Herbalife boasts big rewards for sellers but is it a pyramid scheme?

The economy is bouncing back, consumers are spending – and households are looking for ways to supplement their incomes or launch new careers. And there are plenty of advertised opportunities promising just that.

Earlier this month thousands of people flocked to the cavernous Wembley Arena to attend an anniversary bash organised by Herbalife, the California-based "multilevel marketing" giant.

The company, whose name appeared on David Beckham's shirt when he played for LA Galaxy, has shares listed on the New York Stock Exchange. It is also booming in Britain. Its sales here soared by 64pc during the first quarter of this year. Herbalife boasts revenues of more than £3bn worldwide and sells diet products such as meal-replacement shakes and vitamin supplements. But its products are not sold in shops.

It operates in more than 90 countries through a sales force of three million "independent distributors" who are compensated not only for their sales but also for the sales of the other distributors who they recruit – a practice commonly known as multilevel marketing.

At Wembley, videos of footballer Cristiano Ronaldo and images of colourful protein shakes flashed up on huge screens and strobe lights whirled over the crowd. Dr David Heber, chairman of Herbalife's nutrition advisory board, made his way to the stage to the sound of thumping pop music as attendees clamoured to get his autograph.

"Together we can change the nutritional habits of the world one person at a time," he shouted, pumping his fist in the air. The 3,000-strong audience stood up and applauded. "We're just getting started," yelled another executive, to more enthusiastic whoops and cheers. "There has never been a better time to be a Herbalife distributor."

But, although the firm claims to have 32,000 distributors in Britain and appears to be growing rapidly, behind the scenes it is facing the biggest challenge in its 34-year history.

Earlier this year the United States' Federal Trade Commission (FTC) launched an investigation into Herbalife following accusations that it operated as a sophisticated pyramid scheme and made its sizeable profits from endlessly recruiting distributors who are required to pay hefty sign-up fees as they progress up the business – and little from actual retail sales.

"The vast majority of US Herbalife distributors lose money and quit within a year," said Robert Fitzpatrick, a former business consultant based in the US who runs the campaign group Pyramid Scheme Alert. He claims "the whole operation is hugely deceptive".

According to its records almost 90pc of Herbalife's 32,000 distributors in the UK did not receive payments from the company last year. Only a tiny handful earned more than the national average salary of £26,500 a year. This skew is mirrored all over the world.

Rob Levy, Herbalife executive Vice-President, said the company was keen to resolve any issues with former distributors who felt unfairly treated. He pointed out that its marketing now sought to distance itself from testimonials that say people have made huge sums. "Most distributors make a little extra part-time income – only a very few make more than that," he said.

"Every business evolves and certainly we are. We have had a few complaints against the business over the years but they have been minimal. Today Herbalife operates to the highest ethical standards and provides a gold standard in consumer protection."

The company provides its customers with a unique experience, Mr Levy claimed. "You don't just go and pick up a tub of shake from a store," he explained. Its distributors – or "wellness coaches" – provide "advice on how to lose weight and how to become healthier and how to take the products".

Distributors typically sell a tub of Herbalife's flagship Formula 1 meal-replacement shake for £27.

Herbalife runs "nutrition clubs" around the world which encourage healthy lifestyles and host exercise classes. But critics argue that the clubs' main purpose is to recruit distributors.

Herbalife's most outspoken critic is Bill Ackman, who runs US-based hedge fund Pershing Square. In December 2012 Mr Ackman gave a sweeping three-hour presentation arguing that Herbalife was a pyramid scheme which cynically targeted low-income communities. He has bet more than $1bn against the company by "shorting" its shares. He stands to make an enormous profit if it collapses.

Mr Levy said the FTC probe had been orchestrated by Pershing Square and expected the investigation to fizzle out over time. "They are trying to create a self-fulfilling prophesy and we believe it will fail," he said.

Herbalife run scores of big events like the one at Wembley at venues around the world.

But, as with other firms' similar marketing events, some commentators are sceptical. "This group awareness training reinforces the idea that anyone can succeed," Mr Fitzpatrick said. "It discourages people from thinking objectively and considering other factors like price and demand for the products. Some of the aspects of the company bear all the hallmarks of a cult."

At Wembley many distributors spoke enthusiastically about how Herbalife was a force for good. Mercy Madrideo, a mother of three from East Sussex, said she had worked as a distributor for five years to supplement her main job as a nurse. "The extra income has helped support my family," she said. "And we're helping to change people's lives."

Jason Jones, a US-based lawyer who runs consumer activist website Salty Droid, questions how many Herbalife distributors make any profit at all. "It's packaged up like an earning opportunity but in reality it's almost impossible to make it work," he said. "The products are nothing special and very expensive and there are lots of propitiatory costs.

"A few people at the top make lots of money – most others don't. The sooner the whole operation is exposed for what it really is the better."

Pyramid schemes: the definition

The Government classifies a pyramid scheme as when profits are derived from recruiting an endless chain of new salespeople – rather than from the sale of products.

The result: most people lose money except a tiny minority at the top, who get rich. But in a sprawling network of distributors, nailing down the facts down can be tricky.

Herbalife does not release data on retail sales. It points to independent surveys which show that almost three quarters of its distributors are in fact customers who signed up to buy its products at a 25pc discount and are not interested in developing a business.

But this explanation does not satisfy its critics. "It's a weak argument," said Pyramid Scheme Alert's Robert Fitzpatrick, who pointed out that Herbalife's products were often available online for a knock-down price. "I fear the vast majority are just failed distributors," he said.

Last year Herbalife won a Belgian court ruling which determined that the company was not a pyramid scheme.

Multi-level marketing: opportunity or illusion?

Multi-level marketing (MLM) – which allows anyone to sign up and sell a company's products and receive compensation from other salespeople they recruit – has boomed over the last three decades. It was almost outlawed in the Seventies after two court rulings concluded the practice was unfair and deceptive. However, a landmark 1979 ruling in favour of health care product company Amway opened the floodgates.

Today, there are thousands of MLM businesses all over the world and the industry boasts annual global revenues of more than £120bn.

Over the years, it has been dogged by controversy. In the US, the California Attorney General sued Herbalife in the mid-Eighties for making inflated claims about its products and the company has faced a number of class-action lawsuits. Meanwhile, in the UK, the Government tried to close down Amway in 2008 before forcing it to make significant changes to its operations.