Herbalife Ltd. agreed to pay US$200 million to settle USA claims that the nutrition company deceived consumers with get-rich-quick promises, as the USA government forced sweeping changes to the company’s business but stopped short of hedge fund manager Bill Ackman’s call to shut it down.
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In a separate statement from Herbalife, the company said that the agreement does not change its business model as a direct-selling company.
In a statement, Herbalife described the FTC allegations as “factually incorrect”, but said the company wished to “move forward” after two years of investigation.
The company has been a battleground between two Wall Street titans: hedge fund manager Bill Ackman who bet big against the company and activist investor Carl Icahn, who is major investor in Herbalife, now owning 18.3 percent of its shares. Central to the claim that Herbalife is a pyramid scheme is the assertion that 99 percent of distributors earn less than minimum wage, and most make nothing or even lose money, while the top 0.12 percent earn almost $150,000 each year.
The FTC filed a complaint accusing the company of deceiving consumers about how much money they could make selling its products, noting that most Herbalife distributors make no money at all.
Herbalife’s (HLF) federal settlement may have resolved the USA government’s questions about the company, but for the billionaire investors who have spent years bickering over the nutritional supplements vendor, the feuding continues.
As part of the settlement, Herbalife did agree to tweak how it does business. This leads to almost half of the entire Herbalife distributor base quitting in any given year.
Even so, the company’s shares increased by 18 percent in early trading.
Ackman, 50, hired his own researchers to dig into Herbalife’s dealings and released a series of videos and presentations that he said showed the company was crooked.
The billionaire activist investor, Bill Ackman, in December 2012, publicly attacked the maker of nutritional shakes for running an illegal pyramid scheme.
Herbalife also said it was in the company’s best interest to end the “the financial cost and distraction of protracted litigation”. “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”.
Federal regulators closed an investigation of the multinational, nutritional supplements company Herbalife, which has for years been dogged by accusations that it was run as an elaborate pyramid scheme. With shares of Ackman’s most notorious long Valeant Pharmaceuticals Intl Inc (NYSE: VRX) already down 77.4 percent this year, Ackman short Herbalife Ltd. Herbalife contemporaneously reached a settlement with the IL attorney general, agreeing to pay it $3 million.
The settlement announced today requires Herbalife to revamp its compensation system so that it rewards retail sales to customers and eliminates the incentives in its current system that reward distributors primarily for recruiting. Instead, the LA-based company paid out nearly exclusively to employees who pressured other people to buy into the program at a cost of about $2,000 apiece.
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“I have the greatest confidence in Herbalife’s CEO, Michael Johnson, and the entire management team, who have skillfully led the Company through adversity, including holding firm against a high-profile PR campaign against the Company by Bill Ackman where it was alleged a few times that the Company would be shut down”, the statement reads. Herbalife also is saying that the FTC’s investigation of Herbalife is now complete.
