Herbalife Ltd. (NYSE: HLF) shares soared 12 percent on Friday after the company reached a $200 million settlement with the Federal Trade Commission related to deceiving customers.
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Herbalife agreed to pay $200 million to resolve allegations that the Los Angeles-based company duped consumers into believing that they could make substantial profits from selling the company’s diet and nutritional supplements.
Well good news, they annoy the Federal Trade Commission (FTC) too, which, in a settlement, is now forcing the company to drastically change its business model.
The FTC has been investigating Herbalife since 2014.
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.
Pressed about why the agency did not characterize Herbalife as a “pyramid” scheme, Ramirez said Friday that the FTC was focused on providing harmed consumers with quick, meaningful relief. “That’s a time-tested and traditional tip-off to a pyramid scheme”.
The FTC did not charge Herbalife with operating a pyramid scheme, and CEO Michael Johnson declared the FTC ruling a victory.
“We didn’t allege a pyramid deception count. But what we did allege was an unfairness count”, Ramirez said.
Individuals who want to get involved in a legitimate multilevel marketing company should look for demonstrated revenue on retail sales.
The settlement draws to a close a long-running feud over the company’s business practices, which pitted billionaire investors against each other and roped in government watchdogs.
Herbalife sells weight-loss shakes and nutritional products through independent salespeople – which it calls its members – in more than 80 countries.
For example, events held by the company, which required an admission fee or a minimum purchase of Herbalife products, featured speakers who had succeeded, according to the complaint.
Herbalife said it will also pay $3 million to settle an investigation by the IL attorney general’s office as part of a separate agreement.
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.
Herbalife said the settlement will not change its business model as a direct-selling company and “sets a new standard in the industry”. 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”.
Herbalife believes numerous allegations against it are incorrect, but the settlement is “in its best interest”.
Herbalife also said it was in the company’s best interest to end the “the financial cost and distraction of protracted litigation”.
Herbalife stock was trading up about 7.5 percent Friday afternoon at $68 a share.
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The FTC supported many of Ackman’s claims that Herbalife’s business was driven by its distributors’ recruitment instead retail sales; it misrepresented the potential income of new members, and a large number of distributors lose money.
