The U.S. Federal Trade Commission described the firm's business in harshly critical terms and said the company must restructure and stop misrepresenting how much money its members are likely to make.
The settlement comes a day after Ackman said he was still betting against Herbalife shares and that the FTC probe was unlikely to end well for the company as its business model was not built upon actual retail sales.
The FTC investigation focused on how Herbalife's sales structure depended on multiple levels of people buying its products and finding others to further redistribute them.
According to a complaint filed in Los Angeles federal court, Herbalife lured distributors with promises that they could be their own boss, "have the time and money to enjoy the finer things in life" and "earn extra money each month".
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.
Although Herbalife is avoiding the official pyramid-scheme label by agreeing to the $200 million settlement, the years-long case illustrates how the commission tries to protect consumers by monitoring the world's largest companies. Herbalife, which also announced a $3 million settlement with the IL attorney general, said that it settled to avoid the cost and distraction of lengthy litigation.
Not so fast, said Ackman, who has waged a 3 1/2-year short campaign, seeking to profit from Herbalife's demise.
Back in 2013, billionaire Dan Loeb bought Herbalife at around $28 per share before selling the stock just weeks later at $44. Many distributors, in fact, lost money. "Otherwise, we would not have agreed to the terms", said Herbalife Chief Executive Michael O. Johnson. The Icahn Parties now own 17 million common shares of Herbalife, representing approximately 18.3% of the Company's outstanding common shares. The multilevel marketing (MLM) company works by convincing interested customers to first buy Herbalife products, and then join as a salesperson, hawking those same products to other consumers. Edith Ramirez, FTC Chairwoman, said in a statement that by restructuring their business, "participants are rewarded for what they sell, not how many people the recruit". "In reality, however, Defendants' program does not offer participants a viable retail-based business opportunity", the FTC complaint stated.
Such terms are the most stringent ever mandated by the FTC, whose federal civil complaint against Herbalife filed in a Los Angeles federal court makes numerous same charges as those leveled by Ackman, giving him a moral victory albeit not a financial one, as his short remains under water. The $200 million redress will largely compensate those who were selling Herbalife products, the majority of whom the FTC said earned "little or no money".
The company has been a battleground between two Wall Street titans: hedge fund manager Bill Ackman who bet big against the company and activist investor Carl Icahn, who is major investor in Herbalife, now owning 18.3 percent of its shares.
As other major investors took opposing positions, Herbalife not only recovered, but its shares by a year ago were reaching all-time highs, a catastrophe for Ackman who, even this week, was publicly forecasting the company's complete collapse.
Icahn quickly became a high-profile advocate for Herbalife and installed five board members, putting his inner circle behind the nutrition company.