Herbalife Exec’s Death Prompts Bizarre Fallout

The death of Herbalife International founder Mark Hughes in May following a drinking binge has triggered a series of bizarre allegations about the key executives who helped the charismatic salesman build one of the nation’s biggest dietary supplement sellers.

Since Hughes’ death at age 44, lawsuits between the executives within his closest circle expose a tale of revenge, an executive with a shoplifting arrest and sexual harassment allegations. One close associate told of a failed scheme to spirit Hughes to a Swiss detox center so word of his addictions wouldn’t spread.

Although the company remains financially viable, interviews and the lawsuits paint a picture of rancor within the tribunal that served as close advisors to the late nutritional supplement czar. Among the fallout has been the near financial ruin of Herbalife’s top supplier, which has endangered the jobs of 1,000 workers in Orange County.

Hughes was a juvenile delinquent who learned the art of sales while fund-raising for his reform school in the early 1970s.

He founded Herbalife, with its now famous “Lose Weight Now, Ask Me How” slogan, 20 years ago. Helped by Hughes’ tearful tale of his rags-to-riches past and his mother’s early death from addiction to diet pills, the Los Angeles-based marketer grew rapidly to its current $1 billion in annual sales and a work force of about 1,000 employees in Southern California.

Herbalife relies on a worldwide network of more than 100,000 independent distributors, most of them working part time, to pitch the company’s line of herbal and weight-loss products to neighbors, co-workers and relatives.

Throughout the growth of the company, three key players--two from Hughes’ reform school days and one who knew how to manufacture weight-loss products--fought for his ear while helping to chart Herbalife’s course.

But in the months since his death the three executives have broken ranks, lacking the common goal of supporting Hughes, whose marketing savvy netted them millions of dollars in salaries, stock and profits.

The rift between these individuals took a public twist Tuesday. Richard Marconi, who created the first Herbalife products 20 years ago and until recently was Herbalife’s biggest nutritional supplement supplier, filed a breach-of-contract lawsuit against Herbalife in Orange County Superior Court.

The lawsuit claims that the San Juan Capistrano entrepreneur and his Orange-based Global Health Sciences Inc. are the target of a carefully plotted and long-planned vendetta by Christopher Pair, Herbalife’s chief executive and one of three co-trustees of the Mark Hughes Family Trust, which now controls nearly 60% of the company’s shares. Herbalife paid Pair, the company’s chief operating officer until Hughes’ death, $3.4 million last year.

Marconi has fought with Pair before, at one point telling Hughes to fire Pair during a company downturn in the mid-1980s. According to the lawsuit, Hughes apparently relented to a passionate appeal by Pair, who met Hughes during his reform school days at the Cedu School in Running Springs, Calif. Herbalife has variously described Pair as a former advisor and intern at the institution.

More recently, however, Marconi told The Times he provided Hughes with copies of a Beverly Hills Police Department mug shot of Pair, taken after the executive was caught shoplifting at the Saks Fifth Avenue store on Wilshire Boulevard two years ago.

Pair subsequently pleaded no contest to the 1998 theft of about $400 in merchandise. He was fined $1,762; sentenced to a day in jail, 12 months probation and court-ordered psychiatric counseling; and told to stay clear of Saks, according to court records. Pair was treated by Hughes’ psychiatrist, Dr. Stephen Scappa of Beverly Hills. Herbalife said Tuesday that Pair’s record has since been expunged.

Marconi also told Hughes about Pair’s “multiple acts of sexual harassment” at Herbalife, according to the lawsuit. The shoplifting arrest and the harassment allegations threatened to tarnish Herbalife’s image, Marconi said.

They also engendered Pair’s bad will, according to the lawsuit. Pair took control of the company soon after Hughes’ death and moved to shift business from Marconi’s Global Health to other suppliers. Marconi said in the lawsuit that the switch was inspired by revenge and violated a verbal agreement with Hughes reaffirmed at several points over the past 20 years.

Herbalife officials said Marconi’s claims were absurd. General counsel Robert Sandler said there were no sexual harassment complaints against Pair.

