As Herbalife expands lobbying efforts, will Schneiderman stand up for New York Latinos ? [UPDATED]

By LOUIS FLORES

During Thursday night’s debate between the Democratic and Republican party candidates for state attorney general, the Republican candidate, John Cahill, repeatedly blasted the incumbent, Attorney General Eric Schneiderman (D-NY), over his office’s relationship to one of the most powerful lobbyists in New York state, Jennifer Cunningham.

Ms. Cunningham is Attorney General Schneiderman’s ex-wife.

One of the most powerful lobbyists in New York is Jennifer Cunningham, Attorney General Eric Schneiderman's ex-wife.  Her consulting firm has been retained by Herbalife.  Seen here, Ms. Cunningham was interviewed by CUNY TV 75 in 2011.  Source :  CUNY TV 75/YouTube Screen Shot 

One of the most powerful lobbyists in New York is Jennifer Cunningham, Attorney General Eric Schneiderman's ex-wife.  Her consulting firm has been retained by Herbalife.  Seen here, Ms. Cunningham was interviewed by CUNY TV 75 in 2011.  Source :  CUNY TV 75/YouTube Screen Shot 

Ms. Cunningham’s firm, SKD Knickerbocker, has been retained by Herbalife Ltd., at the same time when Ms. Cunningham advises her ex-husband in his capacity as New York State Attorney General at the same time when the state’s Attorney General’s Office is conducting a probe of Herbalife.  Herbalife has denied each of that SKD Knickerbocker was retained to lobby Attorney General Schneiderman and that Ms. Cunningham will work on its account, according to a report in The New York Post, but Attorney General Schneiderman's decision to refuse to release all e-mail communications between his office and Ms. Cunningham enshrouds their relationship in secrecy.  Representatives from Herbalife would not publicly state to Progress Queens the nature of the work for which SKD Knickerbocker was getting paid.  To government reform activists, the optics of the triangulation are worrisome.  

Incorporated in the Cayman Islands, but headquartered in Los Angeles, Herbalife is a publicly-traded company that generated sales of over $4.8 billion last year, according to the firm’s latest annual report.  It’s how it makes its money that placed Herbalife and Ms. Cunningham in Thursday night’s debate.

A montage of bad headlines for Herbalife.  Source :  ABC News/YouTube Screen Shot

A montage of bad headlines for Herbalife.  Source :  ABC News/YouTube Screen Shot

ABC News and the journalist and researcher Christine Richard have conducted investigations of Herbalife, with ABC News going undercover with hidden cameras this year into one Herbalife nutrition club in Corona, Queens, and Ms. Richard attending various nutrition clubs, also in Corona, but with hers stretching as far back 2011.  Together, they raise troubling questions about how Herbalife recruits its huge sales force to peddle the company’s nutrition products.

Representatives from Herbalife promised to respond to a request from Progress Queens for an interview, but no response was ever made.

Herbalife is now under investigation by the Federal Trade Commission, or FTC, and possibly by various states’ attorneys general.  To counter these investigations, Herbalife has retained a powerful law firm, Dickstein Shapiro.  The role of Dickstein Shapiro in lobbying states’ attorneys general against criminal investigations of their firm’s clients, including Herbalife, was the subject of a shocking report published by The New York Times.  In the report, the Dickstein Shapiro firm was identified amongst lobbyists, which were using "campaign contributions, personal appeals at lavish corporate-sponsored conferences and other means to push" attorneys general to "drop investigations, change policies, negotiate favorable settlements or pressure federal regulators."  These allegations go to the heart of what government reform activists have been complaining about, namely, that prosecutors may not be pursuing corruption cases, because, somehow, prosecutors themselves may have become corrupt.

New York State Attorney General Eric Schneiderman appeared in a campaign commercial touting his commitment to fight corruption.  Law enforcement experts on pyramid schemes cannot predict whether Attorney General Schneiderman will vigorously investigate Herbalife.  Source :  Eric Schneiderman/YouTube Screen Shot

New York State Attorney General Eric Schneiderman appeared in a campaign commercial touting his commitment to fight corruption.  Law enforcement experts on pyramid schemes cannot predict whether Attorney General Schneiderman will vigorously investigate Herbalife.  Source :  Eric Schneiderman/YouTube Screen Shot

The Office of the Attorney General of New York is in a unique position to vigorously investigate Herbalife, because of the office’s financial resources and the size of the office’s staff, to undertake the kind of investigation required in a case like Herbalife’s.

