Herbalife Ltd. agreed to pay $200 million and make sweeping changes to its business to settle U.S. claims that the nutrition company deceived consumers with get-rich-quick promises.
The U.S. Federal Trade Commission stopped short of hedge fund manager Bill Ackman’s call to declare Herbalife a pyramid scheme and to shut it down, but it described the company’s business in harshly critical terms and said it must restructure and stop misrepresenting how much money its members are likely to make.
Herbalife claimed that people could quit their jobs and earn thousands of dollars a month by selling its shakes and nutritional supplements even though the vast majority earned little or no money. These practices caused “substantial economic injury,” the agency said in a statement Friday.
At a news conference, FTC Chairwoman Edith Ramirez wouldn’t call Herbalife a pyramid scheme but also wouldn’t say that it wasn’t one. “Our focus isn’t on the label,” she said.
“The company promised people a dream: a chance to change their lives, quit their jobs and gain financial freedom,” Ramirez said. But that dream “was an illusion,” she said.
Investors cheered the settlement, bidding up Herbalife’s shares 9.9 percent to close at $65.25 in New York. But the agreement’s long-term effect on Herbalife’s results and recruiting are unclear. The FTC is forcing changes that could make it more difficult for distributors to make money.
Herbalife will have to depend on retail sales, which are to be verified by receipts, instead of bulk purchases by members.
“They will have to demonstrate retail sales,” said Tim Ramey, an analyst for Pivotal Research Group. Ramey is one of the few analysts still covering Herbalife and has defended the company throughout Ackman’s onslaught. “I don’t think Herbalife would have agreed to a deal they couldn’t do. But the proof is in the pudding.”
Herbalife remained confident. “The settlements are an acknowledgment that our business model is sound,” Herbalife’s chairman and chief executive officer, Michael O. Johnson, said in a written statement.
Ackman’s Pershing Square Capital Management spent more than $50 million on a public campaign to expose Herbalife as a pyramid scheme and make good on his $1 billion bet against its shares. The attempted takedown has captivated Wall Street since December 2012 when Ackman presented his thesis at an investor conference.
He would later say the company was a fraud on the scale of Enron Corp.
Source: Bloomberg
