NEW YORK: The direct sales nutrition company Herbalife was cleared by the US Federal Trade Commission Friday of accusations that it is essentially an illegal pyramid scheme.
But the company still must pay $200 million to settle complaints that it deceived consumers over the potential gains for selling its products, the FTC said.
The decision cleared the air for Herbalife, which has been the focus of a multi-year open battle between powerful Wall Street activist investors including Carl Icahn and Bill Ackman, and sent its share rocketing more than 18 percent to $70.07 in early trade.
The FTC investigation focused on how Herbalife’s sales structure depended on multiple levels of people buying its products and finding others to further redistribute them. That created a chain of distributors without clear evidence of actual retail demand for the products.
The FTC had charged that Herbalife had deceived consumers to believe they could make substantial profits bringing their products to market.
It also charged that Herbalife’s compensation structure essentially rewarded distributors for recruiting other distributors in ways that did not relate to actual retail demand.
The FTC said the average amount that more than half of its distributors earned in 2014 was under $300, at odds with marketing promises that people earn thousands of dollars each month.
In the settlement, Herbalife was required to restructure its compensation system to reward actual retail sales to users of its nutritional supplements and protein shakes.
Funds from the $200 million settlement will go to distributors in Herbalife’s “Nutrition Club” who bought large volumes of products and lost money.
“Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make,” said FTC Chairwoman Edith Ramirez in a statement.
In a statement, Herbalife said it considered many of the FTC’s allegations “factually incorrect” and stressed that the conditions it agreed to “do not change Herbalife’s business model as a direct selling company.”
“The settlements are an acknowledgement 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,” said chairman and chief executive Michael Johnson.
With the settlement, Herbalife’s board opened the door for Icahn to increase his 25 percent share in the company to 35 percent.
In a statement Icahn expressed confidence in the company, saying his research had disproved Wall Street rival Ackman’s accusations that Herbalife was a pyramid scheme without firm business foundations.
Ackman’s Pershing Square Capital Management had taken large short positions betting Herbalife’s shares would fall.
“Simply stated, the shorts have been completely wrong on Herbalife,” Icahn said. AFP