Herbalife has agreed to refund $200 million to consumers and revamp its compensation system as part of a settlement of charges that it made false promises to distributors about how much money they could make. The investor said in March 2015 that a stock price in the mid-$30s range would put him close to breaking even.
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It also charged that Herbalife’s compensation structure essentially rewarded distributors for recruiting other distributors in ways that did not relate to actual retail demand.
In announcing the deal with the FTC, Herbalife said it had chose to let Icahn increase his ownership limit to 34.99 percent from 25 percent.
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.
The FTC avoided the use of the term “pyramid scheme” in its complaint, but Ramirez was quick to point out in a press conference that doesn’t mean that Herbalife is not a pyramid scheme.
According to the FTC, Herbalife promised part-time income of $500 to $1,500 per month, and substantial full-time income, but “only a small minority of distributors have made anything near what the company promises” and a large majority “made little or no money and a substantial percentage lost money”.
While the settlement requires Herbalife to make some changes, it was widely viewed as good news for the company and a repudiation of Ackman’s protracted campaign.
“They will have to demonstrate retail sales”, said Tim Ramey, an analyst for Pivotal Research Group. “We agreed to the terms and to pay $200 million because we simply wanted to move forward with our mission”.
“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. “But the proof is in the pudding”. That could push top distributors, who are the lifeblood of the company, to leave for another multilevel marketing firm. The agency noted that most of the Herbalife distributors do not make any money at all. Without these exaggerated claims, fewer people may join.
In a statement, he praised the company’s management for the way it handled the investigation.
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One sticky problem remains: Herbalife’s business model, which relies on independent contractors, is notoriously hard to police.