Mr. Cahill, the Republican candidate for Attorney General, at Thursday night’s debate, raised the issue of Herbalife.  Without mentioning Ms. Cunningham by name or distinguishing her from her consulting firm, Mr. Cahill noted that Herbalife had retained the same political consultant that advises Attorney General Schneiderman in his reelection campaign, as well in his capacity as attorney general.  “We are compromising that office, because we are putting politics before integrity,” Mr. Cahill said during the debate.

In addition to the problem of creating the appearance of government corruption, the case of Herbalife also exposes the devastating impact on the Hispanic community that multi-level marketing, or MLM, companies, such as Herbalife, can have.  Brent Wilkes is the national executive director of the League of United Latin American Citizens, or LULAC, an influential nonprofit that fights discrimination against Latinos.  He and other Latino leaders have criticized Herbalife for “predatory business practices” that they say exploit the Latino community.  

“There are 550,000 Herbalife distributors in the United States.  Somewhere between 60 to 83 percent of them are Latino,” Mr. Wilkes wrote in an essay published in The Huffington Post, adding that, “300,000 to 400,000 Latino distributors will quit this year alone only to be replaced by another 300,000 to 400,000 new Latino distributors. If left unchecked, Herbalife could recruit, defraud and dispose of as many as 4 million Latino distributors over the next 10 years. To more and more Latino leaders and advocates, this reeks of predatory ethnic targeting of epic proportions.”

Locally, social service organizations have made efforts to warn the Latino community in Queens about Herbalife’s business practices.  Make the Road New York, a local Latino advocacy group, has produced a documentary-style video in Spanish to warn Latinos in Queens about problems had by some people with past associations with Herbalife.

The video has been viewed over 10,000 times on YouTube.

In the video, people with experiences with Herbalife recount unrealistic promises about Herbalife :  that the company’s products could cure ailments and that selling the company’s products could make sales workers, known as distributors, a lot of money.  If distributors recruited other distributors, those on top would become supervisors, and supervisors would be able to make money from their recruits.  The people interviewed in Make the Road New York’s video said they never profited from their sales work on behalf of Herbalife.  “Angela,” one woman in the video, said that she had known people to invest thousands of dollars in Herbalife products, but all that money was lost.  One of Angela’s friends, who invested $5,000 in Herbalife products, never saw a return of her investment, Angela said.

A common complaint is that Herbalife sells the lie that new distributors and supervisors can make a lot of money by recruiting still yet others to become newer distributors and supervisors, revealing the design of a multi-level marketing arrangement that is adopted by some illegal pyramid schemes.  To help Latinos seek justice, Make the Road New York played a vital role.  “We facilitated interviews with the FTC, when they came to New York to interview victims of Herbalife,” said Hilary Klein of Make the Road New York.

Ms. Klein added that it was a challenge to draw out victims of Herbalife’s to speak about the company's sales tactics, because, she said, Herbalife ingrains in its sales force a sense of shame for those who are unable to advance in Herbalife.  “They were not successful people.  That is why it did not work out,” Ms. Klein said of the message she understood that Herbalife gave its victims.

Trying to be a success at selling Herbalife products is a costly pursuit, one that keeps getting costly the more success a distributor or supervisor wants to achieve.  Ms. Richard, the journalist and researcher, estimated that the first step to moving up in Herbalife is to “consume or cause other people to consume” about 632 Herbalife shakes “over a three-month period.”  Ms. Richard calls these kinds of quotas "part of a nefarious plan" that compels Herbalife distributors to keep luring more recruits in a "fraudulently promoted business."  

In her research work, Ms. Richard, located 26 Herbalife nutrition clubs “within a few blocks of the Junction Boulevard subway stop” in Corona, according to a report published online last month.  Undercover investigators for ABC News were able to buy their way to become supervisors by paying about $3,900, according to the ABC News report.  The high costs of the alleged deception being bourne by New York’s Latino community in Queens, who are losing thousands of dollars of their investments, is taking a backseat to the focus on the machinations by Herbalife as it struggles to prevent investigations from really ramping up.

In a move that shocked the conscious of pyramid scheme watchdogs -- and as if to cement the impression of regulatory capture -- Herbalife hired Pamela Jones Harbour, a former commissioner of the FTC.  The retainer was spun so as to fluff Herbalife’s compliance department at the same time when Herbalife is under investigation by the FTC, but critics of Herbalife see the move as an attempt to use Ms. Jones Harbour to influence her former fellow commissioners in Herbalife’s favour.  Not too dissimilar, some say, from how Herbalife retained the consulting firm of Attorney General Schneiderman’s ex-wife.  The optics give the impression that Herbalife is trying to use people closest to regulators against the regulators.

