Herbalife Forced to Retool After FTC Review Sought by Ackman

Herbalife Forced to Retool After FTC Review Sought by Ackman

Herbalife Forced To Retool After FTC Review Sought By Ackman

Herbalife Forced To Retool After FTC Review Sought By Ackman

Herbalife Ltd. agreed to pay $200 million and induce sweeping changes to its business to settle U.S. claims that the nutrition company deluded customers with get-rich-quick promises.

Herbalife Forced To Retool After FTC Review Sought By Ackman
Carl Icahn
Photographer: Victor J. Blue/ Bloomberg

The U.S. Federal Trade Commission stopped short of hedge fund administrator Bill Ackmans call to proclaim Herbalife a pyramid strategy and to shut it down, but it described the companys business in harshly critical terms and said it must restructure and stop falsifying how much fund its members are likely to make.

Herbalife claimed that people could cease their jobs and earn thousands of dollars a month by selling its shakes and nutritional supplements even though the great majority earned little or no fund. These practises caused substantial economic trauma, relevant agencies said in a statement Friday.

An Illusion

At a news conference, FTC Chairwoman Edith Ramirez wouldnt call Herbalife a pyramid strategy but also wouldnt say that it wasnt one. Our focus isnt on the label, she said.

The company promised people a dream: a chance to change “peoples lives”, discontinue their jobs and gain financial liberty, Ramirez told. But that dream was an illusion, she said.

Investors cheered the settlement, bidding up Herbalifes shares 9.9 percentage to close at $65.25 in New York. But the agreements long-term consequence on Herbalifes results and recruiting are unclear. The FTC is forcing changes that could make it more difficult for distributors to make money. Herbalife will have to depend on retail sales, which are to be verified by receipts, instead of bulk buys by members.

They will have to demonstrate retail sales, told Tim Ramey, an analyst for Pivotal Research Group. Ramey is one of the few analysts still covering Herbalife and has defended the company throughout Ackmans onslaught. I dont believe Herbalife would have agreed to a deal they couldnt do. But the proof is in the pudding.

Herbalife remained confident. The settlements are an acknowledgment that our business model is audio, Herbalifes chairman and chief executive officer, Michael O. Johnson, said in a written statement.

Ackmans Pershing Square Capital Management expend more than $50 million on a public campaign to expose Herbalife as a pyramid scheme and make good on his$ 1 billion bet against its shares. The attempted takedown has captivated Wall street since December 2012 when Ackman presented his thesis at an investor meeting. He would subsequently say the company was a fraud on the scale of Enron Corp. All the while, Herbalife defended itself.

For a QuickTake explainer on short selling, click here .~ ATAGEND

Pershing Square said in a statement that the FTCs findings constitute a pyramid scheme.

We expect that once Herbalifes business restructuring is fully implemented, these fundamental structural changes will cause the pyramid to collapse as distributors and their recruits cease the business, it said.

Herbalife Forced To Retool After FTC Review Sought By Ackman

The FTCs statement backed up many of Ackmans asserts. It said that the business was driven by member recruitment more than retail sales; that the companys distributors misrepresent how much fund new members can stimulate; that a large number of its members lose money; and that the company doesnt adequately disclose the risks of membership.

The agency also said the multi-level marketing companys compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program rather than in response to actual retail demand for the product.

Herbalifes Defense

Herbalife has said there is real demand, although women hasnt provided much proof. The company sells products to its distributors and says that after that it cant be sure what happens. It has instead pointed to surveys that it paid for showing it had almost 8 million clients in the U.S.

In its complaint, the FTC used to say the small minority of distributors who do make a lot of fund are compensated for recruiting new distributors, regardless of whether those recruits can sell the products they are encouraged to buy from Herbalife. After realise they cant make money, they abandon the business possibility in large numbers. Nearly half the Herbalife distributor base discontinues in any devoted year, the FTC said.

The settlement affects only Herbalifes practises in the U.S ., where 80 percent of marketings will have to be from real marketings to real users, Ramirez said. The $200 million will go to compensate consumers.

Icahn vs. Ackman

As Ackman railed against the company, he squared off against billionaire activist Carl Icahn, who became Herbalifes biggest shareholder and installed five board members, pitting both his money and inner circle against Ackmans effort to bring down the nutrition company. Short marketers like Ackman aim to profit from a declining stock by borrowing shares, selling them and then buying them back at a lower price.

Icahn declared victory on Friday. Simply stated, the shorts have been completely wrong on Herbalife, he said in a written statement.

Ackmans campaign continued this week — Pershing Square released its 18 th video on Thursday in a series criticizing the company online. The billionaire, who told early on it was a certainty Herbalife was a pyramid scheme, took extraordinary measures to influence the outcome, including hiring investigators to dig into Herbalifes operations and making videos of unhappy distributors.

This is the highest conviction Ive ever had about any investment Ive ever built, Ackman said in 2012.

For a look at Betting on Zero, a documentary about the Herbalife-Ackman battle, click here .~ ATAGEND

The dispute boiled down to whether there is legitimate demand for Herbalifes weight-loss shakes and supplements by actual customers, which is the FTCs test for a pyramid strategy. Ackman said there isnt such demand. He tells the companys revenue is derived from sales objectives it defines for independent contractors who must buy products from the company. Few of the contractors achieve those goals, Ackman contends.

Independent Contractors

Herbalife products arent sold in traditional stores. Theyre distributed by independent contractors who marketplace to household, friends, neighbors and just about any stranger they come across, typically in that order.

The distributors can make money by buying products at a discount and selling them at a markup. The bigger payoff arrives when distributors broaden their reach by recruiting, training and coaching a downline marketings squad that sells products to friends, neighbors and strangers and then earn royalties and bonuses from those sales.

Also on Friday, Herbalife said it had appointed Jonathan Leibowitz, a former FTC chairman who is a partner at the law firm Davis, Polk and Wardell LLP, as an adviser.

( A previous version of this story was corrected to reflect Leibowitzs role as an adviser .)

Read more: www.bloomberg.com

Herbalife Forced To Retool After FTC Review Sought By Ackman
Herbalife Forced To Retool After FTC Review Sought By Ackman
Herbalife Forced To Retool After FTC Review Sought By Ackman
Herbalife Forced To Retool After FTC Review Sought By Ackman
Herbalife Forced To Retool After FTC Review Sought By Ackman

Herbalife Forced To Retool After FTC Review Sought By Ackman

Herbalife Forced To Retool After FTC Review Sought By Ackman

Leave a Reply

Your email address will not be published. Required fields are marked *