Herbalife nears end of FTC probe into alleged pyramid scheme
SAN FRANCISCO — Shares in Herbalife jumped 11% Friday after the nutritional supplement marketer company said its talks with the Federal Trade Commission were at an advanced stage.
The FTC has been investigating the Los Angeles-based company for the past two years over whether it is a pyramid scheme. Herbalife first disclosed the discussions in February.
If Herbalife (HLF) settles with the FTC, it expects the settlement will include “injunctive and other relief as well as a monetary payment with our best estimate of a payment being $200 million,” the company said in a statement.
“While there are a number of open issues, these discussions have progressed to an advanced stage, and the range of outcomes now includes litigation or settlement,” Herbalife CEO and Chairman Michael Johnson said of the FTC talks as he spoke with Wall Street financial analysts during a Thursday conference call after the market closed.
Herbalife shares rise on news of FTC talks
Injunctive relief can be just as significant as the money obtained for consumers and even more influential on a company’s future operations, the FTC said in a statement.
“We don’t yet have an agreement. What we have is the reasonable possibility of an agreement,” Herbalife CFO John DeSimone told the analysts. He declined to discuss the financial and legal calculations that produced the potential $200 million settlement figure.
Herbalife’s recent earnings disclosures omitted previous references to Department of Justice requests for information about the company’s business practices and members. Asked by an analyst whether the omissions meant that issue was now in the past, DeSimone said: “I can confirm that the DOJ language has been dropped from our disclosures.”
The statement and comments came in conjunction the company’s first-quarter financial report, which was better than expected.
Adjusted earnings were $1.36 a share, with sales of $1.12 billion. S&P Global Market Intelligence forecast revenue had been $1.07 billion, with adjusted earnings per share of $1.09 cents.
Hedge fund investor Bill Ackman has accused Herbalife of running an illegal pyramid scheme that makes money by enrolling people into the act of selling its shakes rather than through the sale of the product itself. The company has denied these claims.
The head of Pershing Square Capital Management famously entered a $1 billion short against Herbalife's shares in 2012 when they traded around $47. But that short bet has proved costly, as Herbalife shares managed to recover after an initial, steep selloff and multiple salvos from Ackman. Late Thursday, they were trading around $66.
Pershing Square had no comment Thursday on the Herbalife news.