Chairman’s Club Member (through June 2013)
Status in Herbalife: Chairman’s Club (former)
Business Methods: Lead Generation, Training Videos, Recruiting Materials
All statements in this report are made pursuant to Pershing Square’s disclaimer, available at http://factsaboutherbalife.com/disclaimer/.
For many years, Shawn Dahl was one of Herbalife’s most successful distributors and was held out by the company as a paragon of success. Dahl ran a lead generation business called Online Business Systems (“OBS”) that was responsible for recruiting huge numbers of new distributors, and they generated large profits for Herbalife as they sought to advance in the Herbalife scheme. It was not until Pershing Square focused attention on Dahl and his deceptive recruiting practices that Herbalife cracked down on him.
Although Dahl is no longer a member of the Herbalife Chairman’s Club, his story remains important for a number of reasons. First, Dahl inflicted a great deal of harm on unwitting consumers with Herbalife’s knowledge and support, and the company cannot escape responsibility for its participating in his misdeeds. Second, we believe that OBS is still selling leads to fledgling Herbalife distributors. Third, Dahl’s rise to the top of the Herbalife pyramid was not, as Herbalife used to pretend, the result of hard work selling Herbalife products to consumers. Instead, he inherited a lead generation business from his mother-in-law that had been outlawed by the Canadian government, and continued to run that business with nothing changed but the name.
I. The Canadian Prohibition Order against Global Online Systems
On November 23, 2004, senior Herbalife distributors Deborah Stoltz and Marilyn Thom, along with their lead generation business called Global Online Systems (“GOS”) were convicted in the Canadian Federal Court in Vancouver, British Columbia (the “Court”) of (1) operating a scheme of pyramid selling in violation of subsection 55.1(2) of the Canadian Competition Act, R.S.C. 1985, c. C-34 (the “Act”),1 and (2) failing to make required disclosures relating to compensation actually received by typical participants in the scheme, contrary to subsection 55(2) of the Act.
According to a November 18, 2004 Agreed Statement of Facts (the “SOF”),2 GOS was “a plan that promotes and supplies a proprietary system to sell and distribute Herbalife products. It is, in effect, a multi-level marketing plan within the larger Herbalife multi-level marketing plan.” (SOF ¶ 4.) The SOF explained that GOS “ma[de] the purchase of products a condition of participating in the plan” and, “through their parent company Herbalife Inc., offer[ed] compensation to participants who recruit new participants.” (SOF ¶ 11.) The SOF further explained that through various websites, promotional materials and purported business manuals, GOS made “representations relating to compensation under the plan, to prospective participants under the plan, without such representations constituting or including fair, reasonable and timely disclosure of information relating to compensation actually received or likely to be received by typical participants in the plan.” (SOF ¶¶ 8-10.)
Upon their convictions, the Court ordered GOS to pay a fine of $150,000, with Stoltz and Thom acting as guarantors. In addition, the Court issued the Prohibition Order pursuant to subsection 34(2) of the Act.3 That Prohibition Order applies to the corporate affiliates of GOS, Stoltz and Thom, and to each of their respective corporate successors, if any. The Prohibition Order, which continues in effect until November 23, 2014, includes the following key terms:
“Future non-involvement in pyramid scheme: each of GOS, Stoltz and Thom is prohibited from becoming involved in any business operation engaged in a scheme of pyramid selling, including but not limited to: (i) incorporating, owning, or operating, or being an officer, manager, employee, consultant or agent of any such business; (ii) receiving compensation from any such business; or (iii) writing, developing or marketing any websites, videos, audio tapes, distribution packages or any other promotional
Compliance with MLM plan disclosure requirements: each of GOS, Stoltz and Thom, and each and every of their corporate affiliates, directors, officers and employees must clearly state in all representations made to the public and/or prospective participants in any MLM plan operated by them the average income actually achieved by all participants operating in Canada.
Notification of existing participants in the scheme: The Prohibition Order also required GOS, Stoltz and Thom to notify existing distributors and participants of the terms of the Prohibition Order, and to include certain mandatory terms (set out in Exhibit B to the Prohibition Order) in Distribution Agreements requiring Herbalife distributors who are recruited by GOS to disclose typical participant compensation to prospective downline participants in the scheme.”
In short, Stoltz and Thom were ordered by the Court to halt their deceptive recruitment of new distributors into the Herbalife scheme, and to avoid involvement with any lead generation businesses similar to GOS in the future. But that is not what happened; they simply handed the keys to GOS over to Shawn Dahl, who continued to run it under a new name.
