Robert FitzPatrick explains the latest tragicomic 'Herbalife (HLF)' Class Action 'Settlement'

Robert FitzPatrick

Herbalife Class Action "Settlement" Reveals how the Court Could be Used to Protect Scams

In the last two years, the most publicized information that exposes the deception and harm of "multi-level marketing" (MLM) has not come from victim reports, federal court rulings, media investigations, lawsuits, or petitions from consumer protection groups, though there have been more than enough of these to prove massive fraud.  Instead, international attention has been drawn to the extraordinary website of hedge fund, Pershing Capital, Facts About Herbalife.  

Pershing invested one-billion dollars in a "short" position on Herbalife stock that becomes profitable only if the Herbalife stock drops in value. The investment largely relies on the same basic facts about Herbalife deception and harm, with much added detail, that consumers have been citing for years as they ask for law enforcement against "endless chain" scams, i.e., "multi-level marketing." Herbalife's "facts" mirror those of hundreds of others, all of them falsely promising "unlimited income."

The great irony is that, lacking protection from law enforcement and with no relevant consumer group with adequate resources to confront Herbalife or other large MLMs, the interests of consumers are now being championed by a Wall Street hedge fund! The limits and flaws in relying upon investment companies - in the absence of proper law enforcement and regulation - are obvious. Yet, such is the strange state of affairs in consumer protection concerning these Main Street frauds.

The Class Action Lawsuit as Substitute for Law Enforcement

There is, however, one other non-government recourse that consumers have turned to, in lieu of effective law enforcement and consumer protection. This is the class action lawsuit. Such suits have been successfully brought by consumers against Herbalife, Nu Skin, and Amway, and other large MLM scams. All of these class action suits against MLMs make similar charges of pyramid fraud, mail fraud, and RICO (racketeering), among others. But, in the end, the class action suit approach is not much more practical than expecting Wall Street to defend and protect consumers. Most class action suits are settled with little real change resulting. Often, the attorneys win big while consumers are left largely where they were before, though the lawsuits themselves do serve as excellent factual records amidst a sea of falsehoods. 

The weakness and potential misuse of the class action approach is on

When Class Action Goes Awry

gross display in the recently proposed settlement between one law firm and Herbalife. The proposed settlement shows how the consumer class action law suit can be manipulated to protect the scam and harm the victims. The Herbalife suit,  Dana Bostick, et al., Plaintiffs, vs. Herbalife International of  America , Inc., et al., Defendants, Case No. 2:13-CV-02488-BRO-RZ, duly listed the terrible and well established charges against Herbalife, involving business opportunity deception, endless chain scam, overcharging, etc. The suit states plainly, "Herbalife Ltd. is the architect, implementer, and operator of a global enterprise that is and has been an illegal and fraudulent pyramid scheme, the "Herbalife Pyramid."

The suit appeared to be based entirely on the facts and charges detailed by Pershing Capital against Herbalife. Indeed the suit was filed, without Pershing's knowledge, right after the public presentation of Pershing's fraud thesis against Herbalife backed by a 300-slide presentation of the facts.

 But, after repeating these powerful charges, the attorneys who brought the suit soon huddled with Herbalife and agreed to accept a tiny settlement amount for victims to be paid by Herbalife and to walk away from the main accusations of deception and pyramid fraud. They agreed to pretend Herbalife made substantive changes and that an absurdly small dollar restitution figure - out of which the lawyers themselves would receive millions in pay from Herbalife - represented justice for the victims. 

But the settlement goes much further than just a meaningless, insignificant financial settlement cost for Herbalife. It also would impose onerous restrictions on all the members of the class, the victims, preventing them from getting actual restitution and restricting their further rights for justice.  It puts a seal of approval on Herbalife's current operations, after the suit had accused Herbalife of heinous wrongdoing, with Herbalife making no real change at all and free to continue the scam. This settlement appears to be custom-designed to help not the victims but Herbalife, which is under federal investigation for fraud by the FTC, SEC and FBI. 

As the apparent result of this absurd agreement, few victims have bothered even to file claims under the suit - 0.5% of the total number of potential victims. Yet, potentially all members of the class, estimated at 1.5 million households, will be bound and restricted by the terms, if it is approved by the court.

Phony "Settlement" Challenged

But a challenge from some victims has now been raised to this absurd, unfair and highly suspect "settlement" quietly reached between the law firm and Herbalife that benefits Herbalife and the lawyers, while leaving the victims worse off than before. The challenge is represented from the one attorney with the strongest record and the most experience in the country of challenging multi-level marketing scams in court and who has spoken out publicly about all disguised pyramid schemes known as "multi-level marketing." Douglas Brooks, a Boston-area based attorney has filed a fully documented challenge to the Herbalife settlement. His challenge is made on behalf of a group of victims of Herbalife, who would be included in the "class" and subject to all the restrictions and injustice imposed upon them by this "settlement."

The objection filed by attorney Brooks on behalf of Herbalife victims is bolstered by a friend of the court brief filed by the non-profit, Truth in Advertising (TINA), which asserted that the settlement will result in a windfall of $5.25 million to class action lawyer's and likely leaves most class members with less than $20 each in recovery. Douglas Brooks estimates that a more realistic restitution would be well over a billion dollars, conservatively.

The facts and arguments presented in Brooks' filing should be required reading for all regulators, attorney, journalists and consumers who are interested in the epidemic of MLM frauds. A hearing will be held in May where the bogus "settlement" and  attorney Brooks' challenge to it will be heard.

View the Official Objection to the Settlement from Douglas Brooks'  and his Declaration.

Robert L. FitzPatrick, Pres. 

PYRAMID SCHEME ALERT

704-334-2047

rfitzpatrick@pyramidschemealert.org