Herbalife has agreed to refund $200 million to consumers and revamp its compensation system as part of a settlement of charges that it made false promises to distributors about how much money they could make.
The U.S Federal Trade Commission alleged in a consumer fraud complaint that the multi-level marketing company rewarded distributors for recruiting others to join and purchase products rather than for actually selling products, “causing substantial economic injury to many of its distributors.”
The settlement announced Friday stopped short of labeling Herbalife a pyramid scheme, as alleged by activist investor Bill Ackman. But FTC Chairwoman Edith Ramirez said it would “require Herbalife to fundamentally restructure its business.”
“Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make,” she said in a news release.
Under the new compensation system, at least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified, and no more than one-third of rewards can be based on purchases by other distributors.
In trading Friday, Herbalife shares rose nearly 10% to $65.25, an apparent blow to short-sellers including Ackman who had been betting that the FTC would determine the company is a pyramid scheme. At the end of June, about a quarter of the stock was held by short-sellers.
“While it appears that Herbalife negotiated away the words ‘pyramid scheme’ from the settlement agreement, the FTC’s findings are clear,” Ackman’s Pershing Square fund said Friday. “We expect that once Herbalife’s business restructuring is fully implemented, these fundamental structural changes will cause the pyramid to collapse.”
According to the FTC, Herbalife promised part-time income of $500 to $1,500 per month, and substantial full-time income, but “only a small minority of distributors have made anything near what the company promises” and a large majority “made little or no money and a substantial percentage lost money.”
The $200 million payment included in the settlement will go toward refunds for consumers who lost money after purchasing “large quantities of Herbalife products,” the FTC said.