Dahl with Stoltz and Thom, available at http://saltydroid.info/herbalife-at-home-online/
II. The Transition of GOS to Online Business Systems
In the months leading up to the entry of the Prohibition Order, and while Stolz, Thom and the Canadian Competition Bureau were negotiating the terms of that Prohibition Order,4 Stoltz and Thom migrated their unlawful GOS business to OBS, a new lead generation business run by Shawn Dahl and his wife Nicole. Pershing Square believes that Stoltz and Thom are sisters, Nicole Dahl is Stolz’s daughter, and Shawn Dahl is Stoltz’s son-in-law. Pershing Square further believes that Stoltz recruited the Dahls into the Herbalife scheme,5 and the Dahls had been active participants in GOS before it was outlawed by the Canadian government.
Several GOS websites were converted into OBS websites in 2004. The websites remained nearly identical; only the name was changed:
www.humblesuccess.com, as copyrighted by GOS (Feb. 4, 2004); see http://web.archive.org/web/20040204022228/http://www.humblesuccess.com/
www.humblesuccess.com, as converted to OBS (June 13, 2004); see http://web.archive.org/web/20040613220101/http://www.humblesuccess.com/
www.4u4meletsdream.com, as copyrighted by GOS (Dec. 4, 2003); see http://web.archive.org/web/20031129163552/http://www.4u4meletsdream.com/
www.4u4meletsdream.com, as converted to OBS (Sept. 23, 2004); see http://web.archive.org/web/20040924001601/http://www.4u4meletsdream.com/
In addition, a series of questions and answers on the OBS website, www.online-business-systems.com/, in September 2004 told GOS distributors that OBS was not changing the content of any GOS materials and that GOS distributors were “welcome to distribute your old [GOS] materials until your supply is depleted.”6
The Q&A further told GOS distributors not to inform recruits that GOS had “changed systems” because “they don’t need to know and it makes no difference.”
The Q&A also reassured GOS distributors that “[y]our Herbalife lineage remains the same regardless of the changes.”
Importantly, in the fall of 2004, just weeks before entry of the Prohibition Order, the OBS website told GOS distributors that they “need[ed]” to change over to OBS “[r]ight away” and said, “you need to get set up the same day that Online Business System is launched.”
The transfer of the GOS business to OBS appears to have been willfully orchestrated by Stoltz, Thom and the Dahls just weeks before the conviction of GOS and the issuance of the Prohibition Order. The timing and circumstances of this transfer and the nature of OBS’s operations (as described in more detail below) all suggest that this was a deliberate attempt by Stoltz, and Thom, acting in concert with Shawn and Nicole Dahl, to evade the restrictions of the Prohibition Order by enabling the continuation of GOS’s unlawful marketing practices under the OBS name. It may also have enabled Stoltz and Thom to avoid the impact of the Prohibition Order by moving GOS participants to another business such that these participants did not have to be notified of GOS’s conviction and the terms of the Prohibition Order.
III. The Continued Involvement of Stoltz and Thom in OBS and Herbalife
In the wake of the transfer of GOS to OBS, Stoltz and Thom remained actively involved with the system in several ways. First, OBS continued to use GOS materials developed by Stoltz and Thom. In a particularly telling statement, the OBS Q&A referred to above assured distributors that OBS would continue to use GOS recruiting scripts, and even stated that the people who wrote those scripts—presumably Stoltz and Thom—were also “the leaders who developed the Online Business System.”
Second, OBS marketing and promotional materials continued to refer to the relationship between Stoltz and the Dahls, including the success of Stoltz and her husband in Herbalife and the inspirational role that Stoltz and her husband played in the Dahls’ decision to join Herbalife. 7
Third, Stoltz and Thom continued to participate in trainings for OBS members. For example, Stoltz and Thom were listed as hosts in 2009 for training calls on the www.theonlinesystem.com website, which is apparently the successor to the www.theonlinesystems.com website that was used by Stoltz Thom in connection with GOS.
Fourth, because Stoltz recruited Dahl and remained an active Herbalife distributor even after entry of the Prohibition Order, Dahl’s continued recruitment of Herbalife distributors in his downline drove royalties, bonuses and other recruiting rewards upstream to Stoltz.
In addition to their ongoing involvement with OBS, Stoltz and Thom continued to promote Herbalife itself. Indeed, Herbalife has continued to celebrate and reward their success.
2013 Herbalife promotional flyer, available at http://www.herbalifemail.com/flyers/2012-2013_MH_Recognition_usen.pdf8
In this photo from 2013’s North American Extravaganza in Las Vegas, Stoltz and Thom are seen with Chairman of the Herbalife Nutrition and Scientific Advisory Board, Dr. David Heber.
