The Federal Trade Commission has reached an agreement with Herbalife, that kept it from being labeled a pyramid scheme.
In a release on Friday, the FTC said Herbalife, a multilevel marketing firm that sells nutritional supplements, will restructure its operations and pay $200 million. It will have to change some of its marketing tactics and its reward system for sales leaders.
The FTC opened a probe into the company after hedge fund manager Bill Ackman alleged that it operated like a pyramid scheme – which would be illegal. Ackman began his crusade against Herbalife in December 2012, with a $1 billion bet the stock would fall.
The shares jumped over 17% following the news Friday, rising to their highest level since early 2014.
The FTC’s complaint showed that half of Herbalife’s top sales leaders earned less than $300 on average in 2014 and were encouraged to recruit more sellers regardless of whether there was consumer demand.
Under the settlement, Herbalife must get rid of incentives that reward distributors primarily for recruiting, the FTC said. The new compensation structure would depend on whether participants sell Herbalife products, not on whether they buy.
Herbalife’s board granted Carl Icahn, the billionaire investor who was already the company’s largest shareholder with an 18% stake, the right to increase his ownership to as much as 35%.
“While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject,” Icahn said in a statement. “Simply stated, the shorts have been completely wrong on Herbalife.”
In July 2014, Ackman published a 235-page slide deck detailing why Herbalife was “the big lie.”
- Google Finance