Herbalife Ltd (NYSE:HLF) reached a $200 million settlement with regulators today to settle claims of operating as a pyramid scheme. Shares of Herbalife jumped more than 20 percent after the settlement was made public. Billionaire investor Carl Icahn is now reportedly planning to boost his stake in the company to as much as 35 percent, up from his current 18.3 percent.
Herbalife sells a variety of products aimed at maintaining weight, boosting energy, and reducing stress through a massive network of independent distributors. However, the company’s sales method has attracted criticism. Under its sales program, some people get more money for recruiting new distributors than selling products.
The Federal Trade Commission found that the overwhelming majority of Herbalife’s distributors earn little or no money. The FTC’s website has a definition of a pyramid scheme that says: “They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they often simply use the product to hide their pyramid structure.” Herbalife said that it disagreed with the FTC’s criticism.
According to the terms of the settlement, Herbalife will have to make changes to the way it does business. The company will now require rewards to distributors to be based on retail sales rather than recruiting new distributors. The company will pay distributors based upon retail sales and provide receipts for their transactions. Jon Leibowitz, a former chairman of the FTC, will advise the board of directors regarding compliance with the settlement.
For years, hedge fund manager Bill Ackman has been betting against the dietary supplements maker. Ackman and his Pershing Square Capital Management, unveiled a $1 billion short bet against Herbalife in 2012. According to Thomson Reuters data, about a quarter of Herbalife’s outstanding shares were held by short-sellers at the end of June.
Ackman became embroiled in a public war of words with Icahn over their opposing bets. Ackman made allegations that the company was effectively a fraudulent pyramid scheme, prompting the U.S. Federal Trade Commission to open a probe into Herbalife in 2014. Icahn famously called Ackman a “crybaby” and a “liar” in a CNBC interview. Icahn said in a statement on Friday, “While Bill Ackman and I are on friendly terms, we have agreed to disagree (vehemently) on this subject. Simply stated the shorts have been completely wrong on Herbalife.”