Herbalife agreed this week to restructure their business operations and pay a $200 million settlement. In exchange, the federal government has agreed to close investigations into the company and refrain from classifying the company as a pyramid scheme. While $200 million is a large sum of money, avoiding this classification has a much bigger upside for the company, and investors rewarded the news with 16% increase in Herbalife stock price.
Per the FTC chairman:
“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit.”
The FTC first began its investigation in March 2014, spurred by billionaire investor Bill Ackman’s rare public short of the company. Following his announcement, Ackman delivered a 300+ page presentation of why Herbalife is “the best managed pyramid scheme in the history of the world.”
Per an Herbalife survey conducted by the company itself:
“Nutrition Club owners spent an average of about $8,500 to open a club, and 57 percent of club owners reported making no profit or losing money.”
Bill Ackman, who presented 342 slides explaining the Herbalife pyramid system all the way back in 2012, prompted the investigation. Once the news of the three-hour presentation got out, the stocks shrank by 12 percent. While Herbalife is claiming this as a victory and that once and for all it should not be classified as a pyramid scheme its quite the opposite. Herbalife viewed this settlement as pocket change, so it could continue its reign as the one of the biggest Multi-Level Marketing systems.
According to the FTC’s press release about the settlement, the company will need to implement the following changes:
- The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity. “Discount buyers” will not be eligible to sell product or earn rewards.
- Multi-level compensation that business opportunity participants earn will be driven by retail sales. At least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
- Companywide, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. Otherwise, rewards to distributors must be reduced.
- Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.