The company’s stock was up about 16% in early trading Friday as investors responded positively to the end of the investigations and the FTC’s decision not to formally label Herbalife’s business model an illegal pyramid scheme, as Ackman had asserted.
The newcomers, alternately titled distributors or members by the company, were encouraged to recruit others, with promises they would profit from a share of the product sales made to those they they brought in to advance Herbalife’s marketing program. The sales method, under which some people get more money for recruiting new distributors than selling products, has attracted criticism.
The pyramid scheme claims had fueled a four-year Wall Street feud led by billionaire hedge fund executive Bill Ackman, who bet big that Herbalife’s stock would drop amid the allegations. “I gotta tell ya, every extra million dollars, I find, comes in handy”, Herbalife Chairman’s Club member John Tartol said in a 2012 summit in Los Angeles, according to the complaint. They have since made up. It remains to be seen how well they will fare under the new arrangement.
“We announced a settlement with the F.T.C. that does not change our direct selling business model and will set new standards for the industry”.
On Friday Ackman’s Pershing Square Capital Management LP issued a statement standing behind its characterization of Herbalife.
And although the FTC stopped short of saying that Herbalife is not a pyramid scheme, investors interpreted the settlement as a sign that the FTC does not deem it as one – and that the worst may finally be over for the company.
Still, the FTC blasted Herbalife for exaggerating the earnings most of its sellers reap and said Herbalife agreed to pay for an independent auditor to monitor its business practices. The Icahn Parties now own 17 million common shares of Herbalife, representing approximately 18.3% of the Company’s outstanding common shares. Mr Ackman has been “shorting” the company – a strategy where an investor borrows stock and sells it hoping to buy it back at a lower price before the date of return.
On Friday, Icahn also eyed strategic options for Herbalife now that the “cloud” over its operations are gone.
“Simply stated, the shorts have been completely wrong on Herbalife”, Icahn said.
The company, the Federal Trade Commission said when announcing an injunction to halt the scheme, “focuses on recruitment rather than retail sales of its products to generate this income”, and while some people at the top were getting rich, “the vast majority of participants make no money, and a lot of them lose money”. This leads to almost half of the entire Herbalife distributor base quitting in any given year. One problem is that there is no specific law prohibiting pyramid schemes, which means the term has largely been defined through the courts and has come to mean a company whose sales rely primarily on recruitment.
“Herbalife has agreed and the terms of the agreement are a devastation of the way they operate right now”, he said. They will also restructure compensation and require at least 80 percent of product sales to “legitimate end-users”.
Under the settlement announced Friday, Herbalife must rework the way in which it pays its salespeople.