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Herbalife strikes $200 million settlement with FTC over business practices
Herbalife will have to “fully restructure their US business operations” and pay the FTC $200 million to compensate consumers.
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Herbalife will now hand over $200 million, which will eventually go back to the pockets of employees who lost money after buying the company’s products in bulk, as well as rework the way it compensates its employees, including eliminating paying distributors for recruiting others.
Negating its refusal to accept that it doesn’t pay up perks to distributors for sales, the agency said that the compensation structure does give incentives to distributor; they can recruit others to join in and buy the products to offer a boost to the company’s marketing program. The Herbalife board also agreed to increase Icahn’s ownership limit to 35 percent from 25 percent, letting the investor take a more active role in steering the company’s strategy – and potentially push it toward acquisitions.
Still, Herbalife’s 9.9 percent rally on Friday put Ackman further away from making money on his short bet.
Herbalife, which operates under a system known as multilevel marketing, has to overhaul its compensation system so that it rewards retail sales, not recruitment by distributors.
A number of media outlets, such as CNBC, are reporting the FTC ruled Herbalife is not a pyramid scheme.
“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 couple of times that the Company would be shut down”, the statement reads.
Herbalife said Friday that it also reached a US$3 million settlement with the IL attorney general and that it’s not aware of any other active state investigations. This leads to almost half of the entire Herbalife distributor base quitting in any given year. “Otherwise, we would not have agreed to the terms”, said Herbalife Chief Executive Michael O. Johnson.
The agreement between Herbalife and FTC ended the two-year investigation of the accusation that Herbalife were running an illegal pyramid scheme, in which Herbalife made money by hiring sales people and selling their stakes, rather than selling the product itself.
The company promised that sellers who got into the Herbalife business could get rich. The ICA will monitor the company for seven years and will report to the Commission.
“While certainly we’ve been a patient investor here, I think this is the most attractive Herbalife has been from a risk-reward standpoint, and that’s why we stayed short”, he added. At the end of 2012, Ackman’s Pershing Square fund placed a huge bet that Herbalife’s share price would plummet amid the allegations.
Back in 2013, billionaire Dan Loeb bought Herbalife at around $28 per share before selling the stock just weeks later at $44. Loeb said his quick Herbalife trade in opposition to Ackman was “not personal”.
The National Consumers League (NCL) said it looked forward to the guidance and welcomed the settlement with Herbalife. 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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“Moreover, the Company’s management can now focus all of its energies on continuing to build the business and exploring strategic business opportunities”, the statement said.