FTC’s press release announcing the settlement today also noted a high turnover of Herbalife’s distributor base, with almost half of distributors quitting yearly after they failed to make a profit. Under the settlement, at least two-thirds of rewards paid to distributors must be based on actual sales, and at least 80 percent of the company’s US sales must be based on “real sales to real users”, Ramirez said.
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According to the FTC complaint, Herbalife made claims that participants could expect to earn thousands of dollars a month in a career-level income, but the overwhelming majority of distributors ultimately earned little to no money.
ABC News found that almost 600 independent distributors of the diet and nutrition sales brand Herbalife had been disciplined by the company in 2013 for making medical claims when selling the company’s weight-loss shakes and supplements, despite company policies aimed at preventing such tactics.
Funds from the $200 million settlement will go to distributors in Herbalife’s “Nutrition Club” who bought large volumes of products and lost money.
“The settlements are an acknowledgment 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 Chairman and CEO Michael Johnson.
Herbalife said in a statement that numerous FTC’s allegations are “factually incorrect” but chose to accept the settlement to avoid lengthy and costly litigation.
The company agreed to pay the IL attorney-general $3 million as part of another agreement. Icahn famously called hedge fund manager Ackman a “liar” and a “crybaby” in a CNBC interview in 2013.
Herbalife uses a massive network of independent distributors to sell powdered shakes, vitamins and other tablets created to help people manage their weight, boost energy and calm stress.
The deal was a blow to activist investor Bill Ackman who was betting against the company.
An independent monitor funded by Herbalife will oversee the company’s operations, the FTC said.
“We agreed to the terms and to pay $200 million because we simply wanted to move forward with our mission”, said a company spokesperson. While she acknowledged the FTC complaint did not charge Herbalife with operating a pyramid scheme, she said the investigation documented serious problems with the company’s business practices. The agency noted that most of the Herbalife distributors do not make any money at all.
To understand how it reached this settlement, it’s important to first take a brief look at what happened to get here.
On Friday Ackman’s Pershing Square Capital Management LP issued a statement standing behind its characterization of Herbalife.
Ackman, who bet $1 billion against Herbalife’s stock, has predicted the company’s eventually collapse, but Wall Street responded positively to Friday’s news. In its statement about the settlement, the company announced Icahn is now permitted to increase his ownership stake in the company up to 35 percent.
Still, the FTC had extremely tough words for Herbalife and made clear it sees many of its practices as deceptive.
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Buoyed by the agreement that enables the company to continue operations under a new structure, investors sent Herbalife (HLF) shares almost 18.6% higher to $70.39 in morning trading.
