The investigation of the Federal Trade Commission (FTC) against Herbalife Ltd. (NYSE:HLF) of the allegations that it is a pyramid scheme may lead to a consent decree wherein the company will be required to agree to change its business and pay a penalty, according to the report released by Barclays Equity Research based on an interview conducted by its analyst Meredith Adler with a lawyer who is also an expert in multilevel marketing (MLM).
According to attorney Kevin Thompson, if the company agreed to sign a consent decree, it will not have an impact on the business operations of the company in other countries. Herbalife Ltd. (NYSE:HLF) generates around 75% to 80% of its revenue outside the United States. The lawyer said other countries will probably be aware of the decree, but will continue to implement their own MLM laws. Some of the other countries have stricter laws, such as China.
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Another potential outcome is for the FTC investigation to take a period of time or the agency may also file a lawsuit against Herbalife Ltd. (NYSE:HLF), but Thompson opined that it may not happen with the seller of nutritional and weight loss products.
“I just don’t see them [referring to FTC] going after a public company like Herbalife. I don’t see why the FTC would want to sue these guys. And I’m really careful when I say that. I am not a naïve person. And when it comes to the government, you can’t really predict what they’re going to do. But there are so many companies that are better target than Herbalife. A suit just doesn’t make sense to me,” said Thompson.
Not enough evidence to win a lawsuit
During the interview, Thompson said the FTC had the option to file a lawsuit against Herbalife Ltd. (NYSE:HLF) to stop its business operation, but chose to conduct an investigation. According to him, the action of the regulator suggests that it did not have enough evidence under the current laws to win a case.
The lawyer explained that the existing law is ambiguous, and previous court opinions regarding the issue have been conflicting. According to Thompson, the most fundamental issue is whether an MLM company is selling products that have real value to end consumers as well as to the distributors.
When asked about whether the state attorneys general will launch their own investigation, Thompson said no because they normally act in conjunction with the FTC, based on how it’s worked in the past several years.
Investigation prompted by publicity
The lawyer opined that the investigation of the regulator against Herbalife Ltd. (NYSE:HLF) was induced by publicity and demands from lawmakers such as Senator Edward Markey. He added that the FTC probably intends to use the results of its inquiry to determine how to update the existing law. Furthermore, he emphasized that any change in the law will not be applied retroactively as part of a lawsuit against the company.
Barclays Equity Research maintained its Overweight rating for the shares of Herbalife Ltd. (NYSE:HLF) with a $94 price target. The financial research firm explained that its stock rating was based on the fact the company transformed its business model from selling bulk orders sporadically to selling smaller volumes frequently.
“This shift has driven significant growth, and we expect this momentum to continue,” according to the financial research firm.