Photo copyright Herbalife.com
Additionally, Debbie Stoltz (now Lyles) describes herself as a ’20k President’s Team member” on her facebook page.
Herbalife also featured Stoltz and Thom in multiple Herbalife training sessions in 2009.
Herbalife flyer promoting 2009 training, available at http://herbalifemail.com/Flyers/2009_MegaSTS_Calgary_caen.pdf.9
Thus, it appears that Stoltz and Thom (1) continue to operate Herbalife distributorships, which Pershing Square believes function as pyramid schemes, and (2) continue to contribute to the operation of OBS, which Pershing Square also believes functions as a pyramid scheme, in violation of Paragraph 1(a) of the Prohibition Order. Stoltz and Thom also receive compensation from Herbalife, and Stoltz receives additional compensation from OBS by virtue of having Dahl in her downline, which appears to be in violation of Paragraph 1(b) of the Prohibition Order. And Stoltz and Thom (1) have created materials used in the promotion of businesses that Pershing Square believes are engaged in pyramid selling, and (2) continue to assist in the marketing and promotion of such businesses, which appear to be in violation of Paragraph 1(c) of the Prohibition Order. The Dahls, OBS and Herbalife have full knowledge of these ongoing apparent violations of the Prohibition Order, and continue to encourage and benefit from these violations.
IV. The Deceptive Conduct of Dahl and OBS
It is well-established that a multi-level marketing company (“MLM”) is considered a pyramid scheme if its compensation structure “tends to induce participants to focus on the recruitment side of the business at the expense of their retail marketing efforts,” Webster v. Omnitrition, 79 F.3d 776, 783 (9th Cir. 1996); see also Dr. Peter J. Vander Nat & William W. Keep, Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes, 21 J. Pub. Pol’y & Marketing 139, 144 (Spring 2002) (An MLM is a pyramid scheme where its “participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers.”).
Dahl plainly tells OBS members that the only way to earn substantial income with Herbalife and OBS is to focus on recruiting new distributors into the scheme. In Dahl’s own words:
- “If you want lifestyle income, you recruit.”10
- “If you want residual income, ongoing royalty income, you’re going to be doing more recruiting.”11
- “I wanted to live from a royalty income and not from a salary.”12
In addition, the “10K+ Plan” and “20K+ Plan” promoted by OBS involve sending out 25-40 Decision Packs per month to potential distributors and recruiting 6-12 new distributors, plus 2-4 new Supervisors. The plans refer to retailing product to only 5 customers per month, regardless of the plan size.13 Further, nowhere in the Decision Pack,14 on the OBS website referred to in the Decision Pack,15 or on the video included in the Decision Pack,16 does OBS describe or disclose the products that distributors are to sell under the plan. The plans are about recruiting new distributors, not about selling Herbalife products at retail.
OBS has continued to make misleading representations to prospective participants in the scheme about the compensation they can expect to receive as Herbalife distributors and members of OBS. As an initial matter, the OBS Decision Pack nowhere discloses any figures showing the typical or average compensation of OBS members, nor is there even a direction as to where such information may be found. In fine print, there is a warning that the earnings of the individuals are not necessarily representative of the income that can or will be earned through participation in the “opportunity.” It is well-established that boilerplate disclaimers to not immunize a potential defendant for making misleading income claims.17
Nevertheless, the OBS Decision Pack is replete with highly misleading income testimonials, including from Shawn Dahl himself:
Similarly, OBS videos, many of which feature the Dahls, show participants driving Mercedes Benz cars and depict mansions, vacation cottages and the pursuit of leisure activities like golf, implying that this luxurious lifestyle is readily available to Herbalife distributors of involved with OBS.18 Videos referring to the relationship between the Dahls and Stoltz also state that Nicole Dahl’s parents were making $30,000 a month at the time the Dahls became involved in the business.19 In another video, Shawn Dahl refers to his rapid rise within the Herbalife pyramid, reaching the President’s Team within 18 months.20 He does not mention that his mother-in-law essentially gave him a lead generation business. In one video, Shawn Dahl estimates that his organization has done “probably over a $100 million, well in excess of that” in the Herbalife business.21
OBS tells new Herbalife distributors that success is easy and virtually guaranteed. For example, one of the testimonials in the Decision Packs reads:
Similarly, an OBS promotional video features Dahl enjoying a lavish lifestyle and saying:
“Most people who start with us actually know very little about business, advertising or the Internet. And that’s OK, so long as you possess the desire and the drive to make a change. No matter what your ability, you can achieve success in this business.”22
In fact, according to the Terms & Conditions of Service for the use of OBS materials, as of September 2012, the retention rate for distributors who utilized OBS materials and became an Herbalife Supervisor was only 14% per year.23 One would never know from the rosy statements in OBS recruiting materials that 86% of participants who make the investment to qualify as a Supervisor fail out each year.
