By Kelly Hertog
The Century City-based multi-level marketing company Herbalife agreed this month to pay $200 million and change its business practices to settle federal regulators’ claims that the nutrition company deceived customers into believing they could get rich by selling diet, protein supplements and personal care products.
The Federal Trade Commission (FTC) said the company misled people into becoming distributors or members by using videos and brochures showing mansions, luxury cars and boats, and telling participants they could expect to quit their jobs, earn thousands of dollars a month, make a career-level income, or even get rich.
However, the “overwhelming majority” of distributors “earn little or no money,” according to the government.
The company issued a statement saying that although it disagreed with many of the FTC’s allegations, it settled to avoid “the financial cost and distraction of protracted litigation.”
Herbalife said it will also pay $3 million to settle an investigation by the Illinois attorney general’s office as part of a separate agreement.
“The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms,” Herbalife Chief Executive Michael O. Johnson said.
The FTC’s investigation began in March 2014 after billionaire investor William Ackman claimed that Herbalife was operating a pyramid scheme.
“Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices,” FTC Chairwoman Edith Ramirez said.
The settlement requires Herbalife to revamp its compensation system so that it rewards retail sales to customers and eliminates the incentives in its current system that reward distributors primarily for recruiting new participants.
However, in a conference call with investors on July 20, Ackman said that in light of the FTC settlement, he now plans to push foreign regulators to investigate the company’s practices. But he said the FTC settlement, while not labeling Herbalife a pyramid scheme, will still lead to the company’s demise, because federal authorities pointed to misdeeds by the company and ordered drastic changes in the way it operates.
“Herbalife has been shut down by the FTC. It just doesn’t know it yet,” Ackman said.
