Investor William Ackman took another blow in his crusade against Herbalife Ltd. , as the nutritional products company struck a settlement with regulators that, while critical of the firm, stopped short of calling it a pyramid scheme.
Herbalife agreed with the Federal Trade Commission to pay $ 200 million to settle government allegations it misled consumers. Herbalife, which Mr. Ackman has called a "criminal enterprise," will be allowed to stay in business.
The deal is a victory for the company in its battle with Mr. Ackman, who has waged a four-year effort to discredit Herbalife in one of the most unusual and aggressive investor campaigns.
At the same time, Herbalife's settlement with the FTC in many ways vindicates Mr. Ackman's scathing indictment of the company.
In the decision, the FTC on Friday blasted Herbalife's operations and said the company will have to make big changes, forcing it to come up with definitive proof that its nutritional shakes and other products are actually being sold to consumers. Mr. Ackman saw hope in that demand, contending Herbalife won't be able to deliver such evidence.
The settlement sets the market as the ultimate arbiter in this fight, and the sharp gain in the stock Friday is a sign that his campaign so far has been a failure, adding pressure to his already struggling portfolio.
Herbalife shares rose 9.9%, to close at $ 65.25, after earlier jumping more than 20% and touching a two-year high on the news, which was first reported by The Wall Street Journal.
"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," Herbalife Chief Executive Michael Johnson said. Herbalife, which has always maintained it has actual sales, said it disagreed with the FTC's findings.
Mr. Ackman said the lack of a "pyramid" label was less important than the FTC's findings. "We expect that once Herbalife's business restructuring is fully implemented, these fundamental structural changes will cause the pyramid to collapse," Mr. Ackman said.
The stock move Friday puts Mr. Ackman's $ 1 billion bet against the company further in the red, though it is unclear by how much. For his Pershing Square Capital Management LP to break even, Herbalife shares need to trade in the low $ 30-a-share range, roughly half the current level.
Mr. Ackman indicated Friday that he would stick with the position, but how long he can do so is uncertain, especially while Pershing Square's portfolio is being battered by other sour bets.
The portfolio is down 19% this year after a similar drop in 2015, hammered by a big investment in embattled drugmaker Valeant Pharmaceuticals International Inc. Mr. Ackman has blamed Valeant for losses in other positions in his portfolio, saying rival hedge funds that trade in his stocks have been forced to liquidate positions.
Meanwhile, one of the most colorful and talked-about Wall Street fights, which has pitted Mr. Ackman against another larger-than-life figure on Wall Street, Carl Icahn, looks likely to continue. Mr. Icahn took the other side of the Herbalife bet after Mr. Ackman went public with his negative wager.
Herbalife said Friday that it granted Mr. Icahn the right to boost his stake in the company to 34.99%, nearly double the 18% he currently holds. Mr. Icahn professed his faith in the company's future and said the settlement is a validation of his investment thesis.
"While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject," Mr. Icahn said in a statement. "I believe that now the cloud over Herbalife is gone, the company will continue to grow."
Herbalife, based in Los Angeles, sells protein shakes, snacks and other weight-management products through a network of distributors who also can sign up new recruits and get paid based on a portion of their sales. For the first quarter, Herbalife reported a profit of $ 96 million on sales of $ 1.12 billion.
The settlement "forces the company to implement a major restructuring of its business operations," FTC Chairwoman Edith Ramirez said. "We focused less on the [pyramid] label than on making sure [the FTC's case] alleged what we considered to be the core problem with Herbalife's business practices," which the FTC called unfair and deceptive.
The settlement requires Herbalife to reward actual retail sales instead of the recruitment of distributors. The settlement also will require Herbalife to verify, through receipts and other methods, that its product sales are legitimate.
This will force the company to prove it has underlying users who use its products. The settlement also bars Herbalife from misrepresenting distributors' potential earnings and prohibits the company from claiming that Herbalife members will be able to quit their regular jobs or live lavish lifestyles.
Herbalife "does not offer participants a viable retail-based business opportunity" and instead encourages "the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product," the FTC's legal complaint said. The commission said the "overwhelming majority" of distributors make little or no money, with a "substantial percentage" losing money.
In December 2012, Mr. Ackman rented a conference hall and launched his campaign against the company with a presentation titled "Who wants to be a Millionaire?"
Mr. Ackman made his Herbalife campaign personal, pledging to protect those signing up to distribute its products, particularly Hispanics. He hosted several presentations, including one he billed as a "death blow" in July 2014. There, he called Herbalife's Mr. Johnson a "predator" and appeared to break down into tears.
"This is a criminal enterprise," he said that day. "I hope you're listening, Michael. It's time to shut this company down."
Write to David Benoit at david.benoit@wsj.com and Brent Kendall at brent.kendall@wsj.com
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