Markey may have exaggerated claims about Herbalife
WASHINGTON — Some of the most compelling details cited by Senator Edward J. Markey in his recent demand for a federal investigation into the Herbalife supplement sales company came from two unnamed Massachusetts residents, including the allegation that one family had “reported that it lost $130,000, including its entire 401(k).”
The stories formed the emotional backbone of Markey’s assertion “that Herbalife’s business practices may be having a negative impact on my constituents” in a letter demanding a Federal Trade Commission investigation.
But Markey and his staff did little to check out the allegations, according to Globe interviews with the two constituents. As a result, it appears Markey provided an incomplete story of their circumstances and may have overstated the financial losses they suffered at the hands of Herbalife.
Michael Araujo, a 60-year-old Norton resident, said the $130,000 cited by Markey is an inflated number that includes rent payments and other living expenses he incurred after he was laid off in 2010 from his job as a vice president of contract management at a bank. He said the senator’s staff relied on information provided by his wife, who did not work on the business.
“I think she exaggerates sometimes,” said Araujo, who did not speak with anyone on Markey’s staff.
Herbalife announced this week that the FTC has launched an investigation into its sales practices, six weeks after Markey wrote his letter citing the plight of his constituents. Markey was the only US senator to seek action against Herbalife after an aggressive lobbying campaign by William A. Ackman, a hedge fund manager who has made a $1 billion stock-market bet that Herbalife will decline in value.
Ackman’s efforts to persuade regulators and members of Congress to investigate Herbalife were detailed by The New York Times early this week, including his efforts to identify potential victims of Herbalife sales practices and put them in touch with regulators. The Times reported that Nevada’s attorney general, Cortez Masto, declined requests from Ackman representatives and community groups to investigate the company because they could not produce any people who had been victimized.
Markey avoided a Globe reporter seeking an interview request for this article in a Capitol hallway — agreeing to sit down for an interview and then retreating to a back office.
His spokeswoman, Giselle Barry, would not say how Markey’s office found the alleged victims.
Barry said Araujo’s wife, Alice, gave Markey’s staff the $130,000 figure in numerous phone conversations. In a statement, Barry said Markey was not vouching for the merits of complaints about Herbalife.
“In conducting oversight, the senator always is mindful of the feelings of victims and whistle-blowers, and the courage necessary to come forward and shine light on potential wrongdoing by powerful corporations,” she said. “Consistent with his approach to all his oversight responsibilities, Senator Markey takes no position on the merits of the allegations in this case, which is why he asked the FTC and SEC to look into whether consumers were being treated unfairly.”
Barry would not say if constituents came to Markey’s office with complaints about Herbalife before his staff was lobbied by Ackman.
Araujo was an independent sales associate for Herbalife who ended his involvement with the company at the end of 2012. He said he believes Markey got his name from Ackman, the hedge fund manager who lobbied Markey to write the letters to federal regulators in late January.
Araujo said that before he heard from Markey, Ackman’s representatives asked him to appear in a documentary the company is making about Herbalife’s business practices, and he agreed. Representatives for Pershing Square Capital Management, Ackman’s hedge fund, confirmed that Araujo would be in the video, which is due for release soon.
Asked if Ackman gave Markey’s office contact information for Araujo, a Pershing spokesman did not respond directly but said the firm responds “to all requests from policy makers and regulators who asked for identified victims.”
Herbalife said its records show that Araujo only spent $7,000 on the company’s weight-loss and dietary supplements. Araujo did not dispute that figure. But he estimated that he spent an additional $80,000 or so on other Herbalife-related costs — including installing a business phone line, setting up a website, purchasing sales leads from other distributors, and traveling to eight Herbalife sales conferences, in New Jersey, Scottsdale, Ariz., and Las Vegas.
Alice Araujo, who had several conversations a few months ago with a Markey aide on behalf of her husband, said she wasn’t sure of the couple’s losses.
“I don’t know where people are getting $130,000 because I said about $80,000 — $60,000 to $80,000” she said in an interview Thursday.
In a subsequent interview on Friday, she said the figure is probably closer to $93,000, based on documents. She said she may have told Markey’s staff in January phone calls that it might have been somewhere between $100,000 and $130,000, including loss of their 401(k).
“That was a ballpark figure, pulled out of my head, without having any information in front of me,” Alice Araujo said.
“I was willing to sit down with anybody to show them all these papers and documents and to have my husband explain this system to them, so they would have a better idea of what was being said,” she said.
“No one’s had the time, really.”
Markey, a Massachusetts Democrat, never requested family bank statements or receipts, she said, nor did his staff check with Herbalife.
The second Markey constituent involved with Herbalife is a Walpole woman who did not wish to be identified by the Globe. In an interview, she said she lost about $300 on Herbalife before she quit the program. Markey’s letter said she was pressured to recruit family members as sales agents for Herbalife, but he made no mention of the small financial loss suffered by the woman.
The woman said in an interview that she joined Herbalife about five or six years ago. She said she had never heard from Ackman or his representative and does not know how Markey’s office got her name.
Markey said in his letters to regulators that the woman “was encouraged to stay in the program even after she wanted out.”
In the Globe interview, the woman said she never asked for a refund of her $300 from Herbalife, because “I just chalked it up as being stupid and gullible.”
A Herbalife spokesman, when contacted by the Globe this week, said the Araujo family spent the $7,000 on Herbalife products over a 14-month period and never sought a refund.
Araujo said the most damaging costs were the thousands of dollars he spent buying sales leads, for $128 per contact, and other products and services he said he was pressured to purchase through the company’s network of sales people. Many of these additional expenses are the basis for accusations that the company is a pyramid scheme, which Herbalife denies.
“Sales leads have never been sold by Herbalife, and the company makes it clear in all materials that no distributor is compelled to make any purchases or to incur any expenses that are not right for them as an individual,” Julian Cacchioli, the company’s vice president of communications, said in a prepared statement.
But the company acknowledged it only began banning third parties from selling sales leads in June 2013, months after Araujo left the business.
Markey’s staff held two meetings with Ackman or his lobbyists in the fall. Markey has insisted he did independent research into Herbalife’s practices rather than rely solely on Ackman’s research.
The strategy has paid off for Ackman. The FTC investigation was revealed Wednesday by Herbalife, causing an immediate dip of about 7 percent in the company’s stock price. After Markey sent initial letters in late January to federal regulators, Herbalife stock dropped 14 percent.