The War Against Herbalife: Pyramid Scheme or Multi-level Marketing Master?


Emily Primeaux
Asst. Editor, Fraud Magazine

On Dec. 19, 2012, activist investor William Ackman publicly confirmed that he was “betting” against the stock of Herbalife because “the company operates like a pyramid scheme.” Ackman claimed in a 334-slide, three-hour presentation, “Herbalife is a pyramid scheme because, among other reasons, distributors earn more than 10 times as much from recruitment as they do by selling the company’s overpriced products to bona fide retail customers.” During his presentation, Ackman disclosed that he had an “enormous” short position in Herbalife’s stock, betting that shares in the company would fall. 

“Here is an investor that’s not just taking a financial stake,” said Jim Conversano, CFE, CFA, Principal at Berkeley Research Group, LCC. “He’s announcing it to the world.”

Were Ackman’s claims correct? Conversano discussed the investor’s qualms about Herbalife, one of the world’s largest multi-level marketing companies, in his breakout session, “The War Against Herbalife: Pyramid Scheme or Multi-level Marketing Master?”

Conversano started the session by giving attendees a brief overview of the difference between Ponzi and pyramid schemes. In short, investors in Ponzi schemes expect to earn a return from profitable investments. Participants in illegal pyramid schemes expect to earn profits from recruiting new members.

Multi-level marketing companies, on the other hand, are legal companies that sell legitimate products and services, use pyramid-like sales and distribution structures, and participants earn commission for products or services they and the distributors in their “downline” sell to others. Your downline consists of the participants you recruit and their recruits.

So where does Herbalife fit into this equation? Herbalife is a global nutrition company founded in 1980 that develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products. Members can earn profits by purchasing Herbalife products at (discounted) wholesale prices and reselling those products, and earning commissions and bonuses by establishing and maintaining their own sales organizations (i.e. sponsoring other members). 

“Herbalife does require its participants to invest in a start-up fee,” said Conversano. “This is very widely out there, it’s not a secret fee. That’s what this investor [Ackman] had a problem with.”

According to Conversano, cases against Herbalife’s business structure, including Ackman’s, have brought into question the legal nature of their operations. In March 1985, Herbalife was sued by the California Attorney General and two other California regulators, alleging that the company made false claims about its diet products and employed an “illegal endless chain” to market them.

In October 1986, Herbalife announced that it agreed to pay $850,000 to settle the suit brought by the California regulators, but they admitted no wrongdoing in the settlement.

Most recently, on March 11, 2014, Pershing Square Capital Management, L.P. argued that Herbalife is violating China's direct-selling law by paying multi-level royalties based upon unlimited downline levels, and paying royalties and commissions totaling more than 30 percent of sales volume, among other accusations.

Despite all accusations, Herbalife vehemently defends its business practices and hasn’t yet been convicted of any wrongdoing. Opinions in the session were varied and active debate ensued. Conversano explained that while Herbalife doesn’t technically present itself as a pyramid scheme, it can’t be denied that there are red flags that should be considered.

So he left it up to us. Could Herbalife really be a decades-long fraud, similar to Madoff? What do you think?

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Maryland Chapter’s Harbor Cruise Raises $3,500 for Ritchie-Jennings Memorial Scholarship


Ashley Stone, CFE
ACFE Chapter Development Manager

When Baltimore was selected as the host city for the 26th Annual ACFE Global Fraud Conference, the Maryland Chapter decided to plan an event to showcase the city while giving back to the fraud-fighting community.

After brainstorming, chapter vice president (and president elect) Steve Lesniewski, CFE recommended that a great way to entertain conference attendees, while raising funds for the ACFE Foundation, was a sunset cruise through Baltimore’s Inner Harbor.

On Monday, June 15 more than 360 conference attendees boarded the Spirit of Baltimore for a two-hour cruise complete with hors d'oeuvres, a cash bar, a live DJ and dancing. The cruise traveled along the Patapsco River and offered views of Baltimore’s Inner Harbor area, historic Fort McHenry (birthplace of the U.S. national anthem), Federal Hill, the Francis Scott Key Bridge and even the world headquarters of athletic apparel company Under Armour.

The chapter paid for the full cost of the cruise but requested that those who wanted to attend pre-register by purchasing $10 tickets. The chapter is donating the entire proceeds from these ticket sales (more than $3,600) to the ACFE Foundation’s Ritchie-Jennings Memorial Scholarship fund as part of the Scholarship Fundraising Challenge.

Chapter president John Grimes, CFE, said that feedback from those that attended was overwhelmingly positive. “From all reports, everybody had a great time. Many people had kind words about Baltimore and the Maryland Chapter,” Grimes said.

On behalf of the ACFE, I would like to thank the Maryland Chapter for hosting this unique event and for their generous contribution to the ACFE Foundation.

Untraceable Links: Technology Tricks Used by Crooks to Cover Their Tracks


Emily Primeaux
Asst. Editor, Fraud Magazine

"I think we need a change in investigations. We need to evolve because of technology," said Walt Manning, CFE, president of Investigations MD, in his session, "Untraceable Links: Technology Tricks Used by Crooks to Cover Their Tracks," at the 26th Annual ACFE Global Fraud Conference last week. "We have to change the way we think about technology because [our methods] are not working anymore," he continued.

Manning began his session with these thoughts and by explaining that this change is based on more sophisticated technologies such as mesh networks and anonymous and encrypted email services that are under development (or have been created) to evade government surveillance. And awareness is key: fraud examiners that are aware of these tools stand a better chance of learning and understanding how they could be used to hide possible evidence of fraud.

From the Tor network to the Invisible Internet Project (I2P), Blackphone to Tox, cybercriminals are finding new ways to get into victims' data. According to Manning, the visible web is only 1 percent of the entire content on the Internet. Criminals lurk on the Dark Web and even though illegal service providers, like Silk Road, are being caught and prosecuted, a new operation will pop up shortly after. For example, as the Tor network receives more attention from law enforcement, a growing number of networks are moving to I2P. Yet another thing to monitor.

Manning also emphasized the importance of not connecting to insecure, public Wi-Fi without VPN. Crooks are using services like Blackphone to keep their anonymity. "Silent Phone allows criminals to make encrypted texts, calls, video messages to anywhere in the world," said Manning.

Manning finished the session with an overview of mesh networks. Mesh networking makes use of special hardware or software to allow devices to directly connect to each other without the use of the cellular network or the Internet. According to Manning, from an investigative perspective, mesh networks make it more difficult to track investigative targets and to trace their communications. Users of a mesh network may never “touch” their cell network or the Internet, and there are no logs to trace messages through this decentralized network.

These developments seem especially threatening, but Manning called fraud examiners to act to thwart the nefarious schemes. "I need your help. Our profession needs your help. It’s only going to get worse," said Manning. "We have to take action, and we can only do it if you’re willing to get involved in the effort."

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