Confusion persists over Herbalife - FT.com Are you ready to lead the life that you deserve? Then you're ready for Herbalife. Herbalife nutritional supplements will not just make you healthier: by selling its shakes and vitamins you could earn some cash as well. Over 32 years that pitch has taken Herbalife into 80 countries, put its brand on the chest of David Beckham, and given it a market valuation of billions of dollars. IN Health Care It also means Herbalife forgoes advertising and product marketing in favour of a network of independent contractors who buy the company's products and sell them on, while recruiting, training and managing other distributors. "Direct selling gives the opportunity to sell a product without the constraint of getting it on a retail shelf and without the constraint of advertising budget," Des Walsh, president of Herbalife, told the Financial Times. We're relying on testimonials of those that sell the product. At Herbalife, independent distributors aspire to become consultants and eventually supervisors, recruiting teams of their own in the hope of earning a share of those extra revenues. Networking and sales are done through nutrition "clubs" that Herbalife distributors organise, through pitches on Craigslist or Facebook, and by old-fashioned word of mouth. "My second check," Alexis Carillo, a new Herbalife distributor, wrote on her Facebook page last month. Maybe not be a lot but [I] just started getting distributors. I am not doing anything for this but turning my clients into distributors so they get the 25 per cent discount. Yet the company is under attack from the short seller Bill Ackman, whose hedge fund Pershing Square has placed a $1bn bet that Herbalife is in fact an illegal pyramid scheme, forcing it to mount a defence of its business model in New York this week. At the heart of that argument is a simple question: where does the money come from? At Herbalife a supervisor can take a share of every sale made below them in the network. So the money flows upwards and what Herbalife calls its "President's Club" - the top 0.05 per cent of its distributors - earned a median income before expenses of $337,000 in 2011, according to the company. This limitless waterfall of payments is not inherently fraudulent. It doesn't matter if there are three, five, seven or more levels of commission paid out, said Joe Marianno, president of the Direct Selling Association. From the point of view of the legality or the legitimacy of the plan there is no such limitation. A pyramid scheme, much like a Ponzi scheme, ultimately collapses because the money must come from new recruits, and exponential growth of the sales network soon requires large parts of the population taking part to sustain it. In the 1970s the Federal Trade Commission attempted to prosecute Amway, the first multi-level marketing scheme to get national attention, as a pyramid scheme. However, after a four-year battle a court ruled in 1979 that Amway could trade under certain conditions. "In the end this ambiguous, fateful decision by one judge allowed Amway to continue operating," said Robert Fitzpatrick, author of False Profits, and head of a non-profit consumer education group, Pyramid Scheme Alert. Those conditions, which largely concentrate on ensuring that there are real customers buying the product and that the emphasis of marketing is on sales rather than recruitment, formed the regulatory basis for the industry to exist, and Herbalife was formed the next year. The FTC declined to comment on the allegations against Herbalife. It may be why Herbalife was keen to emphasise this week that it "has a robust and thriving customer base." The central charge of Mr Ackman is that "Herbalife is in the business of selling dreams, not weight-management products." In Mr Ackman's analysis, the "substantial majority" of Herbalife distributors lose money after taking into account expenses such as shipping fees and sales materials. It is their money flowing up to the top. To counter that, Herbalife said that almost a third of its sales volume in the US, where Herbalife makes a fifth of its $3.9bn in annual sales, is shipped directly to customers. The company also cited a survey by Lieberman Research that found 5 per cent of American adults had purchased a Herbalife product in the previous three months. Barclays analysts predicted in a note to clients that concern about the Herbalife business model would blow over, saying that its complexity, and sales base of poor consumers largely outside the US, sometimes makes "it difficult for analysts to understand the mindset of the typical distributor." Yet the waters are muddied because the company's distributors are hard to distinguish from customers wanting the wholesale rate. Mr Walsh said: "What we know is over 70 per cent become distributors to redeem the discount. Maybe we should come up with some other form of terminology.