Washington, D.C. -Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd. plan to restructure their US business as part of a Federal Trade Commission (FTC) settlement. The FTC is also forcing Herbalife to pay a record $200 million fine to compensate those whom the FTC says it defrauded with unrealistic promises of riches, and it will also be under the watch of an independent compliance monitor to make sure it adheres to the settlement.
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Buoyed by the agreement that criticized the Los Angeles-based company but allowed it to continue operations in modified form, investors sent Herbalife (HLF) shares up almost 11.9% to $66.41 in early afternoon trading.
The FTC settlement requires Herbalife to reorganise its compensation system to reward retail sales more than recruitment.
“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 Friday that it agreed to pay $3 million as part of a separate agreement with the IL attorney general’s office to settle an investigation there.
Bill Ackman speaking about Herbalife on July 22, 2014.
The company has been unofficially labeled a pyramid scheme by high-profile investors such as Bill Ackman, who has bet against the company for years.
Edith Ramirez, FTC Chairwoman, said that Herbalife sold people a fake dream. At that time, Ackman announced that his Pershing Square Capital Management hedge fund had shorted $1 billion worth of Herbalife stock.
Johnson added that Herbalife agreed to the settlement because the company wanted to move forward and avoid further litigation.
Mr Ackman made several public allegations that Herbalife was a “bad” company that relied on a hierarchical structure that focused on recruiting new salespeople rather than selling products.
Herbalife’s agreement with the Federal Trade Commission had noted shareholder activist Carl Icahn, who owns the largest stake in the company, crowing that the pact vindicates his contention that the multi-level marketing firm is not a pyramid scheme, as critics have claimed.
In a statement issued following the $200 million settlement announcement, Pershing Square suggested that the terms imposed by the FTC may cause Herbalife to collapse in the long term.
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 late 2012, Ackman excoriated Herbalife with a 342-slide, three-hour PowerPoint presentation, saying the company was a scam and a pyramid scheme.
He has continued to claim that Herbalife was a fraud that misrepresented its sales.
“In direct response to the interview where Brian Ross brought to light instances of members making unauthorized product claims, the company began a significant re-training initiative”, Herbalife spokeswoman Barb Henderson said in an email then.
Ramirez said that the goal of the complaint was to put out what it believed were “unfair and deceptive practices” on the part of Herbalife and to “obtain relief promptly and in a timely fashion, as opposed to litigating for perhaps years”.
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Not so fast, said Ackman, who has waged a 3 1/2-year short campaign, seeking to profit from Herbalife’s demise.
