Herbalife settles pyramid scheme case with regulator, in blow to Pershing's Ackman

Fri Jul 15, 2016 4:19pm EDT
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By Diane Bartz and Michael Flaherty

WASHINGTON/NEW YORK (Reuters) - Herbalife Ltd agreed to pay $200 million and change the way it does business to avoid being labeled a pyramid scheme by regulators, a blow to hedge fund manager Bill Ackman who for years has been betting against the dietary supplements maker.

Shares of Herbalife jumped more than 20 percent after the settlement was made public and the Los Angeles-based company said its board had cleared the way for billionaire investor Carl Icahn to boost his stake in the company to as much as 35 percent from his current 18.3 percent.

The stock later pared gains, and was up 9.2 percent at $64.90 in afternoon trading.

Herbalife uses a massive network of independent distributors to sell powdered shakes, vitamins and other tablets designed to help people manage their weight, boost energy and calm stress. The sales method, under which some people get more money for recruiting new distributors than selling products, has attracted criticism.

The company became a battleground for Icahn and Ackman, two of the most outspoken U.S. investors, who became embroiled in a public war of words over their opposing bets. Icahn famously called hedge fund manager Ackman a "liar" and a "crybaby" in a CNBC interview in 2013. They have since made up.

The U.S. Federal Trade Commission opened a probe into Herbalife in 2014 following allegations by Ackman that the company was effectively a fraudulent pyramid scheme.

The FTC said Friday's settlement represented a fundamental change in how the company operates, as it will require rewards to distributors to be based on retail sales rather than recruiting new distributors.

The FTC pointed out that the overwhelming majority of Herbalife's distributors earn little or no money. It remains to be seen how well they will fare under the new arrangement.   Continued...

File photo of Bill Ackman speaking at the Ira Sohn Investment Conference in New York, May 8, 2013. REUTERS/Brendan McDermid