The Ephedra Empire A Dallas firm has made a fortune selling the controversial weight-loss aid, even as former distributors sue over the company's get-rich promises.
By Ed Welles

(FORTUNE Small Business) – Ralph Oats is a High School dropout and former truck driver from Nashville who now lives in a Dallas mansion modeled after the White House and until recently owned an oceanfront home and a yacht in Florida. How he amassed such wealth is one of those classic American stories of success fueled by raw entrepreneurial ambition--at least as he tells and retells it.

But Wellness International Network (WIN), a multilevel marketing company founded by Oats in 1992, now finds itself beset by twin controversies: over the promises it has made to its distributors and over the safety of its flagship product, a weight-loss supplement called BioLean. The key ingredient in BioLean is an ancient Asian herb commonly known as ephedra, which has come under renewed scrutiny since February, when Steve Bechler, 23, a minor league pitcher for the Baltimore Orioles, died of heat stroke during spring training. Tests later revealed that he had been taking an ephedra-based product, though not BioLean.

According to the U.S. Food and Drug Administration's most recent statistics, ephedra contributed to 81 deaths between January 1993 and October 2000, among 1,398 reported adverse reactions that included heart attacks, strokes, and seizures. That list represents only a fraction of the tally, according to the U.S. Department of Health and Human Services, which estimates that fewer than 1% of ephedra-related "adverse events" are ever reported. Last summer Congress held hearings on possible regulation of products containing the herb, which as a "dietary supplement" does not face the strict safety standards that are applied to substances classified as prescription drugs. Senator Richard Durbin (D-Illinois) has introduced a bill that would require makers of ephedra-based products to report any adverse events to health regulators. New York and Illinois have banned the sale of products containing ephedra.

While WIN is only one of many companies peddling ephedra products, it is among the most aggressive and creative. BioLean accounts for the "overwhelming majority" of WIN's sales, Cathy Oats, Ralph's wife and a WIN principal, has publicly stated. To boost sales, the company has recruited high-profile distributors--not only sports celebrities such as former NFL player and Super Bowl coach Mike Ditka but also "hundreds" of physicians, according to Bob Wagner, a WIN distributor based on Long Island.

But as experts have expressed rising concern about the health effects of ephedra, attendance at WIN's gala meetings in Dallas, aimed at signing up new distributors, has dropped from some 700 a month to about half as many every other month, according to several former distributors. At the same time, WIN has been hit by 11 lawsuits filed by 38 former distributors over the past three years, alleging fraud, breach of contract, and violations under RICO, a federal racketeering statute. Thirteen plaintiffs have settled their cases with the company; the terms are confidential. The remaining suits are pending, with WIN denying any wrongdoing.

The suits, in essence, accuse WIN of deceptive business practices. Because WIN operates as a multilevel marketer, its distributors not only sell products but also recruit other distributors--an arrangement that has enabled it to efficiently build a national sales force.

But those suing the company, as well as other critics, say that WIN's system essentially operates as a pyramid scheme in which distributors have more incentive to find and offload their inventory to new recruits than they do to sell the product to consumers. These critics claim that Oats and others who got in early--those at the top of the pyramid--make money, while late joiners choke on unsold inventory as they run out of fresh recruits. At some multilevel marketing firms, as at Equinox International in 2000, the pyramid has collapsed. In other cases, such as Nu Skin in the 1990s and Herbalife in the 1980s, regulation and the threat of litigation forced the companies to change their practices.

Efforts to reach Ralph Oats via phone and mail, as well as in person, were unsuccessful. Through a spokesperson Oats declined to be interviewed for this story, although WIN's director of communications, Shannon Camp--his wife's daughter from a previous marriage--did speak to FSB. Regarding concerns about the safety of products that contain ephedra, Camp said, "The number of serious adverse events associated with BioLean is zero." (She defines such events as those requiring emergency-room visits.) The company claims that BioLean contains less ephedra than many rival products, with a recommended daily dose that's a third of the industry's maximum. Camp declined to discuss specific complaints from former distributors but emphasized that WIN operates as a legitimate MLM company and boasts "thousands of successful distributors around the world." As for those less fortunate, "There will always be disgruntled people," says Camp. "Some people who have not been successful don't want to take responsibility for their actions."

Drew Georgeson, 45, a surgeon in Detroit who lost $200,000 as a distributor, agrees with her--up to a point. "I blame myself," he says. "No one held a gun to my head." But, he adds, "what bothers me is that Oats and the company feel no responsibility for the destruction they've caused in the lives of thousands of people."

Those who know him say that Ralph Oats's most potent sales tool is his own rags-to-riches story. At WIN's Dallas meetings, prospective distributors flock to the ballrooms of luxury hotels to hear Oats, citing himself, make the case for investing in WIN. Jack Sheehan, a former distributor from Las Vegas, recalls that Oats "would say over and over again, 'I'm just a broken-down truck driver, a high school dropout, but I'm a millionaire because of WIN. Imagine what all you educated, professional people in suits can do.'" (Like any effective storyteller, Oats is selective. He leaves out the years he spent immersing himself in the techniques of multilevel marketing. In the 1980s he sold water filters for National Safety Associates, based in Memphis; he also spent two years working as a distributor for Omnitrition, based in Reno.)

