The Federal Trade Commission in the USA announced the settlement Friday, saying the Los Angeles company’s compensation practices were unfair.
Advertisement
Herbalife said it had agreed to restructure its USA business so that distributors are rewarded for what they sell, not how many people they recruit. His allegation helped trigger the investigation. The company’s stock rose over 11% on Friday, and is sitting at its highest level since early 2014. Specifics of the repayment plan will be determined later, the FTC said.
The investigation focused on the company’s hundreds of thousands of new sales people who were informed they would make huge profits by selling health and nutrition merchandise that they would pay for themselves up front. Crucially, however, the downtown-based company avoided being labeled as a pyramid scheme by federal regulators. But Herbalife, which had told investors it would fight the FTC in court if it could not reach a settlement it could live with, would no doubt have entangled the agency in a long legal battle had they insisted on the pyramid word, critics believe.
“We didn’t allege a pyramid deception count”.
“In direct response to the interview where Brian Ross brought to light instances of members making unauthorized product claims, the company began a significant re-training initiative”, Herbalife spokeswoman Barb Henderson said in an email then.
One sticky problem remains: Herbalife’s business model, which relies on independent contractors, is notoriously hard to police.
Herbalife relies on an army of independent distributors to sell its weight-loss shakes and supplements – an arrangement that Ackman said led to abuse.
The settlement also is a big victory for billionaire Carl Icahn, who was one of Herbalife’s biggest investors and notably had taken an big bullish position on the stock in opposition to Ackman’s bearish position.
The $200 million payment included in the settlement will go toward refunds for consumers who lost money after purchasing “large quantities of Herbalife products”, the FTC said. Herbalife, which also announced a $3 million settlement with the IL attorney general, said that it settled to avoid the cost and distraction of lengthy litigation.
Under the settlement announced Friday, Herbalife must rework the way in which it compensates salespeople.
“The settlements are an acknowledgement that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms”, said Herbalife CEO and Chairman Michael Johnson. Icahn said in a statement on Friday, “While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject”. The sales method, under which some people get more money for recruiting new distributors than selling products, has attracted criticism.
The company said that it felt that numerous FTC’s claims were “incorrect”, but that the settlement was “in its best interest because the financial cost and distraction of protracted litigation would have been significant”. “The majority of them stop ordering products within their first year, and almost half of the entire Herbalife distributor base quits in any given year”.
Advertisement
“Obviously, we are still here”, he said. It also prohibits Herbalife from making statements that indicate that participation in Herbalife is likely to result in a lavish lifestyle, such as you “can quit your job”, “be set for life”, “earn millions of dollars”, or “make more money than they ever have imagined or thought possible”.
