July 7 (Bloomberg) -- Miguel Calderon is a retired construction worker with a sixth-grade education. He says an Herbalife Ltd. distributor tricked him into squandering $30,000 in life savings on weight-loss shakes.
At the same time, Calderon says he signed an agreement after reading very little of it or the marketing documents that detailed Herbalife’s policies and pay structure.
“There was a small doubt in my mind always,” Calderon said in an interview, speaking Spanish. “But because you have a desire to work and make better, I continued.”
Calderon, 68, is one of at least 16 Latinos in the Chicago area who’ve filed consumer complaints with the Illinois attorney general, saying Herbalife duped them into buying tens of thousands of dollars worth of products they couldn’t sell. Herbalife, a direct seller that relies on independent contractors to distribute its wares, said it enforces inhouse rules governing distributors, investigates all claims seriously and welcomes “the opportunity to help the people mentioned in this story.”
Opening a business doesn’t guarantee success. Not all entrepreneurs work hard, while products wax and wane in popularity. About half of small businesses fail in the first five years, according to the Small Business Administration. The question for Illinois investigators, who can file criminal charges or a civil lawsuit, is whether the complainants were victims of false promises or didn’t prosper because they failed to follow Herbalife’s marketing plan.
Herbalife has spent the past 19 months warding off hedge-fund manager Bill Ackman’s claims it’s an illegal pyramid scheme. In their simplest form, pyramid schemes take money from new participants to enrich those at the top, independent of any product sales. Ackman has accused Herbalife of prospering on the backs of often undocumented Latinos, using products as a front for what amounts to illegal recruiting fees. Those with little English and a basic education are susceptible to scams, he has said.
“Ask yourself why poor Latinos would purchase overpriced nutrition products,” Ackman said in a March webcast hosted by his hedge fund, Pershing Square Capital Management LP.
In February, the League of United Latin American Citizens, America’s oldest Hispanic civil-rights group, flew with Calderon to Washington to lobby Federal Trade Commission Chairman Edith Ramirez. The following month, the company confirmed the FTC was probing its business. LULAC has since forwarded some of the Illinois complaints to the FTC.
Most of the complainants are undocumented, said Julie Contreras, who directs a local Illinois LULAC chapter and coordinated the filings.
Bloomberg News obtained copies of nine of the complaints. Filed between December and February and dating as far back as 2008, they include simple narratives, roughly a paragraph long, and supporting documents, such as order receipts and bank records. In general, the complainants say Herbalife deceived them, defrauded them of their money and should be shut down. The personal information was redacted.
Both Calderon and another former Herbalife distributor named Martil Palma granted interviews, saying they filed complaints with the attorney general. The men declined to provide unredacted versions of the documents, saying they feared jeopardizing the investigation. Cesar Caballero, the 49-year-old Herbalife distributor who worked with both men, also agreed to speak on the record.
Herbalife declined to provide details of its interactions with the men, except to say that each placed multiple orders over at least six months. The company says it provides needed work to Latinos. The FTC’s Ramirez, Illinois Attorney General Lisa Madigan and Ackman declined to comment. The shares rose 0.1 percent to $66.18 at the close in New York.
Calderon lives in Waukegan, a working-class city about 40 miles north of downtown Chicago. As often happens, he learned of Herbalife from a friend. In 2008, Calderon met Caballero at his nutrition club, a storefront where Herbalife distributors hand out samples, provide nutrition and weight-loss advice and encourage customers to order products for regular use or become distributors themselves.
For three mornings, Calderon said, he sampled shakes, herbal tea and an aloe concoction. On day three, he said, Caballero asked Calderon if he was ready to start a business. Calderon decided to open his own nutrition club. Under Herbalife rules, distributors get a discount of as much as 50 percent for such products as Formula 1 protein shake powder, Liftoff energy drink dissolving tablets and Cell-U-Loss herb pills. Selling at full retail, they can potentially double their money.
“I felt excitement and said, ‘OK, I’m poor and since I don’t have work, I’m going to do this,’” Calderon said.