Oats, who contributed nearly $80,000 to Republican candidates between 1993 and 2000, has been known to bring in as guest speakers such GOP luminaries as former House Majority Leader Dick Armey of Texas, former House Speaker Newt Gingrich, and Haley Barbour, former chairman of the Republican National Committee, now running for governor of Mississippi. At such glittery gatherings Oats instructs his successful distributors to park their gleaming, vanity-plated luxury cars out front to remind all who enter what stands within their reach.

While most multilevel marketing ventures persuade new recruits to part with a few hundred dollars, such sums were rounding errors on the checks Oats collected for WIN. "People were writing checks for $200,000, $400,000, even $600,000," recalls Michael Jareou, 39, a Chicago entrepreneur who says he made money as a WIN distributor. Jareou, who had a hand in recruiting nearly 2,000 people to WIN, now believes, based on what he saw, that "more than 90% of the people lost money."

Aware that he was addressing many entrepreneurs and business owners at the monthly meetings, Oats made it clear that WIN distributors were buying a chance not to push potions but rather to invest in a significant business opportunity, says Georgeson. "How much do you have invested in your business?" Oats would challenge them. "If you're really interested in this business opportunity, then let's put some real numbers on it."

To encourage big initial investments, WIN's compensation plan was scaled geometrically. The more money a distributor invested at the outset, the higher his commission would be on future sales. Oats would often repeat the story of one Cecil Edge, a Florida car dealer who came in early but cautiously and just happened to recruit a future top producer under him. But Edge was earning only a 4% commission on that dynamo's efforts, when he could have earned as much as 16% had he been courageous enough to invest more. Just imagine how much richer he would be, wondered Oats. (Efforts to reach Edge were not successful.) Admits Georgeson: "I got drawn in by the show."

So did many others, including skeptics like Kamal Haddad, 40, a Chicago CPA. He attended his first Dallas meeting reluctantly in 1998 at the urging of a friend. But then he heard Oats speak. "Ralph was saying, 'You may already make six figures, live in a big house, and drive a Lexus, but your debts are growing.' That was me," says Haddad. Then, as he remembers it, Oats bore down, adding, "If you died today, would your wife be able to maintain the same lifestyle?" Before long Haddad had his pen out and was writing a check for $35,000. "I don't believe I'm doing this," he recalls thinking at the time. "I can't believe this hillbilly got me."

Over the next three years Haddad, working with Jareou, turned Chicago into WIN's biggest market. He was clearing $250,000 a year and training recruits out of a plush suburban office. In 1999, Haddad rose to become WIN's third-highest producer. But then his recruits, saddled with large inventories of BioLean and unable to find new distributors to purchase them, began struggling. MLM concerns typically buy back a percentage of unsold inventory from distributors, but WIN does not--nor does the company, as Camp points out, require anyone to buy any specific amount of product. "The company just turned its back on these people," says Haddad. In 2001, Haddad set up a website to help his struggling distributors sell their BioLean at half price to consumers. WIN sued, accusing him of violating its marketing and trademark policies. Haddad says he filed a counterclaim, and WIN dropped its suit. (Camp declined to discuss that--or any other--litigation.) Haddad estimates that former distributors in the Chicago area are now sitting on BioLean for which they paid $10 million--and for which there is now no viable retail market, thanks to increased competition and growing awareness of ephedra's dangers.

Wayne Mrozinski, 54, a doorman at Caesars Palace in Las Vegas for 17 years, signed up with WIN in 1998 to take pressure off his overworked wife, Dee Hyland, a nurse. The couple, who initially invested $3,000, were soon hailed by the company as "rising stars," and Mrozinski told his compelling story to 800 people at WIN recruitment meetings. After all, if a lowly doorman--like a lowly truck driver--could make it with WIN, imagine what others, better positioned in life, could accomplish. In 1999, Mrozinski quit his job to focus on WIN. To project the right image, he claims, Oats advised him to take pricey office space, lease a Mercedes, and charter jets to fly prospects to monthly meetings in Dallas. Mrozinski recalls monthly cash inflows of $20,000 to $70,000. But the money would go right back out to buy inventory from WIN and pay bills, including various fees and surcharges owed to WIN. "We could just never catch up," says Mrozinski.

Then business dried up as the couple failed to find new recruits in the glutted Las Vegas market. The more time and money they plowed into prospecting, the worse their situation became. They drained their 401(k) accounts of $150,000 and spent another $160,000 of Dee's father's money, straining family relations. Her semi-retired father ended up returning to work full-time as an undertaker--and buried $100,000 worth of his unmarketable BioLean in their garage. In the three years since he closed his WIN distributorship, Mrozinski hasn't made more than $23,000 a year in various sales jobs. (At his old job he could make as much as $75,000 a year.) "I'm floundering," admits Mrozinski, who now can barely relate to the acclaimed version of himself who stood up at those meetings.

