On March 12, 2014 that the United States Federal Trade Commission (FTC) launched an official investigation into the allegations that Herbalife was running a pyramid scheme.
A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme. The investigation did not focus on retail sales, diet, personal care products but rather on bringing in hundreds of thousands of new sales people who were deceived into believing they would reap big profits by selling its merchandise.
Persons who were encouraged to market Herbalife products were titled distributors or members of the elite club of Herbalife, who were also asked to recruit other persons to join.
FTC’s problem is not in the distribution of Herbalife products but the dream of raking in tons of money from selling its products when ‘members’ gain little to no reward. As shown in the investigation, ‘owners of Herbalife’s Nutritional Club brand invested an average of $8,500 to launch their operations, but 57% broke-even or lost money.
On Friday 15th July, 2015 Herbalife agreed to pay $200 million in a settlement to the FTC that will avoid theme being classified as a pyramid scheme. Micheal Johnson, Herbalife Chairman and Chief Executive stated, “The settlement is an acknowledgement that our business model is sound and underscore our confidence in our ability to move forward successfully”. Nevertheless, FTC chairwoman in her statement said, “Herbalife is going to have to start operating legitimately, making only truthful claims…”.
Since the announcement of the settlement, Herbalife shares have increased more than 20% and were up nearly 10 percent at $65.03 a share by late Friday afternoon.