In addition, OBS and its promotional materials dramatically understate the cost of pursuing the Herbalife business opportunity through OBS. Those materials suggest that the cost is “less than $500.”
In fact, the cost of pursuing the Herbalife business opportunity can be very high, as reflected in an online blog post by an OBS victim:
“So, a Merchant Account will cost you $75 to accept Visa and $35 to accept MasterCard… MONTHLY, whether you use it or not. Oh! And, if you sign a contract covering a term like, say, 3 years (that was THE only option available when I signed up!)… and you decide to quit for ANY reason BEFORE the 3 years has passed… well… you pay a penalty cost, determined by “the Merchant Account” at the time the account is terminated. Believe me, it WAS a hefty charge for me! So you can add another $400 to the total shown in the screen print above, because that’s what it cost me AFTER this screen print was taken and published here.”
OBS also trains its members how to deceive potential recruits, including by selling recruiting scripts that train OBS members to understate costs, dodge questions, pressure potential recruits to sign up right away, and assure potential recruits that success is virtually guaranteed.
OBS Recruiting Script, available at http://saltydroid.info/wp-content/uploads/2013/04/Online-Business-Systems-Sales-Call-Script.pdf
V. Herbalife’s History of Celebrating and Promoting Dahl and OBS
For many years, Herbalife promoted Dahl as a shining example of success. Indeed, when Dahl qualified for the Chairman’s Club in 2008, Herbalife featured him on the cover of (and profiled him and his family in) Herbalife Today, a magazine published by Herbalife.
Herbalife also featured Dahl as a speaker at Herbalife-sponsored events, including as a headliner on Herbalife’s Chairman’s Club tour in November 2012, which promotes the Herbalife business opportunity.
Herbalife flyer for Chairman’s Club Tour, available at http://www.dallassts.com/bioInfo.cfm?idx=98&cls=GuestSpeaker
In a video featuring Herbalife CEO Michael Johnson appearing on stage with Shawn Dahl, Johnson touts Dahl as an example of the “wonderful culture” of Herbalife. “And some of those people have reached Chairman’s Club, and this young man, out of Canada, with his beautiful family and his wife and he’s got family that’s been involved with Herbalife which is another part of this wonderful culture of our company—generations of Herbalife distributors. He’s built a beautiful business. . . .” In light of such interactions, there can be no doubt that Herbalife facilitated Dahl’s deceptive recruiting practices by lending him an aura of respectability.
In addition, Herbalife promoted and supported OBS itself. Indeed, Herbalife CEO Michael Johnson and Herbalife President Des Walsh participated in an OBS recruiting call. A flyer advertising the call told OBS members that Johnson “personally wants to congratulate” distributors who had reached the President’s Team by participating in the OBS system.
OBS flyer, available at http://obstraining.s3.amazonaws.com/OBS/broadcasts/Bottai-Powell-Pres/Bottai-Powell-Pres-1.html
During the OBS call, Johnson promoted Dahl and his lead generation business and said that the Herbalife business opportunity was “changing people’s lives.”
Dahl: “Maybe you’ve just seen that President’s Team position when you were flipping through your career manual, and you saw those steps going up the ladder. This position is attainable for every single one of you guys. You just put your eye on that mark. Incomes reaching $20,000 a month. It’s crazy what’s going on right now. . . . It’s my great, great privilege to introduce our Herbalife Chairman and CEO, Michael O. Johnson. Take it away.”
Johnson: “Hey Shawn, thank you, and welcome everybody. And Shawn, you know I heard something about you this week—that someone called you an adrenaline junkie. . . . What’s taking place in our company right now is evidenced by a call like this with—Shawn, you said a thousand people are on this call? That’s pretty amazing.”
Dahl: “I’m gonna guess, yep.”
Johnson: “Obviously you wouldn’t be on this call tonight if we didn’t have a powerful, powerful business opportunity—one that is changing people’s lives.”
Of course, as Herbalife was promoting Dahl and OBS, Herbalife must have known about the 2004 conviction of Stoltz, Thom and GOS, as well as the subsequent transition of GOS to OBS. That is particularly true in light of the requirement in Herbalife’s Sales & Marketing Plan that any sellers of leads or business tools must register with Herbalife and provide a letter from counsel describing, among other things, the “content, method of operation, advertising and promotion and terms of sale and use” of the relevant Business Method.” Nevertheless, Herbalife celebrated and promoted Dahl and OBS for many years. As Dahl has noted, he and his organization have generated approximately $100 million in revenue for Herbalife.
