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Herbalife takes fire from coalition of minority groups

By Hank Schultz , 21-Oct-2013
Last updated on 21-Oct-2013 at 16:39 GMT

The legitimacy of Herbalife's products has not been an issue in the company's current public perception problems.
The legitimacy of Herbalife's products has not been an issue in the company's current public perception problems.

Network marketing giant Herbalife, which has battled negative publicity generated by activist investors, is under renewed pressure, this time from a coalition of minority groups that are calling on the California attorney general to investigate the company’s business practices.

On Friday a group of Hipanic and black leaders led a protest downtown Los Angeles that coincided with a gathering of thousands of the company’s distributors, many of whom are Hispanic. According to Reuters, dozens of protesters with signs saying "Stop Exploiting Us" stood outside the Los Angeles convention center to urge Kamala Harris, the state's attorney general, and Bob Lee, the Santa Cruz District Attorney, to investigate what they call predatory business practices and review how the $6.7 billion company targets minorities.

"We are asking Attorney General Harris to help us protect vulnerable, low income Latinos and other minorities from these schemes that have cost people their life savings," Angelica Salas, executive director of the Coalition for Humane Immigrant Rights of Los Angeles was quoted by the news service.

According to Reuters, emotions ran high as CEO Michael Johnson confronted the protesters as he arrived for the distributors event at the Los Angeles convention center.

The group has been spearheaded by outspoken Herbalife critic Brent Wilkes, the national executive director of the League of United Latin American Citizens (LULAC).  Wilkes spoke at the protest.  The group also includes two major African-American organizations, the Southern Christian Leadership Conference and the Congress of Racial Equality, among others.

Pressure in stock market

Herbalife has been under varying degrees of pressure in the stock market as a result of the actions of two activist investors. First David Einhorn had some pointed questions during an earnings call in mid-2012 about how the company classifies and compensates various levels of distributors.  The markets reacted sharply to his comments, and Herbalife’s stock plunged almost overnight, from a high of more than $72 per share to less than $45. More recently, the company’s stock price and business model has been under pressure from the huge short position (basically a bet that the stock price will decline steeply) taken by William Ackman, who manages a hedge fund called Pershing Square.  The stock hit a low of about $26 in the weeks after Ackman first took the position; it has since regained almost all of its pre-Einhorn value.  Ackman recently reduced his short position and took a loss in doing so but remains steadfast in his assertion that the company’s business model amounts to an illegal pyramid scheme.

Herbalife took several actions to address the criticisms of its business model and its relationship to minority constituencies. First, the company recategorized its distributors to more plainly distinguish those distributors who are actively pursuing the network marketing opportunity from those who have signed up for volume discounts. Second, in early September the company hired former Los Angeles mayor Antonio Villaraigosa, who will serve as a special advisor to Johnson consulting on “strategic business development and global community outreach.”

Herbalife released a statement from Villaraigosa at the time of his appointment in which he was quoted as saying, "Herbalife has been a solid member of the Los Angeles business community and a strong presence within the Latino community since the company was founded here in 1980."

Bolstering scientific, regulatory teams

One thing the company has not been criticized on is the quality of its products, which include meal replacement shakes, aloe drinks and supplements.  One criterion that the Federal Trade Commission uses to judge whether a given company is a pyramid scheme is whether the company offers a legitimate product or service, and on this score Herbalife seems to be on solid ground.  The company has hired some high-powered scientific and regulatory talent in recent years to further bolster the credibility of its products. The new hires include Vasilios (Bill) Frankos, PhD, former director of FDA’s Division of Dietary Supplement Programs, Andrew Shao, PhD, former senior vice president for scientific and regulatory affairs for the Council for Responsible Nutrition, and Steven Dentali, PhD, former chief science officer of the American Herbal Products Association.