The Federal Trade Commission has finally closed its investigation into Herbalife-the nutritional-supplement company and multilevel-marketing business whose critics have accused it of being a pyramid scheme.
Advertisement
ABC News found that almost 600 independent distributors of the diet and nutrition sales brand Herbalife had been disciplined by the company in 2013 for making medical claims when selling the company’s weight-loss shakes and supplements, despite company policies aimed at preventing such tactics. Instead, Herbalife’s compensation program “incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product”, the complaint alleged.
The FTC also said Herbalife’s structure greatly rewarded a few distributors with downlines and resulted in most distributors earning little to no money and many actually losing money.
Johnson added that Herbalife agreed to the settlement because the company wanted to move forward and avoid further litigation.
While she acknowledged the FTC complaint did not charge Herbalife with operating a pyramid scheme, she said the investigation documented serious problems with the company’s business practices. Mr Ackman has been “shorting” the company – a strategy where an investor borrows stock and sells it hoping to buy it back at a lower price before the date of return.
The settlement also will include the determination that the company isn’t a pyramid scheme, the news service said, citing people it didn’t identify.
Herbalife’s shares were up 8 per cent at $64.08 in premarket trading on Friday.
Herbalife also took the opportunity to announce that it would up the ownership limit of activist investor Carl Icahn, who has backed the company in a three year proxy-war with short-selling rival Bill Ackman, from 25 to 35 percent.
Given the massive overhaul Herbalife is now under government orders to execute, and the requisite supervision as it does so, it remains to be seen whether Icahn increases his stake – and what’s left of the business to strategize over.
The settlement comes a day after Ackman said he was still betting against Herbalife shares and that the FTC probe was unlikely to end well for the company.
Friday’s settlement appeared to be at least a temporary victory for Icahn over Ackman and his Pershing Square Capital Management, which unveiled a $1 billion short bet against Herbalife in 2012.
In a separate statement from Herbalife, the company said that the agreement does not change its business model as a direct-selling company. The settlement requires the company to change the way it compensated distributors, whose earnings were based on the number of new sales people they recruited.
Under the settlement, Herbalife agreed to change its system to base compensation primarily on retail sales.
The Federal Trade Commission said the company misled people into becoming distributors or members by using videos and brochures showing mansions, luxury cars and boats, and telling participants they could expect to quit their jobs, earn thousands of dollars a month, make a career-level income, or even get rich.
Advertisement
“While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject”.
