Three government agencies, including the California attorney general, filed suit Wednesday against Herbalife International, claiming that the fast-growing Los Angeles-based marketer of nutrition and weight-loss products made false health claims about its products and employed an illegal "endless chain" scheme to market them.
The civil suit, which also names as a defendant Herbalife founder Mark Hughes, seeks a court-ordered injunction to prohibit the 5-year-old company from "disseminating any misleading statements in connection with the sale" of its products. The suit also seeks to prohibit Herbalife from engaging in an illegal endless chain scheme.
Joining the attorney general in filing the suit were the California Department of Health and the district attorney of Santa Cruz County, where the 24-page complaint was filed. The suit culminates an investigation by the agencies that began last year.
Herbalife attorney Perry Turner said he couldn't comment on the specific charges in the suit because he had not yet received a copy of it. He said, however, that the company stands behind everything it says about its products. Turner said Hughes, 29, was out of the country and unavailable for comment.
Herbalife, which is privately owned, has boasted that its annual gross sales are now almost $500 million. The company has 700,000 people who independently distribute its nutritional and skin-care products throughout the United States, Canada, Australia and England.
Noted for its "Lose weight now, ask me how" slogan on buttons and bumper stickers, the company is a direct sales organization in which sales representatives at higher levels of the hierarchy receive commissions on orders filled by the friends or neighbors they recruit.
Among the allegedly false claims that the suit says Herbalife has made about its products are that its Slim and Trim diet products result in a "typical weight loss of 10 to 29 pounds a month," that the company's Cell-U-Loss "directs weight loss to particular portions of the body" and that the herbs used in the products will "cleanse the (intestinal) system."
In addition, the suit alleges that Herbalife failed to disclose in its 1982 manual to distributors that one of its products, N.R.G., which the company said is designed to "help increase energy and aid mental alertness," contained caffeine as one of its active ingredients.
"Their presentations, both oral and written, lead some to believe there is something sort of magical in these herbs that makes you lose weight apart from a reduction in your caloric intake," Senior Assistant Atty. Gen. Herschel T. Elkins said.
But Herbalife's Turner said the company is not doing anything illegal. "Essentially . . . we are being accused of trying to work hard to comply with the law. . . . We have taken the position that we are being sandbagged by accusations about things which these agencies have known about for up to five years."
He said the company has been in touch with state agencies over the years and has attempted to cooperate fully. In fact, Turner said, the company has revised its 1982 Herbalife manual since state officials complained about it earlier.
The suit claims that, although Herbalife corrected later versions of its manual, it never recalled or destroyed earlier versions that contained incorrect product claims. One of those claims, the suit alleges, was that Herbalife's Lifeline provides "protection of the entire vascular system."
Endless chain schemes, which are outlawed by California law, involve making money as a commission for recruiting an endless number of new members for an organization rather than from profits on sales or services of that organization.
California prohibits such schemes because investors have little real hope of receiving promised commissions.
With Herbalife, "the person puts $4,000 in to become a supervisor, which entitles him to a 50% discount on the products," Elkins said. "Then he tries to get other people to become supervisors, and when they put in their $4,000 he gets $320, or 8%, of that . . . which encourages a sort of system in which people are just bringing in other supervisors."
"We are not asking the company to go out of business," Elkins added. "We are asking simply that they not make those representations."