FTC says Herbalife’s multi-level marketing structure unfairly rewarded distributors for recruiting others to join, rather than reward them for what they actually sold, “causing substantial economic injury to many of its distributors”.
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The stock has rallied higher after the US Federal Trade Commission (FTC) cleared the global nutrition company of charges that it functions as a pyramid scheme.
The FTC investigation also focused on this structure.
Herbalife said: “We announced a settlement with the FTC that does not change our direct selling business model and will set new standards for the industry”.
If the report from Dow Jones that the FTC has indeed found no evidence of a pyramid scheme it would be a huge loss for the brash and outspoken Ackman. In the eyes of company officials, this proves their business practices are solid.
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.
The agreement will be hard to implement, said Robert FitzPatrick, who formed Pyramid Scheme Alert in 2000 to monitor and oppose pyramid schemes.
“We didn’t allege a pyramid deception count”.
He has continued to claim that Herbalife was a fraud that misrepresented its sales. The move could set the stage for Icahn and others to take Herbalife private, an action that would make it hard to determine the economic impact of the changes in business practices on Herbalife’s bottom line.
Under the settlement, Herbalife will pay for an independent monitor who will oversee its compliance for seven years.
The Federal Trade Commission said some people who sold Herbalife products lost more money than they made. The company also struck a separate settlement with the Illinois Attorney General, in which it would pay $3 million.
But FTC Chairwoman Edith Ramirez had harsh words for Herbalife and said it would “have to start operating legitimately”. “We agreed to the terms and to pay $200 million because we simply wanted to move forward with our mission”.
In a press release, the company said that it believes “many of the allegations made by the FTC are factually incorrect”, but said it agreed to settle to avoid the financial cost and distraction of “protracted litigation”.
The company has been a battleground between two Wall Street titans: hedge fund manager Bill Ackman who bet big against the company and activist investor Carl Icahn, who is major investor in Herbalife, now owning 18.3 percent of its shares.
As other major investors took opposing positions, Herbalife not only recovered, but its shares by a year ago were reaching all-time highs, a catastrophe for Ackman who, even this week, was publicly forecasting the company’s complete collapse.
“Obviously, we are still here”, he said.
The Pershing Square Capital chief has had a long-standing and very public short position on the dietary supplement company.
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“99% of Herbalife distributors earn less than minimum wage and 86% earn nothing from the company”, Pershing Square said.
