Herbalife Ltd. (NYSE:HLF) revealed in a U.S. court filing that it would pay $15 million to settle a class action lawsuit brought by a former distributor claiming the company is running a pyramid scheme.
The settlement also requires the nutrition and supplements company to make numerous changes to its business model.
Allegations against Herbalife
In April last year, Dana Bostick, a former salesman, filed a lawsuit against Herbalife Ltd. (NYSE:HLF) contending that he and hundreds of thousands of other distributors have failed to make much money by trying to sell the products. He alleged that the company was running a pyramid scheme.
Activist investor Bill Ackman has been steadily chipping away at the company’s credibility and business model for nearly two years. He has also called Herbalife Ltd. (NYSE:HLF) a pyramid scheme and said that the company’s distributors don’t comply with laws governing multi-level marketing companies. He also accused the nutrition company of misrepresenting sales numbers and inflating prices for commodity products.
Companies such as Herbalife Ltd. (NYSE:HLF), Nu Skin Enterprises, Inc. (NYSE:NUS) and USANA Health Sciences, Inc. (NYSE:USNA) have come under the scrutiny of short-sellers and other critics who have accused the companies of running pyramid-type schemes. The critics claim the sales model under which distributors make money not only from their own sales, but from people they recruit as distributors, are illegal.
$15 million settlement
According to a court filing that granted preliminary approval for the settlement on Friday, Herbalife Ltd. (NYSE:HLF) will pay $15 million cash, plus up to $2.5 million for product returns. The settlement also mandates the company to make numerous changes to its business model for at least three years after the settlement receives final approval.
The nutrition and supplements company must also make a number of changes to its corporate policies, including how it defines its distributors, paying shipping charge for products that are legitimately returned by members and making clarifications in its membership agreement to make them less confusing. The settlement also stipulates that the product return fund would be available to distributors who file valid claims for the return of unused and unopened products.
In its statement, Herbalife Ltd. (NYSE:HLF) said the company has been aggressively defending itself against Bostick’s allegations ever since the lawsuit was filed in 2013. However, the company indicated the potential cost, as well as the distraction, disruption and burden of prolonged litigation on the company and its management team, led the company to decide that the terms set forth in the settlement agreement provided the best path for moving forward.