Citizens' Issues
Herbalife is an illegal scheme, rules Belgian court

According to a Brussels-based not-for-profit consumer organisation, Herbalife’s sales method is in contradiction with certain articles of the Market Practices Act; whereas the company argued that it uses a legal “multi-level” sales system

Herbalife, a global direct selling firm, has been declared as an illegal scheme by Commercial Court in Brussels, Belgium. According to experts, the decision comes largely on the assessment that the company could not show its retail customer base. However, the company has decided to challenge the ruling.

Herbalife, a US-based company is a global nutrition company selling weight-management, nutrition, and personal care products in 79 countries, including India, through a network of approximately 2.5 million independent distributors.

According to complainant, Test-Aankoop, a Brussels-based not-for-profit consumer organisation, Herbalife’s sales method is in contradiction with certain articles of the Market Practices Act. Whereas the company argued that it uses a legal “multi-level” sales system.

The court decided that, “Herbalife is in breach of Articles 91, 4 and 99 of the Act regarding market practises and consumer protection because it has established, managed or promoted a pyramid scheme, whereby the consumer or a business stands to make money which is more likely the result of introducing new consumers or businesses into the scheme than from the sale or use of products. The court orders cessation of this breach and thus of the Herbalife pyramid scheme whereby a consumer or an business stands to make money which is more likely the result of introducing new consumers or businesses into the scheme than from the sale or use of products.”

The court also ordered, Herbalife to pay a fine of 5,000 euro for each breach that is established from two months after the date of this ruling.

According to Robert FitzPatrick, the co-author of the book, False Profits, the first book-length analysis of pyramid schemes and multi-level marketing, and also the founder and president of Pyramid Scheme Alert, “The court largely based its conclusion on the assessment that Herbalife could not show it had a retail customer base. The court rejected Herbalife's claim that its salespeople (distributors) serve as ‘end-users’. The Belgian court’s conclusion was that Herbalife is not a direct selling company, as it claims to be, but a pyramid recruiting scheme that offers much more reward for recruiting than for retailing. The court also cited the huge dropout and loss rates among Herbalife distributors.”

Mr FitzPatrick writes on his blog, that, “The ruling addresses the most obvious and fundamental of all the deceptions regarding ‘business opportunity’ frauds.  This deception is the scheme’s disguise of ‘direct selling.’ Most of the evaluations and defences of such schemes concern ‘front-loading’ and ‘product return’ policies, the size of the sign-up fees, and the commissions to recruiters based on ‘product sales’ (to sales people) rather than from entry fees.”

He adds, “In fact, those are only incidental factors, and they distract from the most basic of all questions that determine legality and legitimacy: Where are the scheme’s retail customers?  Where does the money for rewards to recruiters (ultimately) come from? Retail sales or from the investments of the salespeople?”

According to Mr FitzPatrick, the decision is a global predator. “In 2005, Herbalife disclosed in its annual 10K report to the SEC that the dropout rate of its distributors was 90% for the ‘non-leaders’ and 60% for the leaders. It reported that about 25% of all sales people were ‘leaders.’ So, overall, approximately 80% of Herbalife’s distributors quit the scheme every year. Translation: Herbalife signs up hundreds of thousands of new people every year! The Belgian court says all recruited people will be deceived and virtually all will lose money. If that is the case, Herbalife would be a global predator.”

Meanwhile, the company has decided to appeal against the verdict. It said in statement that, “Herbalife believes the judgment contains factual errors and is based on misinterpretations of the law and its direct-selling sales model.  Herbalife remains committed to its multi-level direct-selling sales model and is confident that, with clarifications in certain aspects of its business, there will be no doubt as to its compliance with all applicable Belgian laws.”

User

COMMENTS

Sreepathi

5 years ago

How to find out whether their products are good and what for them make any sense?

REPLY

Dodo

In Reply to Sreepathi 5 years ago

The question here is not "are the products good?" but "Is an 80% dropout rate acceptable?". If not, they should forbid marriage too; 50% dropout is really unacceptable. And they should forbid belgians to create their own companies; the dropout rate is quite the same, and you don't loose 100 to 150€ (Herbalife "investment") but thousands and more.

SFIO to have power to arrest under new Cos Bill: Minister of corporate affairs

Corporate affairs minister Veerappa Moily noted that in the present day, with technology is getting more and more sophisticated, the present laws will have to get more stringent in order to be able to combat financial fraud

New Delhi: Corporate fraud investigation body Serious Fraud Investigation Office (SFIO) will have the power to carry out arrests once the new Companies Bill is passed by Parliament, reports PTI quoting corporate affairs minister Veerappa Moily.

“SFIO shall have the power to arrest in respect of certain offences of the Bill which attract the punishment for fraud. Those offences shall be cognisable and the persons accused of any such offence shall be released on bail subject to certain conditions provided in the relevant clause in the Bill,” Mr Moily said at an Assocham conference here.

He added that the government expects the Companies Bill, 2011, to “modernise, reform and clean up the corporate sector”.

The SFIO shot into prominence after the government asked it to investigate the multi-crore rupee Satyam accounting fraud.

The decision to give legal and statutory powers to the SFIO by including appropriate provisions in the new Companies Bill—which is awaiting Parliament’s nod—is in line with the recommendations of the Vepa Kamesan Committee on strengthening the SFIO. The SFIO is under the administrative control of the corporate affairs ministry.

The eight-member committee had suggested that the SFIO should be given exclusive jurisdiction to probe and prosecute entities involved in financial frauds, as well as probe cases related to erring entities/individuals like chartered accountants and company secretaries.

The committee is of the opinion that the power of search and seizure and attachment should be entrusted to the SFIO, as available with the Income Tax authorities, Customs department, Enforcement Directorate, etc.

It has also suggested that the SFIO should be empowered to take up cases suo moto and even on source-based information if a fraud has been committed.

The committee has also recommended that the SFIO should have the flexibility to outsource the services of experts like chartered accountants, legal experts, etc, and officers joining the investigating agency on deputation should be ensured protection of their existing pay and allowances.

However, the minister noted that in the present day, with technology is getting more and more sophisticated, the present laws will have to get more stringent in order to be able to combat financial fraud.

SFIO is investigating 12 cases at the moment, including one against erstwhile retail chain Subhiksha.

User

COMMENTS

Java

5 years ago

Why should different government departments be given such powers that belong to the police and judiciary? What provisions are there to prevent misuse by irresponsible and corrupt officials? Or is this going to be a legal pretext to freely extort more bribes from the corporate world?

Union KBC Mutual Fund launches Union KBC Dynamic Bond Fund

Union KBC Dynamic Bond Fund’s new fund offer closes 6th February

Union KBC Mutual Fund has launched Union KBC Dynamic Bond Fund, an open-ended income scheme.

The investment objective of the scheme is to actively manage a portfolio of good quality debt as well as money market instruments so as to provide reasonable returns and liquidity to the investors.

The new fund offer closes on 6 February 2012. The minimum investment amount is Rs5000.

CRISIL Composite Bond Fund Index is the benchmark index. Parijat Agrawal,
Head-Fixed Income is the fund manager.

User

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)