Herbalife pays $20 million fine over how it pays commissions within China

According to a report in​ ​The Wall Street Journal​,​ SEC had alleged that Herbalife had misled investors by claiming that it compensated its distributors in China under a different structure than it does elsewhere.  In fact, according to the FTC, Herbalife was paying commissions within China in a virtually identical manner as in other markets.

‘Traditional’ MLMs not allowed in China

That’s significant because China has made multi level marketing, as it is conducted in the US and elsewhere, illegal within the country.  According the site China Briefing, published by foreign direct investment firm Dezan Shira & Associates, while direct selling is allowable in China, compensation at different levels within an organization is not.  According to the site, a direct selling organization within China must comply with the following strictures:

• have a business license;
• only pay out one level ​of commission;
• offer an advanced training course to sellers, where they have to get a license by the end of the course; and,
• direct sellers must wear a badge to prove their status.

China had also conducted a '100 day review' of direct selling companies ​​earlier this year.  Herbalife was among the companies included in that action.

Allegations based on China commissions not new

Activist investor Bill Ackman, who had taken a short position on Herbalife stock that at one time was valued by as much as $1 billion, alleged that Herbalife was operating an illegal pyramid scheme within the country.  Those allegations faded after Ackman admitted defeat in 2018 and sold his shares in the company​​.

Other FTC cases against company​

But Ackman’s offensive apparently motivated FTC to investigate Herbalife’s business practices. In 2016 the company agreed to alter its compensation structure to place an increased emphasis on sales of products to end users and deemphasize commissions paid to distributors based solely on the enrollment of new distributors. The latter would fall into pyramid scheme territory.  

Herbalife also paid out a $200 million fine to settle that case.

The current fine is apparently separate from an SEC corruption case that involves statements made by former CEO Rich Goudis. Goudis was allegedly caught on tape telling an employee to ignore expense account reporting rules​​ in its business in China, which raised bribery concerns.