Herbalife shares surged 10.34% to $65.50 after regulators said today that they have reached a settlement with the company. The Wall Street Journal reported early this morning that an announcement was imminent, and a short time later, the Federal Trade Commission issued a formal statement on the settlement.
Herbalife to pay $200 million
The FTC confirmed the earlier report that Herbalife will pay $200 million as “redress for consumers we contend were harmed by the practices challenged in the Commission’s complaint.” The settlement also provides consumers with “injunctive relief.”
The agency ruled that Herbalife is a multi-level marketing company and not a pyramid scheme, scoring a major blow to bears who have argued for years that it is an illegal pyramid scheme. The FTC explained that the company’s marketing materials promise between $500 and $1,500 in part-time income per month and “substantial full-time income” and feature pictures of distributors enjoying things like expensive homes, luxury cars and other items.
However, regulators added that “only a small minority of distributors have made anything near what the company promises, and they have done so mainly by recruiting a ‘downline’ of distributors who buy the product at wholesale.” The FTC also said Herbalife’s structure greatly rewarded a few distributors with downlines and resulted in most distributors earning little to no money and many actually losing money.
Herbalife to restructure
As part of the settlement agreement, Herbalife will restructure its business so that distributors are paid based on “verifiable retail sales.” Before it can pay distributors “at current levels,” the company will have to verify using receipts or “other reliable methods” that at least 80% of sales are made to “legitimate end-users.” Otherwise rewards must be reduced.
The FTC has ordered an independent compliance auditor to review and assess the company’s compliance for seven years. Additionally, Herbalife must not mislead distributors about their earnings potential.
The agency added that the ruling should be a reminder for other multi-level marketing companies as well to make sure that their marketing messages are not false or misleading and that they don’t “incentivize recruitment and wholesale purchases unrelated to retail demand.”
