Herbalife shares climbed today after news that a federal judge has approved a settlement in a class action lawsuit filed against the company by a group of former distributors. The stock climbed as much as 5.79% to $50.44 per share during regular trading hours today.
Investors more comfortable with Herbalife
In a report dated May 18, Barclays analyst Meredith Adler and her team said the settlement should provide investors with some comfort regarding Herbalife’s business model. The multi-level marketing company has been under siege by activist investor Bill Ackman for about two and a half years as he alleges that it’s a pyramid scheme.
In her 60-page ruling, the judge said it seems as if the 7,457 former distributors (of the 1.5 million who were eligible file claims) “are unlikely to have suffered any financial losses on a failed business opportunity.” She said the evidence indicates that most distributors sign up for Herbalife membership for the purpose of getting discounts on products for personal consumption, which meant their reason for signing up wasn’t “to generate or pursue an entrepreneurial enterprise.”
As a result, she doubts that they had any unopened and unused products that they wanted to return for a refund. The class action case that’s been settled is the one that was filed by plaintiff Dana Bostick.
Herbalife to pay for settlement
Even though it seems as if Herbalife’s business model is in the clear, the company still has to pay for the settlement. The payment is a total of $17.5 million, of which $2.5 million is to set up a product return fund, The other $15 million will be paid to former distributors who were able to demonstrate that they did sign up for Herbalife for the business opportunity. Also about $5.25 million will go toward attorney fees.
Herbalife also agreed to make 13 changes, most of which have already been implemented. Among them is the halting of the “Package and Handling Fee” and “Order Shipping Charge,” both of which have been disputed by those who oppose the company. The company will also require members to be active for 90 days or more before they can open a nutrition club.
Herbalife still under investigation
Ackman is undoubtedly very unhappy with today’s increase in Herbalife’s share price. The stock still remains below the one-year high of nearly $70 per share, which was in July 2014. Today’s increase does demonstrate that investors are now a bit more convinced that Herbalife will be cleared when the Federal Trade Commission wraps up its investigation. Those who are bullish on the company have been saying for some time that the company is not running a pyramid scheme and will ultimately be cleared.
In the company’s 10-Q filing with the Securities and Exchange Commission earlier this month, it did officially disclose a Dept. of Justice investigation. There have been reports for some time that Herbalife had an undisclosed investigation, and the 10-Q filing basically confirmed those reports.