Herbalife has a pattern of thwarting criminal investigations into the business practices and the design of its operation by hiring high profile individuals with close ties to regulators.  Besides having retained the powerful consulting firm, SKD Knickerbocker, where Attorney General Schneiderman's ex-wife is a key consultant, Herbalife has deployed Dickstein Shapiro to successfully lobby Florida State Attorney General Pam Bondi to forgo an investigation into Herbalife.  Attorney General Bondi has accepted nearly $25,000 worth of travel and entertainment from a partisan states’ attorneys general organization funded by corporate donors under investigation by states’ attorneys general.  Dickstein Shapiro also helped to further Attorney General Bondi's political ambitions, according to The New York Times report.

After The New York Times dropped the names of many states’ attorneys general, who appeared to be indirectly benefiting financially from the partisan states’ attorney general organizations, it looked odd that Attorney General Schneiderman would be omitted, given the fact that he is a member of one of the partisan organizations, which has received contributions from Herbalife.  Attorney General Schneiderman is currently investigating Herbalife based on complaints of fraud and allegations that the company operates as a pyramid scheme.  During Thursday night’s election debate, Mr. Schneiderman said the conduct exposed in the report published by The New York Times (which included questionable conduct by lobbyists working for Herbalife) was not appropriate, saying that he thought the conduct “should be cleaned up,” or else he would step down from the partisan group.

Social service organizations see Herbalife as one of many businesses that exploit low-income, Latino communities, like employment agencies that charge prospects a fee in exchange for trying to find work for prospects, but the statistics on Herbalife are grand, as Mr. Wilkes pointed out.  All this brings up the issue of enforcement against businesses that engage in unfair and fraudulent practices, not just against the Latino community, but also against the general public. 

Progress Queens contacted Attorney General Schneiderman’s office, but a press official declined to make the attorney general available for an interview.

Watchdogs of pyramid scheme blame the lack of an outright ban against multi-level marketing structures that are presumed to be legal, even though such structures can be exploited by illegal pyramid schemes over long periods, robbing people of money and cheating them out of a real career. 

Wall Street hedge fund titan William Ackman, head of Pershing Square Capital Management.  Mr. Ackman has placed a $1 billion short bet on Herbalife's publicly-traded shares.  Mr. Ackman is leading the charge to expose fraud and questionable business practices at Herbalife.  Source :  ABC News/YouTube Screen Shot

Wall Street hedge fund titan William Ackman, head of Pershing Square Capital Management.  Mr. Ackman has placed a $1 billion short bet on Herbalife's publicly-traded shares.  Mr. Ackman is leading the charge to expose fraud and questionable business practices at Herbalife.  Source :  ABC News/YouTube Screen Shot

Complicating criticism of Herbalife is that a hedge fund billionaire has made a gargantuan short bet on Herbalife’s publicly-traded shares, to the tune of $1 billion.  Some have found fault with the short bet placed by the hedge fund manager Pershing Square Capital Management, because, as one of the loudest critics of Herbalife, Pershing Square is obviously motivated to make a spectacular profit if Herbalife can collapses under a tsunami of labor, financial, and regulatory scandals.  However, because of lax federal and state enforcement against pyramid schemes, in a weird twist of fate, a founder of Pershing Square, William Ackman, is actually leading a quasi-crusade for social, legal, and economic justice for exploited Latinos by challenging Herbalife -- something that federal and state regulators are loathe or too slow to do. 

Defenders of Herbalife point to Pershing Square’s huge financial motivation at stake to denounce Mr. Ackman’s efforts.  To counter that portrayal and to defend his investment management company's security position, Mr. Ackman has funded groups to collect and make public information about Herbalife’s suspect business practices.  Some local organizations in the New York area have received payments connected to Pershing Square, including the Hispanic Federation and Make the Road New York, according to still yet another report published by The New York Times.  Pershing Square is also a client of the research company headed by the journalist and researcher, Ms. Richard.

The Hispanic Federation has close political ties to City Council Speaker Melissa Mark-Viverito by way of her own political consultant, and Make the Road New York is the social services organization that produced the Spanish YouTube video, nobly warning the public about Herbalife’s unrealistic product and income claims.

Des Walsh is President of Herbalife.  Representatives of Herbalife promised to respond to a request by Progress Queens for an interview, but no response was ever made.  Source :  ABC News/YouTube Screen Shot 

Des Walsh is President of Herbalife.  Representatives of Herbalife promised to respond to a request by Progress Queens for an interview, but no response was ever made.  Source :  ABC News/YouTube Screen Shot 

In the ABC News exposé of Herbalife, the broadcast news network found fault with a former Herbalife executive, turned whistleblower, Giovanni Bohorquez, over an agreement between the whistleblower and Pershing Square that appeared to protected the whistleblower from the economic consequences of retaliation against him, in case he lost his new job over his criticisms of Herbalife.  That protection agreement was not disclosed upfront to ABC News, angering journalists, who then used the existence of the protection agreement to question the whistleblower’s integrity.