Testimonials like Mrozinski's, says Haddad, have always been a standard part of the meetings. Typically Oats calls on selected distributors to share with the audience the size of their WIN checks the previous month and how many hours they had put in. "He would let people's imaginations do the math and connect the dots," Haddad says. Oats's penchant for sticking to a tight script became most evident when distributors voiced criticism or even asked him probing questions. "He would get very defensive and personal if he felt that you were attacking the company," recalls Jareou. "He would say, 'You are a dream stealer.'"

While Oats was instinctively protective of WIN and his carefully crafted public persona, he would on occasion offer glimpses of his private life, as when he used his luxury home and yacht on the Florida coast near Boca Raton to recruit especially promising prospects or entertain select distributors. Among the latter was Michael Jareou. While relaxing with Oats in Florida, Jareou says Oats told him that "people believe what you tell them" and that "they follow their emotions."

Indeed, Oats "was really good at making you doubt your instincts," says Susan Moore, 38, a college professor in Phoenix who ultimately lost her life's savings, $15,000, after joining WIN. She recalls a 45-minute conversation in which Oats belittled her earning capacity as a teacher and urged her to quit her hard-won tenured job at a community college in favor of WIN. After all, how could she ever afford to educate her children on a teacher's salary? "He had me in tears," she recalls. "I prayed over this. I came so close to quitting my job."

Moore drew such personal attention from Oats because her sister, Margaret Larsen, a successful Las Vegas real estate agent, and her physician husband had already invested--and would lose--nearly $600,000 in WIN. (The Larsens sued WIN and settled; the terms were not disclosed.) Oats usually focused not on schoolteachers but on high earners. In 1996 the company started an arm to sign up physicians as BioLean distributors. The move was aimed at enhancing the product's image, because the doctors could sell BioLean to their patients. The venture was headed by Bob Wagner and his wife, April, who within 18 months had enrolled 180 physicians on New York's Long Island alone, says Bob. In one printed sales pitch to doctors, the Wagners wrote that they "were working with some Long Island doctors that are now earning thousands of dollars a month in residual income from being in business with WIN," adding, "If the HMOs have affected your income and lifestyle, you should find out what these opportunistic doctors are doing about it."

In September 2002, when Jon Cooper, 48, a county legislator from Suffolk County on Long Island, opened hearings to consider a local ban on ephedra, WIN's doctors surfaced in force. Cooper recalls that some two dozen physicians came to testify against the ban, saying that the supplement was safe and effective. "These were articulate, well-dressed doctors whose words carried a lot of weight," says Cooper. It was only when pressed, he adds, that "nearly every one of them admitted that they were BioLean distributors." (Wagner admits that the doctors did not immediately volunteer that information.) Among them was Moshe Dekel, an obstetrician and gynecologist from Oceanside, N.Y., who told Cooper's committee that his earnings from selling BioLean were "rather small." That assertion conflicts with his testimonial in WIN's promotional literature: "I sold my medical practice after earning over $1 million in four years, part-time, with Wellness." Dekel declined to answer requests by phone and mail for an interview.

Michael Goldrich, chair of the American Medical Association's ethics committee, says, "We have a longstanding policy against physicians' making sales of health-related items." Such transactions, he notes, "exploit the uneven relationship between the patient and the physician, and undermine that trust." Recently the AMA recommended that ephedra be regulated. "In the physician community there is a real concern that this is a dangerous drug," says Goldrich.

In 2001, the latest year for which figures are available, ephedra-based products made up 4.3% of annual herbal sales in the U.S. yet accounted for 62% of the reports of adverse reactions to sup-plements, according to the American Association of Poison Control Centers ( In August 2002 industry leader Metabolife International divulged that it had received 14,684 reports of consumers' adverse reactions to ephedra between May 1997 and July 2002. But WIN, says Camp, considers its product safe and effective. She notes that there have been no reports of "serious" reactions, even though WIN has sold 35 million servings of BioLean over 11 years.

Not that distributors have always had favorable reactions to BioLean as a moneymaker. "This business is not for everyone," Camp says. By that, she means that making it as a WIN distributor requires hard work, commitment, and strong people skills. Among the successful distributors she cites are Bob Wagner, the one who focused on recruiting physicians, and Greg Chudacoff, 47, a personal-injury lawyer in Los Angeles who works part-time for WIN. (His wife works full-time for the company.)

Neither man would say exactly how many of the distributors under them had dropped out or lost money. "There's been a fair amount of turnover, but often people's expectations don't line up with reality," says Chudacoff. Wagner, who claims to have "made millions" with WIN, calls distributors who are less successful than he is a "bunch of crybabies."

Both men say that Oats never misled them. "One thing he says is that it's a hard business until you understand people," says Chudacoff. "Then it's a potentially lucrative business."