Background on Herbalife-Related Businesses

• Paul Michaels owns Herbs4Life, Filing Number: C1986607, registration attached as Michaels Exhibit A).  The registration filing uses the address 4418 Gable Dr, Encino, CA 91316 and lists Paul Mihalakidis (a.k.a. Michaels)^[1] as the company’s agent.  While the registration filing lists the company’s status as “suspended,” Michaels’ LinkedIn website lists his current employment as Owner of Herbs4life.  See Michaels Exhibit B, available at http://www.linkedin.com/pub/paul-michaels/11/304/baa.
  • Michaels’ LinkedIn site also notes that he joined Herbalife in 1995, and states that he is a President’s Team member.  Id.

• Michaels owned and operated How2BSuccessful (H2BS) (www.how2bsuccessful.com), a web-based business that provided members with training materials and recruiting tools that could be used to build their Herbalife businesses (2004 domain registration attached as Michaels Exhibit C).  The domain registration listed Michaels’ HerbsForLife (a.k.a. Herbs4Life) company the registrant, and used the address 4418 Gable Dr, Encino, CA 91316—the same address listed on the registration filing for Herbs4Life.  The domain registration also listed paulmichaels@sbcglobal.net as the registrant’s e-mail address.  The website is no longer active, but can be viewed at http://web.archive.org/web/20010720163238/http://how2bsuccessful.com/.^[2]

• Michaels branded the marketing concept promoted on his H2BS website with the name Vertical Skip Marketing (“VSM”).  See, e.g., Michaels Exhibit D (“a new marketing concept called Vertical Skip Marketing which is truly unique”).
• Michaels also owned the website Diet Diet (www.dietdiet.com) (2004 domain registration attached as Michaels Exhibit E).  Michaels described the site as “absolutely the most effective retail lead generation web site in the industry.”  Michaels Exhibit F, available at https://web.archive.org/web/20010714124229/http://www.how2bsuccessful.com/training/systems/dd/index.htm.  Michaels offered the services of his Diet Diet website to members of his VSM team.  The site is no longer active, but can be viewed at http://web.archive.org/web/20010721195306/http://dietdiet.com/.

• Michaels owned and operated Network Consultants, a company registered in Nevada (Filing Number:  LLC3280-2003, registration attached as Michaels Exhibit G).  Pershing Square believes Network Consultants was an Herbalife-related business given that the company’s other Managing Member, alongside Michaels, was President’s Team member Mark Zucherbrod.^[3]  The registration filing uses the address 2533 N. Carson St., Carson City, NV 89706.  The company was dissolved in February 2009.

Primary Source Data on Business Practices

Recruiting Materials

• Michaels’ H2BS website provided numerous training materials and recruiting tools to VSM team members.

• The welcome page for the H2BS website states that “one of the main reasons How2bSuccessful.com has been so successful is that it’s absolutely the first of it’s [sic] kind in the industry.”  Michaels Exhibit H available at http://web.archive.org/web/20010717171526/http://www.how2bsuccessful.com/training/systems/h2b/index.htm.  The welcome page explains that H2BS eliminated “the need for the individual distributor to be a master presenter.”  Distributors “wouldn’t have to ‘sell’ this opportunity to anyone!”  The welcome page concludes by asserting that “achieving [the distributor’s] goal of 10 new, personally sponsored distributors each month has never been simpler or easier!”
• Another page of the H2BS website, attached as Michaels Exhibit I and available at http://web.archive.org/web/20010623150052/http://www.how2bsuccessful.com/provide.php?access_code=8353, claimed that H2BS had a “PROVEN marketing plan that has shown incredible results over and over,” and stated that H2BS was a “leading company in a $400 Billion industry, doing business in 51 countries, and adding more every year!”  The page did not identify the “public corporation traded on the NASDAQ” with which H2BS is affiliated, but the reference was obviously to Herbalife.

