The Federal Trade Commission announced today that the diet and nutrition company Herbalife will have to pay a $200 million fine and restructure its business in response to allegations of “unfair and deceptive practices.”
The FTC called the settlement a “significant law enforcement action,” but the company claimed it as a victory in its fight against claims it was operating a pyramid-style scheme.
“The company promised people a dream – a chance to change their lives, quit their jobs and gain financial freedom,” FTC Chairwoman Edith Ramirez told reporters, “but the FTC has charged that this wasn’t true.”
Ramirez said Herbalife was charged with deceiving thousands of people into believing they could make money as “distributors,” or salespeople, of Herbalife products when the only real money was actually in buying the products themselves and then recruiting other salespeople to do the actual selling. When asked by reporters if the Herbalife business model was similar to a pyramid scheme, Ramirez said the FTC was not focused on “labels.”
“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,” Ramirez said.
Herbalife was the focus of a year-long ABC News investigation in 2014 in which two reporters went undercover as Herbalife recruits and found a company that has struggled to prevent distributors from embellishing the financial prospects of a sales career there and hyping the health benefits of its products.
ABC News found that nearly 600 independent distributors of the diet and nutrition sales brand Herbalife had been disciplined by the company in 2013 for making medical claims when selling the company’s weight-loss shakes and supplements, despite company policies aimed at preventing such tactics.
In one instance, a Staten Island, N.Y., Herbalife distributor even told a potential customer — who was actually an ABC News reporter wearing a hidden camera — that a woman with a brain tumor became symptom free after starting on Herbalife products.
“She used to shake like this because she lost control of her motor skills to the tumor and she said part of her cerebellum was deteriorated,” he said. “If you see her now, she’s like one of us here… Whatever it is that the product did, it helped her a lot.”
Herbalife executives told ABC News at the time that they were “appalled” by the investigation’s findings, and would take pains to prohibit such tactics. The company announced a “significant re-training intiative.”
“In direct response to the interview where Brian Ross brought to light instances of members making unauthorized product claims, the company began a significant re-training initiative,” Herbalife spokeswoman Barb Henderson said in an email then.
Herbalife officials today counted the settlement with the FTC, as well as a $3 million settlement with the Illinois Attorney General, as victories and claimed the settlements were “an acknowledgement that [Herbalife’s] business model is sound,” in the words of Herbalife CEO Michael Johnson.
The settlements also “underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms,” Johnson said.
In a press release, the company said that it believes “many of the allegations made by the FTC are factually incorrect,” but said it agreed to settle to avoid the financial cost and distraction of “protracted litigation.”
The pyramid scheme claims had fueled a four-year Wall Street feud led by billionaire hedge fund executive Bill Ackman, who bet big that Herbalife’s stock would drop amid the allegations. As recently as earlier this week, Ackman was continuing his series of presentations intended to spur government scrutiny of the company and drive down the stock price.