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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Dietary supplement firm Herbalife has reached a deal with the US Federal Trade Commission (FTC) to avoid being labelled a pyramid scheme.
Shares are surging in premarket trading.
The FTC’s complaint against Herbalife accused the company of misleading consumers by suggesting those consumers could earn significant income by selling Herbalife products; compensation, however, was based on whether consumers were then able to recruit others into selling Herbalife products and was not based on actual product sales.
Thus, participants’ wholesale purchases from Herbalife are primarily a payment to participate in a business opportunity that rewards recruiting at the expense of retail sales. The agency has concluded that Herbalife participants have been earning little-to-no profits on the sale of the company’s retail products.
The FTC said Herbalife must change its marketing, recruiting and the way it measures sales.
The FTC is also requiring Herbalife to “fully restructure their US business operations”.
Ackman’s Pershing Square Capital Management had taken large short positions betting Herbalife’s shares would fall.
In settling with the FTC, Herbalife has agreed to pay $200 million for consumer relief, an amount it had previously disclosed it expected to pay as part of any settlement.
Ackman noted that the Federal Trade Commission (FTC) had ordered changes to the way Herbalife does business, and that eventually those will undermine the company’s business model.
Mr. Ackman tried to show the FTC, along with consumers, for years what he thought about HerbaLife – which was that it was nothing but a pyramid scheme created to rip off its consumers.
Herbalife was structured so that members bought nutritional supplements in bulk directly from the company, before selling them off to others in order to turn a profit.
Herbalife said that Jon Leibowitz, a former chairman of the FTC, would advise the board of directors regarding compliance with the settlement.
Herbalife separately agreed to pay $3 million in an agreement that ends a separate investigation by the Illinois Attorney General’s office. After the FTC settlement was announced Ackman continued to argue that the company will soon collapse even if the feds don’t order operations to cease. Shares of Herbalife (NYSE:HLF) jumped to more than $70 a share and fluctuated between $65 and $70 throughout the morning. “Otherwise, we would not have agreed to the terms”, said Herbalife Chief Executive Michael O. Johnson.
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Under the settlement terms, at least two-thirds of the rewards that Herbalife pays to distributors must be based on retail sales of Herbalife products that are tracked and verified. “Simply stated the shorts have been completely wrong on Herbalife”, Icahn said in a statement.