• Through his H2BS website, Michaels used rhetorical questions combined with purported testimonials to describe to potential recruits the substantial income they stood to make if they joined his Herbalife downline as part of the VSM team.
  • Citing purported Bureau of Labor Statistics data, one page of the H2BS website, attached as Michaels Exhibit K and available at http://web.archive.org/web/20010701072026/http://www.how2bsuccessful.com/destiny.php?access_code=3735, claimed that by age 65, only 5% of people have adequate capital for retirement.  The page then asked rhetorically whether the recruit felt “safe” because they are in a stable job right now?  The page went on to ask whether the recruit thought they would be employable when they were 65.  The page further offered inaccurate arithmetic concerning the amount of money required to retire on “$12,000” which is “just for the basics.”  The website then introduced Marilyn and Julia, two women in their seventies purportedly earning more than $10,000 and $14,000 a month, respectively.  The page concluded by asserting that “this work-at-home business is part of a $400 billion industry” and that “there’s plenty of room for you with unlimited growth potential.”
  • Another page on the H2BS website, attached as Michaels Exhibit L and available at http://web.archive.org/web/20010623143014/http://www.how2bsuccessful.com/desire.php?access_code=8353, contains additional purported success stories.  Among them:  a high school student and hotel manager whose income went from $2,000 a month to $50,000 a month in their first year, a former musician who saw his income increase by $1,000 every month, a 17 year old boy mowing lawns who “took the knowledge he learned and became a millionaire before he was 30,” and a single mom who earned over $59,000 in her first year.

• Still another page of the H2BS website introduced recruits to more detailed success stories, each following a similar arc from stressed poverty to effortless wealth.  See Michaels Exhibit M, available at http://web.archive.org/web/20010623145131/http://www.how2bsuccessful.com/need.php?access_code=8353.
• The H2BS website advertised a “free online audio presentation” that promised to reveal “how ordinary people are tapping a 400 Billion Dollar Industry and quietly building substantial, six-figure incomes working a few hours a week from the comfort of home.”  As with recruiting materials from other senior Herbalife distributors, the emphasis is on passive residual income, benefitting from the efforts of others while doing little or no work yourself.

• The audio presentation, a transcript of which was hosted on the H2BS website, stressed the ability to “leverage off of other people and create a passive income,” likening the H2BS system to those employed by Henry Ford and J. Paul Getty: “They developed Teams of People to build their business!”  The presentation also makes highly misleading claims concerning the likelihood of success, asserting that “there is no guesswork! Nothing left to chance.  Our products work every time.  Our system works every time.” See Michaels Exhibit N, available at http://web.archive.org/web/20010623142835/http://www.how2bsuccessful.com/audio.php?access_code=8353.
• The website also offered a template recruiting letter, which trumpeted “a new marketing concept called Vertical Skip Marketing, which is truly unique.”  The letter directed recipients to the H2BS website to learn more, and become a Qualified Applicant.”  Michaels Exhibit D, available at http://web.archive.org/web/20040324204055/http://www.how2bsuccessful.com/Bizmanager/Training/COIletterforVSM.pdf.
• In a presentation for VSM team members on Herbalife’s compensation structure, Michaels emphasized the importance of recruiting downline distributors.  Michaels Exhibit O, available at http://web.archive.org/web/20040324205845/http://www.how2bsuccessful.com/Bizmanager/Training/compensation.pdf.  To make clear the importance of “duplication” in seeking income growth, Michaels presented the viewer with diagrams of expanding pyramids.  Id. at 4-6.

• Michaels provided VSM team members with recruiting scripts they could use to induce others to join the VSM team.  One such script, attached as Michaels Exhibit P and available at http://web.archive.org/web/20040529060054/http://www.how2bsuccessful.com/Bizmanager2/Training/VSMSCRIPT2.pdf, encouraged VSM team members to tell potential recruits the following about the Vertical Skip Marketing opportunity:  “All of the people who come to the web site and enter their name and e-mail address are entered into a computer program that keeps track of the order in which they enter their name and e-mail address.  Think of a long list that goes straight down, VERTICALLY from 1 to infinity.  Anyone on that list who then reviews the web site and listens to the explanation, and then fills out our short questionnaire requesting an interview, skips to the top of the list just like you have.  For example, if you were number 14 on the list and you were the 1stone of the 14 to have the focus and desire to go through the information, you skipped to the top of the list above the other 13.  Anyone after you who listens to the message and requests their personal interview becomes number 2 under you, etc.”
• In addition to its scripts, Vertical Skip Marketing offered “hints on working the leads and common objections.”  The website encouraged distributors to “TREAT THESE LEADS LIKE GOLD,” and instructed distributors to call each lead three times in the first 24 hours, observing that with “each day that passes, [leads’] urgency and desire is reduced.”  The website further suggested that distributors encourage leads to “sell something that is not making them money (like their TV) if they are truly serious about change.” Michaels Exhibit Q, available at http://web.archive.org/web/20040529065711/http://www.how2bsuccessful.com/bizmanager2/Training/VSMCommonOjectionsHints.pdf.
• Vertical Skip Marketing’s step-by-step checklist for new VSM team members, attached as Michaels Exhibit R and available at http://web.archive.org/web/20040529071614/http://www.how2bsuccessful.com/Bizmanager2/Training/VSMNEWTMFOLLOWUPCHECKLISTSYSTEM.pdf, directed distributors to make recruiting-focused calls and to encourage recruits to send out 20 emails to friends regarding the Vertical Skip Marketing opportunity and order a “wheel slot” to build “more than one line.”

