich.

“We have a system that makes money!”

He also showed me his credit card and asked me what it does. When I said it’s for buying things, he said no, it’s to make money. How? That’s one of the secrets he promised I’d learn later.

The stakes

The pressure on Herbalife now, after three decades in the multi-level marketing business, can be attributed to Pershing Square hedge fund manager William Ackman, who took a billion-dollar short on the company, which he announced in December 2012, betting, in a very public manner the stock will fall to zero.

Not everyone agrees with Ackman and heavy hitter investors have reported significant shareholdings in the company, including Carl Icahn, George Soros and William Stiritz.

Ackman and Pershing Square have analyzed Herbalife, decided it meets the FTC’s definition of an illegal pyramid scheme and widely shared the findings through public presentations, media interviews and online.

Ackman describes his battle with Herbalife as a “moral obligation” and has said he will give anything he personally makes on the short to charity, calling it “blood money.”

Ackman told CNN that pyramid schemes require a huge number of people at the bottom to make money for the people at the top, and “inevitably the people at the bottom lose money and the people at the top make money, and it’s inherently fraudulent.”

Ackman believes he will be the catalyst that shuts the company down.

“They’ve never had someone like me prepared to tell the truth about this company,” he said.

At the other end of the financial spectrum are most of Herbalife’s distributors and past distributors. The League of United Latin American Citizens (LULAC), the oldest Hispanic civil rights organization in the U.S., launched its a campaign against Herbalife after learning that a disproportionate number of distributors are Latino. They’ve been joined by a number of consumer advocacy and civil rights groups in the U.S.

Executive director Brent Wilkes accuses the company of using predatory business practices and “defrauding hundreds of thousands of Latinos.” LULAC has been collecting accounts from Latinos across the U.S., including many undocumented immigrants, who reported losses from $1,000 to $40,000.

“Everybody has a little bit of a different story, but in general, they are low income, struggling to feed their families,” he said.

The people who go to LULAC say they were pitched by someone like them, someone who used to wash dishes and clean houses, but since joining Herbalife says they have made $100,000 a year, Wilkes said.

“Then what happens is people go ahead and put some money down to get started, but then when they’re not able to make money selling the Herbalife products they keep asking their mentor what’s going wrong,” he said.

They are encouraged to buy more Herbalife product at a greater volume to increase their profit margin. Some keep putting more money in and spend more money on training and sales aids until they eventually give up, Wilkes said.

There are approximately three million Herbalife distributors in 92 countries across North and South America, Europe, Asia, the Middle East and Africa.

The system

According to Rojas, one of the best benefits of the Herbalife system is it earns you money even when you’re not working.

“Residual income, Jessica, means you work, you make money, you don’t work, you make money! Oh! When my brothers — which have been in this business for 20 years — said this, this is what I say. I’m wasting my time. You’re crazy. I’m wasting my time. Somebody’s going to give you money for not working? You’re crazy. Goodbye.”

But Rojas said he joined Herbalife and said he’s been in business full time for two years, along with his wife. He was part time for a few years before that.

Using a marker and a white board Rojas explained the basics of Herbalife’s incredibly complicated compensation system.

Distributors make money two ways. The first is buying the products at a discount from the suggested retail price and re-selling them at a profit.

The second is payments from the company, which include cuts from the sales of the people they recruit to become Herbalife distributors, and the people they in turn recruit, and so on, who are collectively called their “downline.” The company also issues bonuses and all-expenses paid vacations to certain distributors with high-performing downlines.

Rojas told me a distributor can get about $1,000 a month by retailing the product and another $1,000 a month from “wholesale profits” from the sales of your immediate downline—but the real money is the royalties you get from building a large downline network of distributors. When you buy or sell enough product from Herbalife and recruit enough downline distributors, you begin to qualify for royalties and bonuses.

“From royalties you can get, easily, $2,000, $3,000, $4,000, $5,000, $50,000 a month! A month, my friend,” he said.

Rojas is hardly alone in hyping Herbalife. YouTube videos of the outrageous success stories of Herbalife distributors are widely circulated online— distributors at the top of the system showing off their vacation photos, mansions and luxury cars. Similar inspirational speeches at meetings are a staple of Herbalife.

The video above is a testimonial from Herbalife Chairman’s Club member Doran Andry. In the video, he talks about how much money he made with Herbalife and how easy it was, while showing off his custom-built mansion and expensive cars. He says, “I step out of the Ferrari, the Bentley, or whatever, and people go – ‘what does that guy do for a living? – and I go, I’m a Herbalife independent distributor,’ and people are absolutely amazed.”

Retailing the product

The first way people make money through Herbalife is through retail sales. But for new recruits, it can be harder than they were led to believe.

Herbalife distributors like Rojas tell potential recruits they can get the product at 75 per cent of its total retail cost and can make 25 per cent profit. However, that doesn’t include shipping and handling or tax, and assumes the distributor is selling the product at its suggested retail price.

For example, if a new Toronto-based distributor orders the core products from Herbalife’s website for a customer who pays the retail price of $102.75, the distributor’s profit is just $5.95 — a margin of just over five per cent.

