Herbalife agreed to pay $200 million on Friday in consumer relief as well as change some of its business practices as part of its settlement with the FTC or Federal Trade Commission.
This agreement will allow the company, which specializes in nutritional supplements, to avoid charges of operating a pyramid scheme as well as facing a shutdown forced by the federal agency.
The settlement ends an investigation of two years by the FTC of the businesses’ operating structure and marked a likely financial setback for William Ackman the billionaire operator of a hedge fund who placed a huge short bet against the company when he alleged the operation system of the company was not proper.
Herbalife shares were up almost 10% at the close on Friday.
FTC filed a legal complaint in federal court in California saying that Herbalife did not focus on retail sales of its diet, personal care and nutritional products but on attracting hundreds of thousands of sales people who then were deceived into thinking, they would earn huge profits by selling the company’s merchandise.
The new salespeople joining were called either members or distributors by Herbalife and encourage to recruit more members with promises they would be profiting from a percentage of the products the people they attracted would sell.
The complaint also said the company offered its new participants a dream that was promoted through videos in both Spanish and English featuring testimonials where some distributors of Herbalife spoke of earning thousands of dollars each month, while some claimed they earned millions of dollars in profits.
However, it was determined by the FTC that over half of the sales leaders at the company received reward payments of less than $300 during 2014.
The settlement will require Herbalife to change it structure for compensation so the success of participants will depend upon if they sell the products of the company not if they buy the same products.
In addition, the settlement calls for Herbalife to differentiate between the participants that join to just buy their products that receive a discount and those joining for the business opportunity.
Those who are considered discount buyers cannot be eligible to sell products of the company or earn any rewards.
A minimum of two-thirds of the rewards paid by Herbalife to its distributors need to be based upon tracked as well as verified retail sales.
To pay any compensation to its distributors at the current levels, a minimum of 80% of the product sales of Herbalife need to involve sales to legitimate users.