Herbalife Owes 200M After FTC Settlement

Herbalife officially owes $200 million after agreeing to a settlement that will end a two-year FTC investigation into allegedly deceptive business practices. The settlement marks a massive victory for Herbalife despite the $200 million price tag, since the supplement company will walk away from the investigation without the FTC labeling it a pyramid scheme.

In addition to paying $200 million, the settlement will also force Herbalife to alter its business model and avoid misleading claims about potential earnings.

According to Herbalife CEO Michael Johnson, the $200 million FTC settlement and a separate $3 million settlement with Illinois are proof of a sound business model.

"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," Johnson wrote in a statement.

Johnson also indicated that the settlement terms, "in no way change our business model as a direct selling company but simply build upon current procedures," which is at odds with statements issued by the FTC.

"This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit," FTC chairwoman Edith Ramirez said.

CNN Money reports that Herbalife is a multilevel marketing company, similar to household names like Mary Kay and Tupperware, that relies on distributors recruiting other distributors to sell products. Each distributor receives a portion of the sales made by their recruits, which has led to allegations that Herbalife is actually operating a pyramid scheme.

Allegations that Herbalife is a pyramid scheme were first leveled by hedge fund manager Bill Ackman in December, 2012, two years before the FTC opened its own investigation. At that time, Ackman announced that his Pershing Square Capital Management hedge fund had shorted $1 billion worth of Herbalife stock. With a position like that, Pershing would stand to make a tremendous amount of money on the back of an Herbalife failure.

herbalife ackman short sale
Ackman's Pershing Square would make a great deal of money if Herbalife failed, but he pledged his own hypothetical piece of any short sale to charity. [Photo by AP Photo/Manuel Balce Ceneta]In a 2012 interview with Bloomberg, Ackman called Herbalife's profits "blood money" and pledged to donate his own personal share of profits from the short position to charity.

Herbalife stock has more than doubled, from less than $30 per share to more than $60, since Ackman first attacked the company in December, 2012.

Following the announcement of the $200 million settlement on Friday, Herbalife stock soared nearly 15 percent, according to CNN Money.

While the outcome of the FTC investigation may have been a defeat for Ackman, who has publicly fought with Herbalife investors for years, many of his complaints were addressed in the terms of the settlement.

In a statement issued following the $200 million settlement announcement, Pershing Square suggested that the terms imposed by the FTC may cause Herbalife to collapse in the long term.

"We expect that once Herbalife's business restructuring is fully implemented, these fundamental structural changes will cause the pyramid to collapse as top distributors and others take their downlines elsewhere or otherwise quit the business."
Ackman's Pershing Square maintains an anti-Herbalife website that highlights misleading claims about distributor earnings. Central to the claim that Herbalife is a pyramid scheme is the assertion that 99 percent of distributors earn less than minimum wage, and most make nothing or even lose money, while the top 0.12 percent earn nearly $150,000 each year.

[caption id="attachment_3311606" align="aligncenter" width="670"]herbalife pyramid scheme settlement According to the FTC, "recruiting, rather than retail sales,is the natural focus of successful participants in [Herbalife's] business opportunity." [Photo by Brian Blanco/AP Images][/caption]Although Herbalife CEO Michael Johnson has stated that his company will not have to substantially change its business practices, the terms of the FTC settlement not only say that Herbalife owes $200 million to its distributors, but that it will also have to make substantive changes going forward.

"Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make," FTC chairwoman Edith Ramirez said of the settlement terms, "And it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices."

According to USA Today, 80 percent of Herbalife product sales must be to "legitimate end users" rather than to distributors, and two-thirds of the rewards that Herbalife pays out must be based on verified retail sales rather than sales to other distributors.

Some of the $200 million settlement will be paid out to Herbalife distributors that lost money, while Herbalife will also be responsible for funding an independent monitor to verify that the company adheres to the terms of the settlement.

Do you think that the FTC was right to extract a $200 million settlement from Herbalife, or do you think the company is a pyramid scheme that should have been shut down?

[Photo by AP Photo/Richard Drew]