More clouds over Herbalife with complaints in Canada, letter from Sen. Edward Markey

30-Jan-2014 - Last updated on 30-Jan-2014 at 15:13 GMT

Herbalife, the world’s biggest network marketing company devoted solely to selling nutrition products, has come under renewed scrutiny with reports of complaints about the company made to a regulatory body in Canada and the receipt of a letter from Sen. Edward Markey, D-MA, seeking information on Herbalife’s business practices and compensation plan.

Yesterday the New York Post reported that the Canadian Competition Bureau has “launched a formal inquiry in pyramid scheme complaints made against Herbalife.”

Canadian complaints

The Post reported that the Canadian bureau is similar to the US Federal Trade Commission except that it has the power to bring criminal charges. The inquiry was the result of complaints received by the CCB in regards to Herbalife’s business practices.

The Post report also included a long section on the activities of now-departed top distributor Shawn Dahl, on whom the paper has reported previously. As well as being a top distributor in his own right, Dahl operated a side online business that generated leads for Herbalife distributors. The Post report said that some of the complaints made in Canada involved Dahl’s activities. Dahl left the company in mid 2013.

But a report by columnist Theresa Tedesco in the Financial Times, a national Canadian newspaper, said her sources told her that the watchdog agency is not close to commencing a formal inquiry. A spokesman for the competition regulator would neither confirm nor deny that an official probe is in the works.

Herbalife issued a statement concerning the news of Canada saying, “We are unaware of any investigation and have not been contacted. Canadian sales represent less than 1 percent of sales.”

Seeking info on compensation plan

In his letter to Herbalife dated Jan. 23, Sen. Markey asked Herbalife to provide detailed information on the company’s compensation structure to help determine whether it constitutes a pyramid scheme. Central to that determination is whether sales of a company’s products are directed inward toward its own sales force, requiring recruitment of ever greater numbers of new members, or outward, toward consumers.

In recent months, Herbalife has emphasized the latter, and has touted its “daily consumption” model, meaning that the company’s growth has been based largely on increased sales to consumers and not on purchases of products from within the network. In his letter, Markey requested more detailed information on that scenario, and noted that the company has pegged the figure of sales outside the network at widely varying levels. For example, Markey said in his letter that at three different points in 2012 Herbalife said that sales outside the network were 70% of total sales, 90% of total sales and at another point in that same year the company said that it didn’t keep track.

“What’s the correct number of sales outside the network as a percentage of total sales?” Markey asked.

In addition, Markey asked for information on how many different sales levels Herbalife had within its network and the requirements a distributor must meet to attain each level. And he sought information on how many people have entered and exited the sales force since 2007, among other requests.

Markey requested answers to his questions form Herbalife by February 28.