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Unofficial translation of First Financial Daily's Herbalife article, Aug 2013

Unofficial translation of First Financial Daily's Herbalife article, Aug 2013

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Published by New York Post
First Financial Daily’s investigative reporter said he was told by an Herbalife sales representative that he had to buy about $2,000 worth of product to qualify to become a “direct sales representative,” the name the company gives its distributors in China, according to a translation of the article by the Hong Kong office of a US law firm.
First Financial Daily’s investigative reporter said he was told by an Herbalife sales representative that he had to buy about $2,000 worth of product to qualify to become a “direct sales representative,” the name the company gives its distributors in China, according to a translation of the article by the Hong Kong office of a US law firm.

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Categories:Types, Brochures
Published by: New York Post on Jan 24, 2014
Copyright:Attribution Non-commercial


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Herbalife's Sneaky Business Activities in China Raised Suspicion: Disguised Form of Recruitment Fees Gives away Its Pyramid Scheme
August 12, 2013 15:08 Source: First Financial Daily
Herbalife (NYSE: HLF), a global nutrition product magnate, has continued to be drawn into the whirlpool of the bull-bear battle since last May. Hedge fund manager William Ackman accused Herbalife of practicing a pyramid scheme and thought that Herbalife makes money by recruiting members rather than selling products. It is worth noting that, since August this year, financial guru Soros, as reported by overseas media, has taken a sizeable long position in the stock of Herbalife. He was another billionaire investor who joined the alliance of Herbalife's backers since the Herbalife bull-bear battle. Herbalife share soared over 10% on the day when this news was released. As the bull-bear battle unfolds at full scale, apart from its performance in the capital market, Herbalife's management and control over its distribution and the effects of its products have caught the attention of the industry. Recently, First Financial Daily discovered through private investigation that, while Herbalife is fast growing in the China market, its sales model is suspicious in five respects: collection of "recruitment fees" in disguised form, suspected exaggeration of  product effects, possible windfall profit derived from products, fast growing clubs absent of strict supervision and control, and product purchase overly dependent on sales representatives or potential sales representatives…… A series of issues have deviated the direct selling model of this company, and have contradicted with certain provisions in the "Regulations on the Prohibition of Pyramid Selling" promulgated and implemented by the State Council in 2005. As a result, suspicion has been brought up that Herbalife's sales model is a pyramid scheme.
"Recruitment Fees" in Disguised Form
"Xiao Zhong, you'd better order products worthy of 1000PV these two days, so that we can get you promoted to senior business representative and you can then develop your own client base and get commissions." Business representative of Herbalife, Li Ming (pseudonym), who had introduced one of our reporters to become a premier customer of Herbalife, kept urging our reporter to purchase Herbalife products, although our report kept telling Li Ming that he has no intention to do so. Li Ming explained that Herbalife evaluates performance on the basis of the PV value. 1PV equals to RMB12. A monthly sales turnover of RMB1200 to 48000 (i.e.100PV to 4000PV) would generate a 15% to 30% sales commission. Li told our reporter that he has to invest by purchasing the products before making money and it would be pretty easy to sell the products afterwards. However, if our reporter fails to sell
2 the products, he would not be able to become a business representative and therefore would not be entitled to commissions. Herbalife's trump card is its direct sales representatives all over the country. However, it is not easy to become one of the direct sales representatives. One of the key conditions is that you need to purchase Herbalife products up to a certain quantity; and such a disguised form of "recruitment fees" may constitute a violation of the relevant  provisions of the State. As requested by Li Ming, our reporter has to buy 1000PV (i.e. RMB12000) worth of products before he can become a direct sale representative of Herbalife. Our reporter found Li Ming through private investigation and told Li Ming that he wanted to become a direct sales representative of Herbalife. However, after Li Ming enrolled our reporter as a premier customer, he kept putting off allowing our reporter to become a business representative (i.e. Herbalife's direct sales representative who is entitled to commissions through sales of products). He told our reporter that he should take a certain quantity of Herbalife products before he could