Arizona readers may already know that pyramid schemes in which participants earn more from recruiting new sales persons than by selling products are illegal. This illegal company structure is to be distinguished from legal multi-level marketing in which all participants sell products, but are also compensated for other salespeople they recruit. The differentiation between these two business structures was the focus of business litigation filed against Herbalife Ltd. and its chief executive officer.
Reports indicate that even the company's CEO admitted that Herbalife's business practices could be questionable and invite legal challenges. A federal judge recently acknowledged that the company seems to operate somewhere between a pyramid scheme and a multi-level marketing business model. In fact, the company is no stranger to litigation as evidenced by a $15 million settlement approved by another federal judge back in May.
The Oklahoma Firefighters Pension and Retirement System alleged that Herbalife failed to disclose to shareholders the fact that it was unable to accurately track its retail sales in a lawsuit that was recently dismissed. The case was dismissed because the federal judge presiding over the case did not feel that fraud was proved. He did acknowledge, however, that the company's activities appeared to be irregular.
Investing in a company requires some faith that it is being forthcoming regarding its business practices and financial situation. Business litigation by shareholders often arises when it appears that faith was misplaced. In order to avoid allegations of fraud or other wrongdoing, Arizona companies need to be sure that their business practices do not fall into some gray area that could jeopardize their reputations and open them up to litigation. This often requires a thorough review of the laws, rules and regulations governing a particular industry.
Source: Reuters, "Judge dismisses 'pyramid scheme' lawsuit versus Herbalife, CEO", Jonathan Stempel, July 29, 2015