Herbalife related to a Canadian pyramid scheme

Herbalife, the nutrition selling company under attack from shortseller Bill Ackman, allowed an affiliated business to continue operating in its network for almost a decade after Canadian authorities had labelled the operation a pyramid scheme, a Financial Times investigation indicates.

Mr Ackman, founder of hedge fund Pershing Square, stated earlier that Herbalife itself is a pyramid scheme, while the company has said it is legitimate, prompting a high-profile battle between investors on either side of the argument.

The history of a company called Online Business Systems, which until this year specialized in recruiting salesmen for the Herbalife network, raises questions about the practices Herbalife had previously tolerated.

OBS is the successor to Global Online Systems, a company judged to be a criminal “scheme of pyramid selling” by a Canadian federal court in 2004. Both were part of an ecosystem of business built around promoting Herbalife to sell marketing materials and other services such as “sales leads” to the direct seller’s recruits.

Online check in archives show that websites operated by GOS such as www.4u4meletsdream.com, were rebranded as OBS. A website that encouraged GOS participants to register with OBS by September said that they would remain in the network: “Your Herbalife lineage remains the same regardless of the changes to your new marketing system.”

Those recruited by OBS became part of Mr and Mrs Dahl’s network of Herbalife salespeople, and by 2009 the couple were ranked in the company’s top 50 distributors, joining its “Chairman’s Club”. Ms Stoltz and Ms Thom also continued to be prominent Herbalife distributors.

Earlier this year, Herbalife took steps to distance itself from OBS by restricting distributors use of leads and marketing materials provided by the company. Following that change, Mr Dahl moved to a rival direct seller. Herbalife has since banned the sale of leads to or by distributors entirely. OBS, Mr and Mrs Dahl, Ms Stoltz and Ms Thom did not respond to requests from Financial Times for a comment on the topic.