• In 2006, Paul Michaels and Vertical Skip Marketing, along with senior distributors Kurt and Cindy O’Connell and Herbalife International, were sued in a class action lawsuit in California Superior Court in Los Angeles.  See Michaels Exhibit S (Complaint, Minton. v. Herbalife International Inc., et al., No. BC338306 (Super. Ct. L.A. Cnty. Jan. 17, 2006)).  Plaintiffs alleged that Herbalife and Vertical Skip Marketing operated “endless chain schemes” in violation of California’s Endless Chain Scheme law (Cal. Penal Code § 327 ).  See Id. at ¶¶ 1-9.  Plaintiffs further alleged that Vertical Skip Marketing was a “fraudulent scheme designed to exhort Herbalife distributors to instantly achieve ‘Supervisor’ status under the Herbalife compensation structure by making a qualifying purchase of Herbalife products, to focus most of their efforts on recruiting new distributors, and to ignore retailing.”  Herbalife and its co-defendants settled the Minton action in late.
• Michaels’ VSM recruiting system did considerable damage to consumers.  Complaints on www.WAHM.com—“The Online Magazine for Work at Home Moms”—describe Michaels’ misleading business practices.  Michaels Exhibit T.  The WAHM website is no longer active, but can be viewed at http://web.archive.org/web/20090517030319/http://www.wahm.com/boards/Forum8/HTML/000499.html.  VSM’s failure to identify the product being marketed was the subject of multiple complaints.  One victim explained that “I too felt like I had to submit the sign-up fee before I could get some answers to my questions.”  Another complained about being asked “to buy a ‘decision packet’ just to find out the names of the company.”

Links to Other Senior Distributors

• As noted above, Michaels and Vertical Skip Marketing, along with senior distributors Kurt and Cindy O’Connell, were sued in a class action lawsuit in California Superior Court for violating California’s Endless Chain Scheme law.  See supra at 45.
• President’s Team member Rick Berg was listed as the “Technical Contact” on the domain registration for Michaels’ www.dietdiet.com website.  Michaels Exhibit E.  As mentioned above, this website is no longer active, but can be viewed at http://web.archive.org/web/20010721195306/http://dietdiet.com/.

Links to Herbalife Corporate Leadership

• Herbalife honored Michaels as a 2012 President’s Summit Qualifier, which allowed Michaels to attend the 2012 President’s Summit at the Nokia Theatre in Los Angeles.  See Michaels Exhibit J.
• Michaels was profiled in a 1998 edition of Herbalife Today, a magazine published by Herbalife.  Michaels Exhibit U at 12, available at http://factsaboutherbalife.comcontent/uploads/2016/01/Exhibit.U.pdf.  After describing Michaels’ struggles as a single father and cable repairman, the article recounts that “not only did [Michaels] lose 45 pounds in 90 days, he also lost a dead-end job and a future that seemed hopeless.”  Four years later, the article claims, Michaels earned $25,000 to $30,000 per month.  The article quoted Michaels as attributing his success to sending out “10,000 Lead Generation Brochures every month without fail,” and putting “all the profits back into the business,” which “was the best investments I’ve ever made.”

• Michaels was also featured in a 2000 edition of Herbalife Today in an article entitled “Paul Michaels Shares His Tips for Success.”  Michaels Exhibit V at 15, available at http://factsaboutherbalife.comcontent/uploads/2016/01/66.pdf.  The article again recounted Michaels’ alleged ascent from debt-ridden cable repairman to Herbalife distributor earning more than $500,000 per year, and offered Michaels’ “tips for success,” including to “keep your downline motivated” and “promote, promote, promote.”
• Michaels’s Facebook website, https://www.facebook.com/paulmichaels5, features a photograph of Michaels with Herbalife founder Mark Hughes at a past Herbalife event.

https://www.facebook.com/photo.php?fbid=497448603625830&set=a.327483207289038.73206.100000820838339.

[1] Paul Michaels was originally Paul Mihalakidis.  See Michaels Exhibit A.

[2] To access this older version of the How2BSuccessful website, use access code 3735.

[3] Zucherbrod is commonly spelled Zuckerbrod in public Herbalife documents.  See, e.g., Michaels Exhibit J at 8.