Distributors can get a better margin by becoming a “supervisor” and paying for about $4,000 worth of product in one month or $2,500 and $2,500 in two consecutive months, or by having someone in your downline who does so.

Nominally, this gives a distributor a 42 per cent discount on that product (and qualifies them to get a 50 per cent discount on product after that) but when taxes and shipping and handling and included, that margin is actually only about 27 per cent, assuming the product is sold at its suggested retail price.

Figure in any expenses — gas for driving around the city putting up flyers and delivering the product to customers, and putting ads online — and retail profits shrink again.

To reach the supervisor level, distributors can pay up front for the product — as Rojas encouraged me to do — and get a huge shipment of product to sell at the larger profit margin.

Former distributors who’ve told their personal stories to LULAC or in court filings say they’ve done so and ended up stuck with product they can’t sell at a profit. They spend more and more in an effort to turn it into a business and often end up unloading the product for a discount online.

In his pitch to join Herbalife, Rojas recommended I consume the product myself, keep only a small stable of regular customers and put 90 per cent of my effort into recruiting, where the “real money” is made.

Recruiting

Herbalife discloses limited information on how much distributors actually earn, but the available numbers paint an entirely different picture than the tales Herbalife recruits hear.

Herbalife issued statements showing what money distributors from various countries made from the benefits of recruiting a “downline” in 2012. You can find them online, if you’re looking for them, on Herbalife websites, linked to the disclaimer, “These are examples and not necessarily typical or average, nor do they represent a guarantee of your personal results.”

Only about one per cent of the 13,786 Canadian Herbalife distributors made more than $10,000 all year from their “downline” sales organizations and a tiny fraction of those who did—nine people—earned in the hundreds of thousands or millions of dollars.

Eighty-eight per cent of the distributors collected no payments from Herbalife.

However, Herbalife said it has surveyed its membership and says about 70 per cent of distributors join to get a product discount for personal use and never try to make money.

Even among those who have worked to build a business, few are successful. About 17 per cent of the company’s total 13,786 Canadian distributors were “sales leaders with a downline” which means they, or someone in their downline, bought a significant amount of product from Herbalife, and they have recruited others.

However, three out of four people considered “sales leaders” made less than $1,000 in compensation in 2012 Herbalife and only 6.8 per cent made more than $10,000 this way.

Canadian sales make up only one per cent of Herbalife’s global business. The company has a massive market in the U.S., but the rate of success there is nearly identical to Canada’s.

The allegations

Ackman’s thesis on why Herbalife is a pyramid scheme and what separates it from legal multi-level marketing companies such as Avon and Tupperware, is complex. It centres on the claim that the participants are paid more through recruiting than through retail sales of the product, which, according to the FTC, is a quality of a pyramid scheme.

However, Herbalife does not track how much of its product is actually sold to retail customers — rather than consumed by distributors or disposed of — or what price it is sold at.

Ackman argues that Herbalife has survived and remained profitable for so long by entering new markets where the first distributors in get wealthy building their downlines, and later recruits can’t replicate their success as the market becomes saturated.

Pyramid schemes are illegal because the people at the bottom “essentially get screwed,” said David Soberman, a marketing professor with the University of Toronto’s Rotman School of Management.

“If the person at the very end of the chain — not obviously the consumer, but the last person selling — basically lacks information about how much people are willing to pay for the product, they could end up ordering the product, pay for it in advance, and then they can’t sell it,” he said. “They get, in some ways, tricked.”

Herbalife’s response

Marco Antonio Gonzales, senior director of corporate communications for Herbalife in North America, issued a statement from Herbalife, but did not directly answer questions from Metro about issues including the conditions attached to Herbalife’s return policies, the lavish wealth featured in distributors testimonials and why the company doesn’t disclose information about sales of the product outside the distributor network.

“As part of our commitment to our members, we believe Herbalife sets a new industry standard in terms of its consumer-protection policies: including clear, accurate and timely disclosures to prospective members regarding potential income-generating opportunities; no minimum purchases and low start up cost; generous refund policies covering the nominally priced start up kit and resalable product,” the statement said.

Coming clean

During my investigation into Herbalife, Rojas didn’t know I was a reporter. When I told him, and showed him the research I’d done on the company, he said people fail because they don’t care or work hard enough.

When he thought I was going to spend $4,000 on Herbalife products to reach the supervisor level, Rojas had promised to make Herbalife work for me — to put all his time into making sure I sold the products I bought and helping me start a Herbalife downline organization of my own. To his credit, he never forced or bullied me to sign up or to spend excessive money up front, he only made a compelling and convincing pitch that it was a good idea that would help me get rich.

When I showed him the numbers on how rarely that happens in Herbalife, he said he wasn’t really aware of them and made an argument that numbers can convince anyone of anything in the world, but don’t necessarily represent the truth.

Rojas acknowledged his own success hasn’t been as great as he hoped, only as great as he’s worked. However, he also said he works incredibly hard and is devoted to the company, something I’d witnessed first hand.

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