become a sales representative as that would make our reporter have a better idea of the products. When our reporter kept making excuses for not buying the products, Li Ming told him flatly, "it is impossible for you to become a  business representative without buying the products, and such a quantity of products are easy to sell." When our reporter joined another franchised club under Herbalife, a sales representative also insisted that our reporter must purchase a certain quantity of products  before he could become a sales representative. In accordance with Article 7 of Chapter 2 of the Regulations on the Prohibition of Pyramid Selling effective as of November 1, 2005, "if an organizer or operator seeks for unlawful interests by recruiting people to participate in pyramid selling and asking the recruited person to pay fees explicitly or in any disguised form (such as purchasing commodities) for obtaining the qualification for participating in pyramid selling or recruiting others to participate in pyramid selling, it shall constitute an act of pyramid selling". The acts of the direct sales representatives of Herbalife who asked people to  purchase products as a condition to becoming a direct sales representative is very close to  pyramid selling. In order to lure our reporter to become a business representative promptly, Li Ming kept telling our reporter the advantages of becoming a business representative. Our reporter asked a direct sales representative how much he earns a month. He told our reporter, "I have been doing this for only half a year and I earn about RMB20,000 a month now ." While our report was feeling surprised about the high income they earn, Li Ming waved his hand and added, "this is nothing."
Direct Sales Representatives Make "Prescriptions" at Will
Although the direct sales representatives kept trying to persuade our reporter to  purchase products so as to become a "member", the way they promoted the health
3  products was not professionally convincing. For various symptoms pointed out by our reporter, these direct sales representatives gave quite similar "prescritpions". A kind of  protein drink mix product almost became the "panacea" that could cure all health  problems. "Does Herbalife have any product that can cure insomnia?" Our reporter went to a Herbalife nutrition club located in the Yangpu District and pretended to be a customer who has a health problem to solve. A sales representative in the store immediately recommended the Herbalife protein drink mix to our reporter. "Our protein drink mix contains not only rich protein, but also dozens of types of vitamins. After you have improved your body, quality of your sleep will naturally improve." Our reporter challenged the sales representative immediately that this product's main function as advertised before was for weight loss. The sales representative continued to explain, "this product helps to lose weight if you use it to replace two meals a day. If you don't want to lose weight, you can use it to replace one meal a day and it will also improve your health." When our reporter added that he suffered the syndrome of deficiency-cold of the spleen and stomach, the sales representative recommended to him the same product, i.e. the protein drink mix. "Your problem lies in the lack of body conditioning and deficiency in detoxification. Using our product will help improve your body." Our reporter noticed that the sales representative used his mobile phone to search on the "Baidu Knows" web page when he explained to our reporter. Furthermore, the sales representative showed our reporter a product brochure, which introduces recommended combinations of Herbalife products for improving various health problems. Our reporter noticed that the health problems listed in the  brochure include obesity, insomnia, gynecological inflammation, chronic cholecystitis, chronic pancreatitis, hyperthyroidism, colitis, rhinitis, hypertension, hyperlipidemia, coronary heart disease, liver cirrhosis, and dozens of other diseases, and the improvement  plans for almost each of the health problems include the protein drink mix mentioned above. The sales representative explained, "the protein drink mix is a basic product of Herbalife as it is rich in proteins and various vitamins, and therefore it is a basic product for improving various types of health problems." He also mentioned that the protein drink mix has detoxification and anti- stress functions. However, does the protein drink mix, as a basic product of Herbalife, indeed have the magical effect of "curing all kinds of diseases" as suggested by the sales representative? Our reporter got in touch with several consumers who used to use Herbalife products. Generally, these consumers felt that their health improved to certain extent, but it was not that obvious. "All health products will certainly improve your health to certain extent. But are they as amazing as the advertisement says? I have been using Herbalife products for more than a year but do not have obvious feelings."
Windfall Profit Hidden in Weight Loss Products

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