Criticizing Herbalife, N.Y. State Senator Unveils MLM Legislation

Citing stories from “victims" who invested money in Herbalife Ltd., a New York state senator last week introduced legislation to crack down on deceptive practices in the multilevel marketing (MLM) industry.

The bill, introduced by state senator Jeff Klein (D-Bronx/Westchester), would require multilevel marketers such as Herbalife make additional disclosures, such as revealing distributors’ average and median incomes, in an effort to increase transparency.

Klein cited the accounts of more than a dozen “victims" of Herbalife, including one man who lost US$100,000.

“We have seen time and time again how Herbalife promises of the American Dream only wind up as a financial nightmare," he said in a March 11 news release.

Klein referenced a video by Herbalife CEO Michael Johnson, which he said encouraged Herbalife employees to focus on recruitment.

Some critics including hedge fund manager Bill Ackman of Pershing Square Capital Management have accused Herbalife of operating a massive pyramid scheme and exploiting minorities by touting its business as a pathway to riches when in fact most members earn little to no income.

In a speech earlier this month, a Securities and Exchange Commission official characterized unlawful pyramid schemes as ones “in which participants profit not from the product they are selling but almost exclusively through recruiting other people to participate in the program."

Herbalife, whose business has been the subject of government investigations in recent years including an FTC probe, has repeatedly denied the pyramid scheme allegations. The company has referenced various disclosures it makes to prospective members and surveys showing that millions of consumers buy its nutritional and weight-loss products for their own consumption.

Klein’s legislation, which Bloomberg first reported on, was unveiled during the 18th Anniversary of National Consumer Protection Week. He said his bill would require multilevel marketers disclose to prospective distributors—in their primary language—information about the benefits, risks, and actual effects of each product, service and business opportunity. Companies which violated Klein’s transparency requirements would be subject to fines of up to $10,000.

Herbalife and the Direct Selling Association, a national trade organization for companies that distribute goods and services sold directly to consumers through an independent salesforce, did not immediately respond Monday to INSIDER’s requests for comment.