The Federal Trade Commission announced the settlement Friday, claiming that the company “deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products“. CEO Michael Johnson says, “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”.
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The company reached a settlement with the FTC today that has it paying a $200 million fine and will force the company to improve disclosures about its distributors and change its compensation structure.
In trading Friday, Herbalife shares rose almost 10% to $65.25, an apparent blow to short-sellers including Ackman who had been betting that the FTC would determine the company is a pyramid scheme.
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.
Herbalife disclosed in 2014 that it was being investigated by the FTC for possible “deceptive practices”. Herbalife also issued a statement, saying the settlement does not change its business model as a direct selling company.
Herbalife, which also settled a probe by the IL attorney general for $3 million, spun the resolutions as a vote of confidence that the company was on solid ground.
Herbalife also gave Carl Icahn the right to boost his stake in the company to up to 34.99%, up from 25%.
While that definition might seem to fit what the FTC alleged about Herbalife’s practices, the phrase “pyramid scheme” did not appear in the agency’s news release or formal complaint.
In Friday Pre-Market trade, HLF is now trading at $64.44, up $5.08 or 8.56%.
The company became a battleground for Icahn and Ackman, two of the most outspoken USA investors, who became embroiled in a public war of words over their opposing bets. The majority of people broke even or lost money, according to the FTC.
We congratulate the FTC for enforcing the law that will lead to protections for consumers in the United States and the rest of the world. “Obviously, we are still here”.
Far from being contrite, Herbalife described the agreements as a victory that concluded all active investigations known to the company. Before it can pay distributors “at current levels”, the company will have to verify using receipts or “other reliable methods” that at least 80% of sales are made to “legitimate end-users”.
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.
As part of the settlement, Herbalife did agree to tweak how it does business.
The $200 million payment will include compensation for certain consumers who purchased Herbalife products.
The company is required by the FTC to pay for an independent compliance coordinator; that coordinator will be a board headed by former FTC chairman Jon Liebowitz.
“The company promised people a dream – a chance to change their lives, quit their jobs and gain financial freedom”, FTC Chairwoman Edith Ramirez told reporters, “but the FTC has charged that this wasn’t true”.
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“Simply stated, the shorts have been completely wrong on Herbalife”, Icahn said.
