Herbalife Linked To Canadian Pyramid Scheme

Aug 19 2013 | 9:29am ET

Nutritional supplements company Herbalife may—as Pershing Square Capital Management's William Ackman alleges—or may not be a pyramid scheme. But it kept company with pyramid schemes, according to a new report.

A Financial Times investigation shows that Herbalife maintained its ties to Online Business Systems for almost a decade after a Canadian court had branded the company's predecessor a pyramid scheme.

A 2004 ruling found that Global Online Systems, which became OBS, was a criminal "scheme of pyramid selling." The company's main business was recruiting salespeople for Herbalife.

GOS was ordered to make changes to its practices and to notify its customers about its criminal conviction. But before the court ruled, the company encouraged customers to move their business to OBS, which is run by the daughter of one of GOS' founders. And OBS promised that "your Herbalife lineage remains the same regardless of the changes to your new marketing system."

Herbalife earlier this year moved to distance itself from OBS, the FT reports, restricting the use of leads and marketing materials by distributors. The company has since ended the sale of leads to or by distributors.

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