Dietary supplement firm Herbalife has reached a deal with the US Federal Trade Commission (FTC) to avoid being labelled a pyramid scheme.
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But the company still must pay $200 million to settle complaints that it deceived consumers over the potential gains for selling its products, the FTC said.
In a statement, Herbalife said it believed numerous FTC’s conclusions were “factually incorrect”, but believed the settlement was the best course of action given the prospect of lengthy and costly litigation. Billionaire investor Carl Icahn is now reportedly planning to boost his stake in the company to as much as 35 percent, up from his current 18.3 percent.
The agency ruled that Herbalife is a multi-level marketing company and not a pyramid scheme, scoring a major blow to bears who have argued for years that it is an illegal pyramid scheme.
Icahn said in a statement Friday that he continues to have the “greatest confidence” in Johnson and the Herbalife management team.
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. Ackman, who runs Pershing Capital, bet $1 billion that the company’s stock would fall and lobbied regulators and shareholders to scrutinize the company’s business model.
“I ended up earning more during the summer than my father”, he said.
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 shares tumbled 12 per cent before the presentation when word leaked that Ackman was shorting the shares, which would lead to huge profits if they fell. “When the stock collapsed, he got a margin call from Goldman Sachs”, Ackman said, forcing Pearson to sell more Valeant shares than he had planned.
The FTC settlement requires Herbalife to reorganise its compensation system to reward retail sales more than recruitment.
“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.
Nutrition company Herbalife owes the federal government $200 million. However, when pressed on this issue during a media conference, Ramirez said she does not endorse the statement that FTC has declared Herbalife is not a pyramid scheme.
“Many of the terms agreed to were either already being contemplated by the company or are extensions of practices already in place and will be implemented over the next 10 months”, the company said.
According to the terms of the settlement, Herbalife will have to make changes to the way it does business.
Ackman was not available for additional comment. By increasing his ownership, Icahn could position the company to go private, a move that potentially hides any negative economic impact of Herbalife’s business model reorganization.
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“Obviously, we are still here”, he said.
