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Herbalife Agrees to Pay $850,000 Penalty (1986)

Stephen Barrett, M.D.

In 1986, Herbalife International, Inc., and its president Mark Hughes, agreed to pay $850,000 to settle charges by the California Attorney General that the company made false medical claims and engaged in an illegal pyramid-style marketing scheme. Herbalife has been selling its products through a multilevel marketing program in which the amount of money received by its distributors depended upon the amounts purchased by them and by those whom they recruit as distributors. The Attorney General's suit, filed in 1985, cited the following questionable claims made for Herbalife products:

The suit also charged:

The court order settling the case, dated October 14, 1986, forbids representations without reasonable basis that:

The court ordered strict limits on testimonials and said that the caffeine content of N.R.G. should be disclosed in the career book and on the product's label. It also ordered Herbalife to change its marketing program so that distributors can profit only from retail sales and are discouraged from maintaining (and possibly becoming stuck with) large product inventories in order to qualify for bonuses.

The $850,000 penalty-payable over a five-year period-was assessed to reimburse the state for costs, attorneys' fees, expenses of investigation, and other expenses. Mark Hughes was ordered to post a $400,000 security deposit to cover possible default by the company.

On December 3, 1986, The Wall Street Journal reported that Herbalife had merged with a Utah-based shell corporation and plans to raise $14 million with a public stock offering. The company netted $7.6 million on sales of $115.7 million during the first half of 1986 and $12.4 million on $462.9 million of sales in 1985.

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This article was revised on November 12, 1999.