A decision from the Federal Trade Commission on July 15, 2016, indicates that Herbalife is neither a pyramid scheme nor a Ponzi scheme. Allegations had been made that Herbalife’s recruiting practices and payment plan for new recruits favored the recruiter to the extent that the system was a pyramid scheme.
The nutritional supplement distributor faced similar allegations in Belgium in 2011. The initial decision that the company was a pyramid scheme was overturned on appeal in 2013.
The FTC did find that Herbalife knowingly and willfully misrepresented the health benefits of some of its products. The FTC also found that health warning against the detrimental effects of some of the Herbalife products was insufficient to safeguard the public. The company was fined $200 million for misrepresentation.
Herbalife must change the description of benefits on most of its products. The company must also clarify health risks that have been associated by independent testing labs with any of its products. The FTC stipulates that a frequent review of the business practices of Herbalife was mandatory and that any future misrepresentation could be grounds for rulings that would force Herbalife to cease business in the United States.
The ruling was seen as a positive for Herbalife based on investor response immediately after the ruling from the FTC became known. Herbalife shares rose almost 15 percent in early morning trading on Wall Street. The stock lost 50 percent of its value in 2014 when the FTC investigation was announced.
William Ackhman, a former Herbalife investor, initiated the suit that resulted in the FTC ruling. The revelation of 729 health complaints that had not been responded to by Herbalife increased FTC scrutiny in 2015. Carl Icahn who owns 18 percent of the common shares of Herbalife heralded the decision as a turning point for the company and the stock.