1. Why has Herbalife’s multilevel compensation model been accused of being a pyramid scheme?
2. Describe the differences between a legitimate business model and a pyramid scheme.
3. How has Herbalife demonstrated social responsibility?

Herbalife International is the third largest direct selling, multilevel marketing company in the world. Its product line consists of weight management and nutrition products. These products are not sold in retail stores; rather, consumers interact with independent contractors, who are often everyday people like themselves, to order the products. Herbalife’s headquarters are located in Los Angeles, California, and they operate in many countries throughout the world. Herbalife is a publicly traded company that is both loved and hated by investors and consumers.

This case first discusses the history of the company from its founding to its present status, followed by a description of the types of products Herbalife offers. Then we will get into a discussion of multilevel marketing and the role of independent contractors in the direct selling model. Next will be an analysis of pyramid schemes and why they are often confused with the multilevel marketing model. We then examine Herbalife to determine whether it is a pyramid scheme.

We will illuminate the role of hedge fund investor William Ackman, who has prominently accused Herbalife of being an elaborate pyramid scheme, in the backdrop of Herbalife’s business model and describe his contentions with the company as well as some of the criticisms levied against him. The case shows that while Ackman’s accusations may be the most widely known, Herbalife has had to face similar allegations (mostly referring to pyramid schemes) throughout the course of its existence. The case then briefly overviews Herbalife’s social responsibility program, and finally ends with overall conclusions.

Herbalife is a company that focuses on nutrition, weight management, and personal care products with independent contractors selling in more than 90 countries. Mark Hughes founded the company in 1980 out of a desire to create a safe alternative to other weight loss products. Herbalife’s first sales were made from out of the trunk of Hughes’s car in Los Angeles, California, and two years later the company reached $2 million in sales. Herbalife was taken public in 1986 on the NASDAQ stock exchange. Since then, Herbalife has become a multibillion dollar global company.

In 1999 Hughes planned to take the company back to the private sector by purchasing all of its remaining shares, but this attempt was stopped as investors sought legal action. The next year, Mark Hughes died unexpectedly at the age of 44. Christopher Pair, who was Herbalife’s former Chief Operating Officer (COO), then became President and Chief Executive Officer (CEO) of the company. His reign at Herbalife was cut short when he stepped down one year later.

An Internet retailer, Rbid.com, made a bid of $173 million to acquire Herbalife, but the Mark Hughes Family Trust rejected the offer. In 2002 the investment firm J.H. Whitney & Co. purchased the company along with another investor and took it back to the private sector. However, in 2004 Herbalife went public once again and was traded on the New York stock exchange. Michael O. Johnson has been Herbalife’s CEO since 2003. The company currently employs 7,800 people and has almost three million independent contractors throughout the world.