Following an investigation into Herbalife’s Chinese operations, the SEC has determined the company uses it’s global compensation plan across the country.
As Herbalife reveals in its own SEC filings, ‘[i]n China, while direct selling is permitted, multi-level marketing is not.‘
While Herbalife using their MLM compensation plan in China would certainly be illegal, the SEC is quick to point out its investigation
does not make any findings regarding whether Herbalife did, or did not, violate Chinese law.
That’s not to say Herbalife didn’t violate Chinese law, but rather whether they did or didn’t isn’t the SEC’s problem.
Rather the SEC has objected to Herbalife’s misrepresentation that it adheres to Chinese law in it’s filings.
Specifically, Herbalife’s claim that
Our business model in China differs from that used in other countries”; and that, “[d]ue to restrictions on direct selling in China, our independent service providers in China are compensated with service fees instead of the distributor allowances and royalty overrides utilized in our traditional marketing program.
The SEC’s investigation revealed that as opposed to how it claimed to calculate commissions for it’s Chinese distributors,
Herbalife calculated eligible SP compensation using its worldwide system, which is based on downline purchases, and in almost all cases, actual individual SP compensation was almost the same as the amounts calculated under Herbalife’s worldwide system.
This, the SEC claims, means Herbalife has
made false and misleading public statements in numerous U.S. regulatory filings regarding its China business model and, thus, misleading and depriving investors of information to fully evaluate the risks regarding Herbalife’s compensation system under Chinese law.
And it’s not a one-off. Rather Herbalife appears to have been lying about its Chinese operations in public filings since February 2012.
The SEC claims Herbalife violated US securities laws and served the company with a cease and desist.
In response and in anticipation of getting steamrolled in court, Herbalife consented to a $20 million dollar civil fine.
Whether local authorities will take action regarding Herbalife operating illegally in China remains to be seen.
One would also assume this means Herbalife can no longer continue to run an MLM opportunity in China and make public filings claiming otherwise.
Or at least not until they find another convincing loophole to string investors and the SEC along for another seven+ years.
Update 20th May 2020 – On top of the $20 million fine paid to the SEC, NutraIngredients USA are reporting another $123 million fine has been preliminary agreed on.
The additional fine pertains to Herbalife engaging in bribery fraud in China “prior to 2016”.
The case was filed over alleged violations of the Foreign Corrupt Practices Act that is meant to restrain US companies from engaging in activities in foreign markets, such as the payment of bribes, that are prohibited by US law.
The agreement was revealed in Herbalife’s 2020 first quarter 10-Q filing with the SEC.
Shenanigans in China also saw former Herbalife CEO Rich Goudis abandon the position after a year and a half.
Goudis reportedly instructed a Herbalife employee to ‘ignore company accounting policies when it came to entertainment related expenses within China’, a recording of which made its way to federal investigators.
Goudis had been with Herbalife since 2004 and left with a $3.5 million golden handshake.
Pending finalization of Herbalife’s bribery fraud fine, stay tuned.