Business

Herbalife reaches deal with US regulators

Herbalife building Image copyright Getty Images

Dietary supplement firm Herbalife has reached a deal with the US Federal Trade Commission (FTC) to avoid being labelled a pyramid scheme.

Herbalife agreed to pay $200m (£150m) to settle the accusations.

The FTC had been investigating whether Herbalife misled customers about the potential value of reselling its products.

The deal was a blow to activist investor Bill Ackman who was betting against the company.

Herbalife shares climbed over 18% at one point.

Mr Ackman made several public allegations that Herbalife was a "bad" company that relied on a hierarchical structure that focused on recruiting new salespeople rather than selling products.

Reorganise compensation

The FTC investigation also focused on this structure. Herbalife uses a direct sales method where products are bought by distributors to sell to the public and who are also encouraged to bring in new recruits.

The FTC settlement requires Herbalife to reorganise its compensation system to reward retail sales more than recruitment.

The regulator said, only a small proportion of Herbalife distributors earned anything near the amount the company promised.

"Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make," said FTC chairwoman Edith Ramirez in a statement.

Herbalife marketing material advertised that part-time sellers of its nutritional products would earn between $500 to $1,500 a month. Many distributors, in fact, lost money.

Investor fighting

On Friday, the company also announced it was changing its internal governance to allow investor Carl Icahn to own a larger stake in the company.

Mr Icahn will now be able to own 35% of Herbalife shares.

In a statement, he praised the company's management for the way it handled the investigation. He also said the company should move on and look at possibly acquiring some competitors.

"Now that the company has reached a settlement with the FTC, it is time to consider a range of strategic opportunities, including potential roll-ups involving competitors, as well as other strategic transactions," Mr Icahn said.

His support of Herbalife led to a dispute with Mr Ackman. 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.

The two exchanged insults during an interview calling each other a "liar" and a "cry-baby".

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