Calderon said he paid an initial $1,300 for mostly protein shake powder, as well as a sample pack and a marketing DVD. From there, Calderon paid Herbalife $7,000 plus $1,500 a month for about a year, he said.
To market the products, Calderon said he outfitted a nutrition club thinking customers would buy the Herbalife merchandise as soon as he made it available.
“‘I would put a lot of spirit into trying to sell the product,’’ Calderon said. ‘‘In the snow we would go out and put up flyers.’’
He took training, as well, to learn how to recruit others into the business. The few people he approached wouldn’t listen, so he concentrated on retail sales instead, he said.
As he poured money into Herbalife, containers of protein shake powder stacked up in the nutrition club, Calderon said. Customers trickled in or sampled shakes daily without ever ordering for home use, saying it was too expensive, he recalled. Calderon said the $30,000 in losses before he got out after about a year and a half included rent and supplies for the modest shop.
Calderon says he never questioned what he was told and signed his Herbalife distributor contract based mostly on Caballero’s explanation.
‘‘They weren’t easy to understand carefully without trouble, so I believed what he said,” Calderon said of the documents, published in English and Spanish. “I read the parts that I thought were most related to me.”
Palma, the second complainant who agreed to speak on the record, said he lost $16,000. Palma said he attended a sales meeting at a luxury hotel in downtown Chicago, where at least one speaker boasting of flying in for the meeting by helicopter.
“I thought to myself, ‘All these people can’t be making a mistake,’” Palma said in Spanish. “I was so impressed to see so many people.”
Palma also said he signed a contract without reading it and doesn’t recall seeing a marketing plan.
“Yes, I did sign,” he said. “They put it in front of me and I signed it.”
He said he called the company to request a refund and was told one wasn’t available. At the time, Herbalife allowed distributors to return merchandise, less a 10 percent restocking fee and shipping charges, the company said.
In an interview, Caballero said Palma and Calderon failed to follow Herbalife sales methods despite attending training. He spoke mostly Spanish, which was translated by his adult son, who also sells Herbalife and runs fitness classes. Caballero said he doubted Calderon lost $30,000.
“It’s impossible,” Caballero said. “There are two stories to everything.”
Caballero has sold Herbalife products for about seven years and is part of Herbalife’s Millionaire Team, meaning his network of distributors has generated that much in retail sales. Inside his Waukegan nutrition club, a big-screen television plays Herbalife videos. Photos show Caballero, his wife and children on Herbalife trips to such exotic locations as Hawaii.
Caballero said his distributors who work hard succeed. One is Ismael Hernandez, who opened a nutrition club in 2008 and was able to quit his job as a dispatcher for a temp company after six months.
Hernandez says his club has between 80 and 150 members, 80 percent of whom aren’t distributors themselves, he said. They pay $5 a visit, take Zumba fitness classes and order product for home use, he said. Hernandez recently opened a second club.
“When you know the marketing plan, it’s easy,” he said, referring to a 124-page document that describes how wholesale profit, commissions and royalties are paid to 18 levels of distributors, all based on so-called volume points that vary depending on the product being sold.
Proving Herbalife did anything wrong won’t be easy, said Joel Winston, a former FTC lawyer who now works at Hudson Cook LLP in Washington.
“It’s not clear what responsibility Herbalife would have for what its distributors would say,” he said. “It really comes down to what evidence is there beyond individual consumers saying a distributor told me xyz. Can they show a pattern? Can they show that this happened routinely?”
Today, Calderon’s nutrition club is closed. He gave away and sold for pennies on the dollar some of the leftover Herbalife merchandise. He said he lost his house.
“We feel that this has been like a fraud that has come to us,” Calderon said.
His dream of making it big in the direct-selling business didn’t end there. Calderon became an authorized representative for a direct seller of cookware, until his children persuaded him to get out.
To contact the reporter on this story: Duane D. Stanford in Atlanta at firstname.lastname@example.org