FTC Chairwoman Edith Ramirez said the settlement would force Herbalife to change how it does business in response to the agency’s findings that the “multi-level marketing company’s compensation structure was unfair”.
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The settlement, which calls for broad changes to Herbalife’s direct marketing program, contains no admission of wrongdoing and the company said in a press release that it believed numerous allegations by regulators were “factually incorrect”. The sales method, under which some people get more money for recruiting new distributors than selling products, has attracted criticism.
The Federal Trade Commission found that the overwhelming majority of Herbalife’s distributors earn little or no money. Pershing Square said that it foresees Herbalife’s top distributors and others leaving the company once its restructuring is fully implemented.
The $200 million will go to refunds for consumers who lost money after purchasing “large quantities of Herbalife products”, the FTC said.
The settlement caps a two-year investigation by the FTC, which probed Herbalife over accusations that the company’s main focuses less on retail sales of products than on on bringing in increasing numbers of new sales people who were deceived into believing they could reap substantial profits by selling diet, nutritional supplement and personal care products.
According to the Federal Trade Commission, Herbalife is not a pyramid scheme, however, the company need to make the payment and restructure their business. Herbalife contemporaneously reached a settlement with the IL attorney general, agreeing to pay it $3 million.
But the agreement did specifically weigh in on hedge fund manager Bill Ackman’s claim that Herbalife is, in fact, a pyramid scheme.
In late 2012, Ackman gave a three hour long presentation in NY where he alleged that Herbalife was a pyramid scheme and that the shares would fall to zero.
In fact, the FTC’s action and statements bolstered numerous assertions by Ackman, who began campaigning against Herbalife in late 2012.
What: Shares of Herbalife Ltd. The multilevel marketing (MLM) company works by convincing interested customers to first buy Herbalife products, and then join as a salesperson, hawking those same products to other consumers.
Now that the FTC has concluded that Herbalife isn’t really the pyramid scheme that Bill Ackman spent all these years in proving, it results in a major blow to his $1 billion short-selling bet against the company.
In late 2012, Ackman excoriated Herbalife with a 342-slide, three-hour PowerPoint presentation, saying the company was a scam and a pyramid scheme. “Simply stated the shorts have been completely wrong on Herbalife”, Icahn said in a statement.
The FTC settlement requires Herbalife to change its business model to ensure all compensation is based on retail sales that are verified.
Icahn owns about 18% of the company and has been a vocal proponent in recent years, at one time engaging in public feud with Ackman.
In a statement issued following the $200 million settlement announcement, Pershing Square suggested that the terms imposed by the FTC may cause Herbalife to collapse in the long term. Each distributor receives a portion of the sales made by their recruits, which has led to allegations that Herbalife is actually operating a pyramid scheme.
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In another twist of fate, Herbalife has also said that its board has freed Carl Icahn from his limitations of taking a stake of up to 25% to a new higher threshold to acquire up to 34.99% of the company’s outstanding common stock.