In the past, Pershing Square Capital Management has employed the powerful public relations firm headed by Howard Rubenstein, which manages media for some of the biggest business interests in New York City.  Lost in the power play between Herbalife’s lobbyists and Pershing Square’s monied efforts to expose Herbalife is the broken political system that gives rise to companies like Herbalife, in the first place.

Robert FitzPatrick is perhaps the nation’s leading watchdog of pyramid schemes.  In 2010, he authored a memorandum to President Barack Obama and select members of Congress, asking them to take action to improve federal oversight over multi-level marketing companies.  ”The prevailing media and government message is the myth that” multi-level marking organizations are “a viable, legal and perhaps, as the promoters claim, the consumer’s best chance for income in troubled economic times,” noting the danger of consumer exploitation, before cautioning that, “Regulators routinely ignore complaints.” 

One-at-a-time, after-the-fact investigations are an enforcement nightmare.

A footnote in that passage from the memorandum underscored that, “In the past, the FTC utilized class action lawsuits to support prosecutions and as reasonable cause to open investigations.  Today, though numerous class action suits have been filed against major MLMs such as Amway, Herbalife, Usana, Pre-Paid Legal, and others – all making the same charges of pyramid fraud – the FTC has not even opened investigations.”  Mr. FitzPatrick’s memorandum has become a highly-cited document by the press in articles about pyramid schemes.  Three years after the memorandum was written, the FTC finally opened an investigation into Herbalife.

One explanation for why the FTC dragged its feet for so long in respect of the growing complaints about Herbalife can possibly be traced back to the appointment of Timothy Muris by former President George W. Bush to chair the FTC, a move that, according to Mr. FitzPatrick’s memorandum, basically ended federal enforcement actions against multi-level marketing companies.  Prior to Mr. Muris’ appointment to chair the FTC, Mr. Muris had been an anti-trust attorney, and his biggest client was the Amway Corporation, another notorious multi-level marketing company with a history of complaints against it.  Under Mr. Muris, the FTC practically legalized pyramids by “[e]ffectively halting investigations and prosecutions of pyramid selling schemes,” amongst other acts, according to Mr. FitzPatrick’s memorandum.

Progress Queens spoke with a retired former state prosecutor with a distinguished record of prosecuting pyramid schemes.  Progress Queens understands that the retired prosecutor has an extensive network of contacts in the national legal community and did not want the retired prosecutor to jeopardize his relationships, so Progress Queens agreed to speak with the retired prosecutor on the condition of anonymity

As a result of the years of apparent reluctance by the FTC to vigorously investigate Herbalife, some law enforcement officials were looking to Attorney General Schneiderman’s office to take the lead to investigate Herbalife.  The Office of the Attorney General of New York is in a unique position, because of its financial resources and the size of its staff, to undertake the kind of investigation required in a case like Herbalife's, the source said.  New York state also has laws that may be better suited to handle cases against multi-level marketing companies.  Other attorneys general in smaller states would not have the resources of a state like New York.  Plus, there is a large constituency group here in New York, the Latino community in Queens, who are expressing complaints about Herbalife.  There is a confluence of local reasons here that should compel Attorney General Schneiderman to act. 

The source added that changes made by the FTC have altered the decision mechanism used to determine whether to investigate multi-level marketing companies.  The mechanism is now skewed to protect multi-level marketing companies, the source said. 

Since oversight has been weakened, the FTC is forced to play catch-up whenever a multi-level marketing company transforms itself into an illegal pyramid scheme.  This is because the FTC wrongly does not treat all multi-level marketing companies as pyramid schemes, advocates fighting against pyramid schemes say, allowing multi-level marketing companies to wreak financial damage to consumers before the multi-level marketing companies are deemed to later be pyramid schemes -- after it's too late.  After years go by with no enforcement action, the financial damage is great -- and already done. 

One-at-a-time, after-the-fact investigations are an enforcement nightmare, the source said.

In the slow and lobbyist-conflicted investigations of Herbalife, the legal community looks to Pershing Square with its mixed motivations, to confront Herbalife over its business practices.  This is one time when one of the most controversial hedge fund managers on Wall Street is actually leading the charge to help Latinos in Queens when perhaps Attorney General Schneiderman may not.  All because the FTC and states’ attorneys general are taking too long to confront, regulate, or outright ban businesses that are premised on shady multi-level marketing models. 

