Ackman’s crusade against Herbalife—in plain English

The recent $200 million Herbalife settlement leaves us with some open questions

Herbalife

The recent $200 million Herbalife settlement leaves us with some open questions about how Herbalife will do in the stock market and what Bill Ackman will do with his short position.

In case you’re not entirely familiar with the concept, a short position is when a broker sells you a stock that they do not yet own. The broker is betting against a particular company, in this case Herbalife. The broker sells you “borrowed” stock at say $50 a share. They are betting that the stock will drop below $50, at which point they will actually buy the stock, at say $40. The broker then makes the difference of the $10 per share; you paid $50 and the broker paid $40. To put it simply, the broker—in this case Ackman—is betting that a company’s stock will decrease in value.

As of July 29, 2016, the stock price for Herbalife is up to 68.15 which is a positive 1.72% change. If you look at the past year, the stock price dropped in January of 2016 then gained over the last six months (up 47.22%). The recent settlement with the FTC coincides with another boost to the stock price. It seems that the market perception of this settlement is that it shows the FTC does not see Herbalife as a pyramid scheme.

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FTC v. Herbalife Settlement: First Take

MLM Attorney Jeffrey A. Babener's Legal Perspective On Herbalife .v FTC Settlement

Jeffrey_Babener

This week’s author Jeffrey A. Babener is the principal attorney in the law firm of Babener & Associates.

For more than 25 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the Direct Selling Association. He has served as legal advisor to various NYSE direct selling companies, including Avon, Herbalife, USANA, and Nu Skin. Jeff has lectured and published extensively on direct selling. He is a graduate of the University of Southern California Law School. Jeff is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener

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Moving Forward, Here’s What the FTC’s Order Requires Herbalife to Do

Kevin Thompson Shares His Legal Insight To The Herbalife Settlement

Herbalife

After a two year investigation, Herbalife has agreed to pay a $200 million fine to the FTC and act in accordance with prescribed measures. With this morning’s announcement of a settlement, investors and proponents/opponents of the MLM industry alike are attempting to process what it all means for the Company’s future. Before we provide you an in-depth analysis of the stipulations found within the FTC’s Order for a Permanent Injunction and Monetary Judgment, it’s important to remember that these prescribed actions only apply to Herbalife and not multi-level marketing companies collectively. In response to a question in which she was asked what kind of implications the settlement will have on the network marketing industry , FTC Chairwoman Edith Ramirez stayed mum on its long-term implications and stated rather plainly that the FTC would soon be providing additional guidance on legitimate network marketing companies. That aside, let’s get down to business and clarify what the FTC’s order does and does not say.

THE BIGGEST TAKEAWAYS

Macro Perspective

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Breaking Herbalife News: NOT Found To Be Pyramid Scheme!

Herbalife Will Restructure Its Multi-level Marketing Operations

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Multi-level marketer Herbalife will pay $200 million back to people who were taken in by what the FTC alleges were misleading moneymaking claims. But when it comes to protecting consumers, that may not be the most important part of the just-announced settlement. What could matter more than $200 million? An order that requires Herbalife to restructure its business from top to bottom – and to start complying with the law.

“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” FTC Chairwoman Ramirez said. “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.”

For example:

  • The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity. “Discount buyers” will not be eligible to sell product or earn rewards.
  • Multi-level compensation that business opportunity participants earn will be driven by retail sales. At least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
  • Companywide, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. Otherwise, rewards to distributors must be reduced.
  • Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.

Herbalife to Restructure Operations, Pay $200 Million to Settle FTC Charges

Herbalife States USA Revenues Only 20% Of Total Company Revenues!

Angle Of Justice

Note: See an overview of how this settlement affects network marketers, and watch out blog for detailed analysis and updates.

Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd. will restructure their U.S. multi-level marketing business operations and pay $200 million to compensate consumers to settle the FTC complaint that the Herbalife companies deceived consumers into believing they could earn substantial money their products.

The FTC complaint also charged that Herbalife’s compensation structure was unfair because it distributors were rewarded for recruiting others to join and purchase products in order to advance in the MLM program, as opposed to actual retail demand for the product, causing economic injury to many distributors.

According to the complaint, Herbalife claimed that people could earn thousands of dollars a month or even get rich in the program. But the complaint alleged that the majority of distributors earn little or no money, with more than half the distributors known as “sales leaders” receiving less than $300 in rewards for 2014. According to a survey by Herbalife itself, Nutrition Club owners spent an average of about $8,500 to open a club, and 57 percent of club owners reported making no profit or losing money.

Those distributors who do make a lot of money, according to the complaint, are compensated for recruiting new distributors, regardless of whether those recruits can sell the products they buy from Herbalife.

As part of the settlement, Herbalife will change its compensation system so that it eliminates recruiting incentives and rewards retail sales to customers. As examples of the changes, the FTC says:

  • Herbalife will differentiate between participants who join simply to buy products at a discount and those who join the business opportunity.
  • At least two-thirds of rewards paid to distributors must be based on tracked and verified retail sales of Herbalife products. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
  • I order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be to legitimate end-users. Otherwise, rewards to distributors must be reduced.
  • Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.

In addition, Herbalife will pay a $200 million for consumer redress, including money for consumers, such as Nutrition Club owners, who purchased large quantities of Herbalife products.

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URGENT >> BULLETIN >> MOVING: Herbalife Must ‘Fundamentally Restructure Its Business,’ FTC Says In Settlement Announcement; Agency Brings Complaint In Federal Court That Alleges ‘Deceptive And Unlawful Acts And Practices’

FTC Brings Complaint In Federal Court That Alleges ‘Deceptive And Unlawful Acts And Practices’

PatrickPretty

URGENT >> BULLETIN >> MOVING:  (13th Update 3:45 p.m. EDT U.S.A.) The FTC is going to federal court in the Central District of California, alleging that Herbalife engaged in “deceptive and unlawful acts and practices.” Separately, the agency announced a settlement with the company that will have Herbalife pay $200 million and change the way […]

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Global Direct Selling Industry in 2015

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Few weeks ago the WFDSA (World Federation of Direct Selling Associations) announced 2015 figures it had gathered from local organizations. Before that, we had Direct Selling News magazine’s company-specific sales volumes.

Both reports contain interesting statistics, especially from a comparative point of view. Let’s take a look at these numbers.

Regions and Countries

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