Report: Herbalife Disciplines Distributors Who Boast of Treating Diseases

<p>The investigation by ABC News troubled Herbalife, whose business practices are under investigation by the FTC and other authorities.</p>

Herbalife Ltd., the marketer of nutritional and weight-loss products, told ABC News it disciplined nearly 600 independent distributors for making medical claims after the network investigated the company and revealed examples of distributors claiming that Herbalife's products could treat diseases ranging from diabetes to heart disease.

Herbalife and its distributors, which is one of the largest dietary supplement companies in the United States, are not authorized under federal law to make such disease claims unless its product has been preapproved as a drug.

An ABC reporter, wearing a hidden camera, found one particularly troubling case in which a distributor boasted that a woman with a brain tumor became symptom free after beginning to use Herbalife's products.

"She used to shake like this because she lost control of her motor skills to the tumor, and she said part of her cerebellum was deteriorated," ABC quoted the distributor. “If you see her now, she’s like one of us here… Whatever it is that the product did, it helped her a lot."

The network's findings troubled Herbalife, whose business practices are under investigation by the FTC and other authorities.

"I am appalled to hear you say this," Des Walsh, Herbalife's president, told ABC when confronted with the network's findings in an interview. "What is happening there is a complete and absolute violation of our rules."

In a press release responding to the report, Herbalife said the company "is explicit with its members that 'products are not intended to diagnose, treat, prevent or cure any disease or medical condition, and under no circumstances should there be any statements, advertising or implications to the contrary.'"

"Enforcement of the rules of conduct is a top priority at Herbalife, and we investigate and take all claims seriously," Herbalife added. "The Company has a compliance team of more than 300 people worldwide that monitors members' activity and enforce Herbalife's rules. Our compliance operation includes secret shoppers who investigate compliance on the ground, web-monitoring companies to track internet-based compliance and several customer feedback channels."

But ABC cited multiple examples in which Herbalife distributors made shocking claims, including the account of one woman who said she became pregnant after taking Herbalife.

"Before Herbalife, for my bad nutrition, my body developed a tumor, and for nine years I did not have my period," the woman said. "Then I met Herbalife, I start using the product, my menstruation problems go away, so I’m 40 years old, I have my first pregnancy."

Another distributor who was suffering from early congestive heart failure indicated Herbalife cured or mitigated her condition, according to the report.

Such statements likely amount to drug claims, running afoul of federal law and FDA regulations that require preapproval of products that make claims of being able to treat a disease.

"Drug claims must be approved prior to marketing based on data from well-controlled clinical trials, as required by act [Federal, Food, Drug & Cosmetic Act] provisions," said FDA spokesman Arthur Whitmore. "A New Drug Application must be submitted to the agency that includes data that demonstrates effectiveness and safety profile. A drug claim is one that claims it will treat, mitigate or prevent a disease. A firm making an unapproved drug claim is subject to regulatory action to remove it from the market, to protect public health."

ABC broke the story a day after reporting that an Herbalife whisteblower could receive millions of dollars under a pact with the hedge fund manager who bet $1 billion against the company and has called it a pyramid scheme.

Bill Ackman's Pershing Square Capital Management has already paid former Herbalife executive, Giovanni Bohorquez, $80,000 under the agreement, ABC News reported, citing the executive's lawyer.

In exchange for providing certain information to the media and other parties that was previously shared with the government, Pershing Square agreed to indemnify Bohorquez and hold him harmless from any fines, lawsuits and losses he incurred for disclosing information to government authorities, and if requested, to Pershing Square, the media and other third parties regarding Herbalife.

Pershing Square also agreed to reimburse the executive for lost wages and benefits, up to $250,000 per year with a 5-percent increase each year, for up to 10 years, according to terms of the June 21, 2013 confidential agreement that ABC made public.

“Giovanni could not afford to take the company on. We thought his story was important," Ackman told ABC. “Being a whistleblower is a very dangerous thing to do if you want to get a job."

In December, Bohorquez agreed to be interviewed on camera by ABC News. His lawyer, Stephen D. Alexander, later told ABC the indemnification clause was revealed during the interview, but he agreed that the terms were not disclosed.

"The payments are only one part of a calculated, coordinated and well-funded effort by Mr. Ackman and his agents to offer secret, undisclosed payments to individuals and organizations to bring false and misleading charges against Herbalife," Herbalife said in a statement, commenting on ABC News' report.

Ackman has acknowledged spending more than $20 million in a lobbying and media campaign against Herbalife, according to the report.

The 47-year-old Ackman, whose net worth is approximately $1.5 billion according to Forbes, has called Herbalife a pyramid scheme that exploits distributors and achieves few sales outside its vast network of distributors.

Herbalife, whose 2013 sales rose 18 percent to $4.8 billion, has vehemently denied the allegations.

Pershing Square Capital Management took a short position on Herbalife's stock, which allows its investors to profit if the stock price falls. According to an article in Bloomberg last month, Ackman said Pershing's investors would make about $2 billion if Herbalife disappeared.

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