Moreover, Herbalife executives said the strategic move to stop using Global Health as a near exclusive supplier started three years ago with Hughes’ approval. They said diversifying the company’s supply chain was a prudent business decision.

“This was a strategic move to get more competitive pricing and to meet the needs of global, political and economic factors,” said Conrad Klein, Herbalife’s executive vice president.

Klein said that both Marconi and Hughes knew that the Herbalife contract with Global Health expired at the end of 2000.

Indeed, in several regulatory filings, Herbalife has said it was nearing the end of a three-year supply agreement with Global and that it was not sure if it would continue the relationship.

“This is a very nasty type of hardball to be playing. We are being vilified because we won’t give them all of our business,” Sandler said.

The decline in Herbalife purchases from Global Health pushed the company into default last month after it failed to make a scheduled $12-million interest payment on $257.8 million of debt. Global has hired an investment banker to negotiate with bondholders to craft a restructuring.

Two months after Hughes died, Herbalife fired another long-time Hughes associate, former executive vice president Michael E. Rosen, who was a counselor at the reform school attended by Hughes. Herbalife filed a suit in Los Angeles County Superior Court claiming that Rosen misused company funds when he hired a financial analyst who allegedly did little corporate work.

Instead, according to the lawsuit, the unnamed analyst maintained Rosen’s personal checkbook, tracked his investments on a daily basis, paid his bills and helped prepare his tax filings. Herbalife said it paid the analyst $170,000 in salary and bonuses since 1997. Herbalife paid Rosen $3.3 million last year.

Rosen did not respond to an interview request. However, his attorney, Hillel Chodos, said the lawsuit “has no merit.”

Pair declined to be interviewed.

It was Rosen, an advisor at the Cedu School, who met Hughes in the 1970s and discovered that the shaggy but charismatic Hughes had a talent for raising funds for the program.

After Hughes left the school he found work as a distributor for Seyforth Labs. Hughes liked the sales business and soon jumped to Best Line Products, a similar firm that quickly went out of business.

Hughes then sought out Marconi, who had supplied weight-loss products to Seyforth.

They reached an agreement where Marconi would develop a series of products for Hughes, who would sell them through a new company called Herbalife. Instead of splitting the company, they agreed that Hughes would run the marketing end while Marconi would be the exclusive supplier, according to Marconi’s suit. Marconi said the two made a strategic decision to split the business into a manufacturer and a marketing company.

But as the companies grew, Hughes wound up with an interest in what became Global Health, collecting $43 million in a 1998 Marconi-led leveraged buyout of the manufacturer.

Certainly the financial fortunes of both men have been closely linked. Herbalife profits enabled Marconi to expand his company, finance his Marconi Automotive Museum in Tustin, a charitable foundation for children and commission Italian sculptors to make full-scale replicas of Michelangelo works for his San Juan Capistrano ranch.

Marconi, 66, also has been a subject of controversy.

Early marketing materials said Marconi was a “well-respected nutritional expert” with a doctorate who helped develop the Herbalife Slim & Trim diet product. It turned out that Marconi’s degree was a mail-order doctorate from Donsbach University School of Nutrition, a non-accredited correspondence school in Huntington Beach.

In an interview, Marconi said he has always looked out for Hughes’ interest, either helping or attempting to bail Hughes out of difficult situations. When a series of congressional hearings questioning the efficacy of Herbalife products put the company into a tailspin in the mid-1980s, Hughes asked Marconi for help. Fred Siegel, Marconi’s former business partner, joined Herbalife and helped devise a plan to restore Herbalife’s financial health.

After Hughes was arrested twice for drunk driving, in 1996 and 1997, Marconi said he approached Rosen and Pair with a plan to take Hughes to a secretive alcohol-treatment center in Switzerland for three weeks. Each of the three associates would spend one week with Hughes to make sure he finished the program.

Marconi feared that if news of Hughes’ addiction leaked out, it would damage the pitchman’s youthful and healthy image and hurt the company.

The executives, however, apparently couldn’t agree on the plan, perhaps because they didn’t trust each other to be alone with Hughes during such a sensitive period, Marconi said.