VI. Herbalife’s Efforts to Distance Itself from Dahl, and Dahl’s Departure
On December 20, 2012, Pershing Square delivered its presentation called “Who wants to be a Millionaire?,” during which we showed a slide from an OBS presentation telling distributors to focus on recruiting in order to earn “lifestyle money” and a series of deceptive income testimonials from the OBS Decision Pack. Several weeks later, on February 14, 2012, Herbalife issued a notice to its distributors announcing that OBS was no longer “registered” to provide leads or advertising.
February 14, 2013 Notice, available at http://herbalifepyramidscheme.
The next day, February 15, Herbalife issued a similar notice announcing that OBS was no longer “registered for purchase or use in Canada.”
Around the same time, Herbalife’s Chairman’s Club website, http://www.herbalife.com/chairmansclub, was taken down, supposedly for “scheduled maintenance.” When the website came back up in late April, Shawn Dahl (along with Doran Andry) no longer appeared as a member of the Chairman’s Club. On the morning of April 30, the website went down again. That afternoon, Herbalife held an earnings conference call, and Gerald Price of Height Analytics asked about the “issues with your Chairman’s Club website.” Herbalife President Des Walsh assured investors that “we have no changes in our Chairman’s Club members.”
Herbalife confirmed to the New York Post in a story published on June 22, 2013 that Dahl had left the company.31 The Chairman’s Club website remains down, although after nine months it would be absurd to suggest that is the result of routine maintenance.
* * *
Since 2004, when Stoltz and Thom gave Dahl the keys to their unlawful recruiting business, Dahl has recruited many thousands of consumers into the Herbalife scheme with false promises of easy money and financial freedom. As those consumers try (in vain) to climb the Herbalife marketing plan, they generate huge profits for Herbalife, OBS and Dahl himself. With full knowledge of Dahl’s deceptive recruiting practices, Herbalife facilitated his business and celebrated him as a paragon of success, lending him an aura of respectability and contributing to the false impression that ordinary distributors can achieve vast riches by following his system. When Pershing Square focused attention on Dahl and OBS, Herbalife moved quickly to distance itself from him, but Herbalife cannot escape liability for participating in Dahl’s deceptive and destructive conduct for nearly a decade.
 The Act defines a “scheme of pyramid selling” as “a multi-level marketing plan whereby (a) a participant in the plan gives consideration for the right to receive compensation by reason of the recruitment into the plan of another participant in the plan who gives consideration for the same right; (b) a participant in the plan gives consideration, as a condition of participating in the plan, for a specified amount of the product, other than a specified amount of the product that is bought at the seller’s cost price for the purpose only of facilitating sales; (c) a person knowingly supplies the product to a participant in the plan in an amount that is commercially unreasonable; or (d) a participant in the plan who is supplied with the product (i) does not have a buy-back guarantee that is exercisable on reasonable commercial terms or a right to return the product in saleable condition on reasonable commercial terms, or (ii) is not informed of the existence of the guarantee or right and the manner in which it can be exercised.” R.S.C. 1985, c. C-34 § 55.1(1).
 A copy of the SOF is available at SOF.
 A copy of the Prohibition Order is available at Prohibition Order.
 At a November 23, 2004 hearing, counsel for Stoltz, Thom and GOS indicated that the Prohibition Order had been in negotiation for almost a year. A copy of the hearing transcript is available at Nov 23, 2004 Hr’g Tr, see page 5.
 In a video available here, Dahl confirmed that “my upline was my mother-in-law.”
 Similar flyers are available at http://herbalifemail.com/Flyers/2012_5Bill_MarkHughes_Qualifiers_usen.pdf; http://herbalifemail.com/flyers/2012_PTSummit_Qualifiers_usen.pdf; http://herbalifemail.com/flyers/2012_PTSummit_Qualifiers_usen.pdf; and http://www.herbalifemail.com/Flyers/2009_AWT_AWT_en.pdf.
 A similar flyer for an event in Edmonton is available at http://herbalifemail.com/Flyers/2009_LDW_Edmonton_caen.pdf
 Video (November 22, 2010).
 See the video available at http://obs.enterthemeeting.com/e/mtg?BF4T45.
 Slide 77.
 Slide 212.
 A copy of the February 15 Notice is available at Feb 15 Notice.
 Michelle Celarier, Ace shakes h’life, New York Post, June 22, 2013, available at http://www.nypost.com/p/news/business/ace_shakes_life_SWAxcl0OcWNN5S2XslS6MP.