Herbalife gets a second life
Steve’s breakdown: So Herbalife is not a pyramid scheme. Or at least the court convicted the company to stop operating like one. Now distributors are going to get paid on what they sell, not on how many people they recruit. It’s a big shift and getting the right campaign out there will be crucial. Are you the ones to do the work?
LOS ANGELES, CA: Let’s hope embattled hedgie Bill Ackman has plenty of aspirin today.
Herbalife shares Friday morning surged as much as 13 percent in pre-market trading after the nutrition shake maker settled a long-running regulatory probe and avoided being labeled a pyramid scheme.
Under the settlement, Herbalife will pay $200 million to compensate its independent-contractor distributors whom the company misled into “believing they could earn substantial money selling diet, nutritional supplement and personal care products.”
Ackman bet $1 billion — and a huge chunk of his reputation — nearly four years ago that the Los Angeles company was a massive fraud that cheated its mostly Hispanic distributors.
In dozens of public appearances since his December 2012 declaration of war against the company, he maintained he would ride his bet to the ends of the Earth.
While the settlement is certainly a blow to Ackman, it isn’t a decisive victory for Herbalife. The company will have to restructure its business and mostly notably its compensation and incentives structure, which Ackman has long said is responsible for much of the bad behavior seen at the company.
“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 in a statement.
“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 as a result of what we charge are unfair and deceptive practices,” she added.
The FTC had filed a 42-page complaint in federal court in California and the settlement closes out the case.
Both Ackman’s Pershing Square hedge fund and Herbalife hired legions of lobbyists, and the Washington battle — waged at the Federal Trade Commission, with lawmakers on Capitol Hill as well as in statehouses across the country — was one of the most watched slow-motion showdowns on Wall Street.
“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 Chairman and CEO Michael O. Johnson said in a statement.
Ackman and Pershing Square could not immediately be reached for comment.