To unpack some of the political complexities that Attorney General Schneiderman faces, Progress Queens spoke to a political consultant, who, like the retired former state prosecutor, would only speak on condition of anonymity.  To share those insights, Progress Queens agreed to respect the political consultant’s request.

New York’s four top, state-wide elected offices are Democrats, the political consultant noted.  The state’s top four Democrats would seek to protect party unity before they would ever confront one another over possible official misconduct.  Under a system where the governor controls the committee resources of the state Democratic Party, an attorney general would not be likely to effect an enforcement action against a large corporation that also happens to be a campaign contributor of the governor.  Herbalife’s lobbyists, Dickstein Shapiro, have donated $5,000 to Gov. Cuomo’s campaign committee and $12,500 to Attorney General Schneiderman’s campaign committee, according to state campaign finance authority records.  An example of how bad policy comes about as a result of the reluctance of Albany officials to place a check each other is the secretive Vito Lopez sexual harassment settlements, which Attorney General Schneiderman never opposed, the political consultant said.

Another example is how Attorney General Schneiderman never stood up to denounce the interference with and later closure of, the corruption-fighting panel known as the Moreland Commission, which Gov. Cuomo repeatedly hobbled. 

The political consultant suggested that one way to perhaps upset the importance that Democrats place on party unity before the independence and integrity of a public office, like that of the office of the attorney general, would be to have a strong antagonist, like a Republican, serve as an attorney general under a Democratic governor.  “There’s no one way to do it,” the political consultant said, but, the consultant added, “The Democratic Party needs to be cleaned out.”

Although the issue of lobbyists now targeting states’ attorneys general was raised in the attorney general debate, there was no drill-down to how Herbalife’s business practices impact New York’s Latinos.  Notwithstanding, one issue important to the Latino community has been brought to the fore in this year’s gubernatorial election.  Gov. Andrew Cuomo (D-NY) was criticised for not making an effort to pass the DREAM Act through the State Senate.  The act would have provided tuition assistance to about 8,000 undocumented college students, according to statistics provided by Democracy Now!  Some government reform activists saw the failure of the DREAM Act as a politically-expedient election year ploy by Gov. Cuomo to galvanize New York’s Latino community to vote for the incumbent Democrat over the Republic nominee, County Executive Rob Astorino (R-Westchester).  Before to the DREAM Act failed to pass, County Executive Astorino had said that he opposed it, a move that the Cuomo reelection campaign would have sought to exploit if Latinos could be forced to go to the polls in an election year to ensure the act’s passage next year.  

Gov. Cuomo has indicated that his goal for the general election was to win by a margin of victory larger than his father's, the former Gov. Mario Cuomo (D-NY), and a large-turn out of Latino voters would have helped him achieved his prideful aim.  The Cuomo reelection team has promised that the DREAM Act will pass next year.  It’s difficult to see the true politics, except that the stall and delay tactics are very transparent.

In New York, some see the Democratic stranglehold up in Albany as an obstacle to confronting corporate corruption, because the Cuomo administration is so closely aligned with big money corporate campaign contributors.  Indeed, Gov. Cuomo is reportedly under federal investigation for obstruction, and then later prematurely closing, a corruption fighting panel that he had himself appointed.  To Latinos in Queens, who are losing thousands of dollars to Herbalife, and to some prosecutors, who saw law enforcement being weakened under the Bush administration, the lobbying and politics surrounding Herbalife should not be a factor in the government’s decision to vigorously investigate a multi-level marketing company on the basis of numerous complaints of fraud.  Some social service organizations are doing their best in the limbo in which the government places them.  And the fleeting moments of leadership that critics of Herbalife have to cling to, for now, are when a Wall Street hedge fund titan ups the ante or when a Republican challenger stands up to Attorney General Schneiderman in a political debate. 

Organizers of Thursday night’s debate of the top two candidates for attorney general deliberately overlooked third-party candidates, including Ramon Jimenez.  Mr. Jimenez’s party, the Green Party, is making historical inroads in this year’s gubernatorial election.  Last-minute efforts to reach Mr. Jimenez for his perspective on Herbalife were unsuccessful.  In an unrelated matter, Mr. Jimenez has been a vocal critic when lobbyists appear to step out-of-bounds.

This article was updated to :  (i) provide clarification about how advocates fighting against pyramid schemes view multi-level marketing companies, (ii) include a reference to Attorney General Eric Schneiderman's decision to not release all e-mail communications between his office and his consultant, Jennifer Cunningham, and (iii) examples of how Attorney General Schneiderman never stood up to check Albany officials.