Herbalife Ltd. (HLF) ‘Pyramid Scheme’ Lawsuit Thrown Out

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Herbalife notched another court victory on Tuesday as a federal judge in LA threw out an investor lawsuit against the much loved and reviled nutritional supplements maker. In the ruling announced today, the beleaguered firm won a second dismissal of an investor lawsuit claiming it was lying about the legitimacy of its business operations.

The lawsuit filed by the Oklahoma Firefighters Pension and Retirement System and others argued that Herbalife shareholders lost money after hedge fund activist Bill Ackman accused the company of running a pyramid scheme.

U.S. District Judge Dale S. Fischer in Los Angeles rejected the complaint from the pension funds, noting in his ruling that investors did not show the firm or CEO Michael O. Johnson actually knew of wrongdoing, which is a legal requirement for this type of lawsuit.

Fischer said the plaintiffs had until August 27th to file a revised complaint. of note, an earlier version of the suit was thrown out by Judge Fischer in mid-March when he ruled that Ackman’s claims by themselves did not constitute enough evidence that Herbalife had committed fraud.


More on Tuesday’s Herbalife ruling

Despite the court victory for Herbalife, other investors may still sue the firm if they have real proof that fraud led to stock losses. Also of note, the dismissal of the  case has no impact on a Federal Trade Commission investigation of Herbalife’s business practices.

In his ruling, Judge Fischer argued that the plaintiffs did not show the defendants defrauded shareholders by hiding the firm’s inability to track retail sales.

The judge went on to note that CEO Michael Johnson’s cutting back his Herbalife stake by 12% over one year, while “undeniably large,” did not automatically create suspicions, and by the same token, disclosures that top executives expected “some form of disciplinary action” over the firm’s business practices did not amount to fraud.

“Herbalife openly disclosed that it was susceptible to legal challenge precisely because its practices occupy the gray area between legitimate multi-level marketing company and illegal pyramid scheme,” Fischer highlighted in his ruling.

Herbalife – Statement from plaintiffs in lawsuit

“We are disappointed with the ruling and will determine our next steps after consultation with the client,” Maya Saxena, a lawyer for the Oklahoma fund, commented in an email sent Wednesday.

The ruling was first reported by Jonathan Stempel of Reuters.

Herbalife declined for a request to comment citing a quiet period before earnings.

The full court decision can be found below


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