Herbalife Ltd. agreed to pay $ 200 million to settle U.S. claims that the nutrition company deceived consumers with get-rich-quick promises, as the U.S. government forced sweeping changes to the company's business but stopped short of hedge fund manager Bill Ackman's call to shut it down.
Carl Icahn
Photographer: Victor J. Blue/Bloomberg
The U.S. Federal Trade Commission described the firm's business in harshly critical terms and said the company must restructure and stop misrepresenting how much money its members are likely to make. Herbalife claimed people could quit their jobs and earn thousands of dollars a month by selling its shakes and supplements even though the vast majority earned little or no money. These practices caused “substantial economic injury,” the agency said in a statement Friday.
“Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered,” FTC Chairwoman Edith Ramirez said.
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. All the while, Herbalife defended itself.
Herbalife shares were up 18 percent to $ 69.53 at 10:02 a.m. in New York. Herbalife already had gained 11 percent this year through Thursday.
A spokesman for Pershing Square didn't have an immediate comment.
The FTC's statement backed up some of Ackman's claims. It said the multi-level marketing company's compensation structure was “unfair” because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program “rather than in response to actual retail demand for the product."
Herbalife has said there is real demand, although it hasn't provided much proof. The company sells products to its distributors and says that after that it can't be sure what happens. It has instead pointed to surveys that it paid for showing it had almost 8 million customers in the U.S.
Billionaire activist Carl Icahn quickly became Herbalife's biggest shareholder and has installed five board members, pitting both his money and inner circle against Ackman's effort to bring down the nutrition company. Short sellers aim to profit from a declining stock by borrowing shares, selling them and then buying them back at a lower price.
Herbalife said Friday that it also reached a $ 3 million settlement with the Illinois attorney general and that it's not aware of any other active state investigations.
Ackman's campaign has continued to this week — Pershing Square released its 18th video July 14 in a series criticizing the company online. The billionaire, who said early on it was a "certainty" Herbalife was a pyramid scheme, took extraordinary measures to influence the outcome, including hiring investigators to dig into Herbalife's operations and producing videos of unhappy distributors.
"This is the highest conviction I've ever had about any investment I've ever made," Ackman said in 2012.
The dispute boiled down to whether there is legitimate demand for Herbalife's weight-loss shakes and supplements by actual consumers, which is the FTC's test for a pyramid scheme. Ackman said there isn't such demand. He says the company's revenue is derived from sales goals it sets for independent contractors who must buy products from the company. Few of the contractors achieve those goals, Ackman contends.
Herbalife products aren't sold in traditional stores. They're distributed by independent contractors who market to family, friends, neighbors and just about any stranger they come across, typically in that order.
The distributors can make money by buying products at a discount and selling them at a markup. The bigger payoff comes when distributors broaden their reach by recruiting, training and coaching a "downline" sales team that sells products to friends, neighbors and strangers and then earn royalties and bonuses from those sales.
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