Herbalife (NYSE: HLF) agreed to pay $200 million and to restructure its business operations in the United States to settle the charges filed by the Federal Trade Commission (FTC).
The multilevel marketing company also settled a separate complaint by the Illinois Attorney General for $3 million. Herbalife said it is not aware of any active investigations by other state attorney general.
In a statement, Herbalife Chairman and CEO Michael Johnson said, “The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully. Otherwise, we would not have agreed to the terms.”
Herbalife simply wants to move forward
According to Herbalife, many of the accusations of the FTC are “factually incorrect.” However, the company believes that settling the charges is in its best interest citing the reason that the financial cost and distraction of protracted litigation would be significant.
Herbalife also said it “simply wants to move forward” and focus its energies on continuing to build its business and exploring strategic options.”
The FTC alleged that Herbalife deceived consumers into believing that they could earn a substantial amount of money or become rich by selling its products. According to the FTC, the reality is that an overwhelming majority of the company’s distributors earn little or no money.
The FTC also alleged that a small number of distributors are making a huge amount of money for recruiting new distributors regardless of whether they can sell Herbalife’s products. The Commission found that distributors left the company in large numbers because they can’t make money.
Details of the settlement with the FTC
Aside from paying $200 million and fully restructuring its business operations, Herbalife also agreed to pay for an Independent Compliance Auditor (ICA) for seven years. The ICA will monitor its compliance with the Commission’s order provisions requiring it to amend its compensation plan.
The settlement required the company to eliminate the incentives in its current compensation system that reward distributors primary for recruiting.
The FTC also prohibited the company from misrepresenting distributors’ potential earnings particularly from claiming that its members can “quit their job” or enjoy a lavish lifestyle.
Herbalife will have to start operating legally
FTC Chairwoman Edith Ramirez said the settlement requires Herbalife to restructure its business fundamentally to reward participants for what they sell, not how many people they recruit.
Ramirez added that the company “will have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”
Carl Icahn gets right to increase stake in Herbalife
Carl Icahn and his affiliates received the right to increase stake in Herbalife to as much as 34.99% of the company’s outstanding common shares. Currently, they own 18.3% stake in the company.
“I have always believed in Herbalife’s strong fundamentals and am pleased the Board has decided to increase my ownership limit from 25% to 34.99% of the company’s outstanding shares. A significant part of my investment success is directly tied to our in-depth investment research and understanding of often complex and unique issues facing companies,” said Icahn in a statement.
He also expressed great confidence in Johnson and the entire management team .of Herbalife. According to him, they successfully led the company through adversity against a high-profile PR campaign by Bill Ackman.
Icahn noted that Ackman alleged more than once that the company would be shut down. He said, “Obviously, we are still here.”
The Board of Directors of Herbalife will continue to include five members designated by Icahn. The stock price of the company surged nearly 10% to $65.22 per share on Friday, July 15.