Herbalife dodges ‘pyramid scheme’ label and agrees to pay $200m fine

Stock soars as FTC chair says the investigation focused less on the label or shutting dieting supplements operations down, opting for the less severe charge

Dieting supplement sales company Herbalife dodged the pyramid scheme designation on Friday as it agreed to pay the US Federal Trade Commission a $200m fine. The FTC said Herbalife cheated hopeful salespeople out of hundreds of millions of dollars with a high-pressure multi-level marketing scheme.

Herbalifes stock received an immediate 15% increase following the news. The company also announced that it would hire a second former FTC commissioner in a press release describing the terms of the settlement.

The FTC required the company to restructure its operations so that it tracked and rewarded sales that ended in purchases by consumers, rather than that it allegedly hoodwinked junior retailers.

The regulators chairwoman, Edith Ramirez, said the FTC had stopped short of branding Herbalifes tactics a pyramid scheme or shutting its operations down, opting for the less severe unfairness charge.

We focused less on the label, Ramirez said. Herbalife issued a press release saying it would allow activist investor Carl Icahn to purchase an increased maximum 34.99% of the companys stock Icahn already owns about 18% of the companys stock.

The company is required by the FTC to pay for an independent compliance coordinator; that coordinator will be a board headed by former FTC chairman Jon Liebowitz. The company already boasts one FTC commissioner, Pamela Jones Harbour, in its executive suite; Harbour will specifically oversee the changes to the way the company rewards its distributors.

I have the greatest confidence in Herbalifes CEO, Michael Johnson, Icahn said in a press release. Johnson, who ran the company throughout the scandal was at one time the highest-paid CEO in the US, though he did lose his bonus in 2014.

The company promised people a dream: a chance to quit their jobs, change their lives and gain financial freedom, said Ramirez. Instead, the LA-based company paid out almost exclusively to employees who pressured other people to buy into the program at a cost of about $2,000 apiece. Herbalife enjoyed revenues from members in some of the worlds poorest countries, notably Ghana and Zambia.

A career selling Herbalifes products to consumers was effectively worthless, Ramirez told reporters on Friday; the only way to make money was for salespeople to buy its products in bulk, pressure new recruits into joining the company and then sell those products to the new employees.

The average amount that more than half of the elite members known as sales leaders received in a year for recruiting others into the Herbalife program was less than $300, Ramirez said. Far more made nothing or lost money on the initial investment.

Bill Ackman of Pershing Square Capital Management said in 2012 that he would short the companys stock and that his firms target price is zero because we think the business will fail and pledged to donate all proceeds from Pershing Squares short position on the companys stock to charity.

The companys stock price has risen in the subsequent years.

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