Critics of the company's structure have contended that it has operated as a
pyramid scheme. They have also argued that the company does not sufficiently work to curb abuses by individual distributors, though Herbalife Nutrition has consistently denied the allegations. A 2004 settlement resolved a class-action suit on behalf of 8,700 former and current distributors who accused the company and distributors of "essentially running a pyramid scheme". A total of $6 million was to be paid out, with defendants not admitting guilt. In November 2011, the
Commercial Court in
Brussels,
Belgium, ruled that Herbalife was an illegal pyramid scheme. The company filed an appeal on March 8, 2012. On December 3, 2013, a Belgian appeals court found for Herbalife, reversing the lower court's finding. On May 1, 2012, a
short seller,
David Einhorn, asked questions about the company's business and sales models during the Q1 earnings call, setting off suspicions that Einhorn had a short position. These suspicions were proved correct in January 2013 when at an investor meeting Einhorn revealed that he had profited through a short position against the company. Einhorn said the short had been closed before the end of 2012.
Bill Ackman On December 20, 2012,
Bill Ackman (of
Pershing Square Capital) presented a series of arguments outlining why his firm believed that Herbalife operated a "sophisticated pyramid scheme" and contended that its stock would hit zero. Ackman alleged after a year-long investigation that the majority of distributors lose money, that the chance of making the testimonial-implied headline income is approximately one in five thousand, and that the company materially overstates its distributors' retail sales and understates their recruiting rewards. According to a number of financial commentators, Ackman bet roughly $1 billion against the company; soon after remarks to the press, the price of the stock decreased such that Ackman would have made $300 million if he had closed his short position then. In March 2015, federal prosecutors and the FBI revealed that they were investigating whether or not individuals paid by Ackman and otherwise had made false statements about Herbalife's business model to regulators and others in order to lower the company's stock price and influence authorities to conduct an investigation. In November 2017, Ackman closed out his short position after Herbalife shares increased by 51 percent over the year, and replaced it with a less aggressive
put option. In March 2018,
The Wall Street Journal reported that Ackman had "largely exited" his bet against the company, while others reported that the bet against Herbalife had cost his company hundreds of millions of dollars and damaged the confidence of investors in his hedge fund.
FTC investigation Based on information from a
Freedom of Information Act (FOIA) request, the
New York Post reported on February 4, 2013, that Herbalife was subject to a pending probe from the
Federal Trade Commission (FTC). The FTC released 729 pages containing 192 complaints received over a seven-year period in regards to the
New York Post's FOIA request. The FTC stated that the wording in its response to the FOIA request was incorrect; the FTC could not confirm or deny an investigation into Herbalife. In March 2014, the FTC opened an investigation into Herbalife in response to calls from consumer groups and members in both houses of the
United States Congress. Herbalife responded to the probe by saying it "welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC. We are confident that Herbalife is in compliance with all applicable laws and regulations". However, in the press conference, Herbalife was declared not necessarily not a pyramid scheme. In July 2016, Herbalife agreed to modify its business model and pay $200 million in a settlement with the FTC. Partial refund checks were mailed to roughly 350,000 Herbalife distributors in January 2017. The FTC said in a press release about the settlement "it's virtually impossible to make money selling Herbalife products." The lawsuit alleged Herbalife deceived consumers into believing they could earn substantial income from the business opportunity or big money from the retail sale of the company's products. In addition, the complaint charged that one of the fundamental principles of Herbalife's business model—incentivizing distributors to buy products and to recruit others to join and buy products so they could advance in the company's marketing program, rather than in response to actual consumer demand—is an unfair practice in violation of the FTC Act. The company remained under investigation as of early 2019 both by the
United States Department of Justice (DOJ) and the
U.S. Securities and Exchange Commission (SEC) for corruption in China. On September 27, 2019, the SEC announced Herbalife agreed to pay $20 million to settle charges of making false and misleading statements about its business model and operations in China between 2012 and 2018. The company did not admit or deny the charges but agreed to the settlement terms.
U.S. Department of Justice investigation of bribery in China In 2019, the DOJ charged two of Herbalife's employees with conspiracy in violation of the
Foreign Corrupt Practices Act (FCPA). They were accused of bribing Chinese officials to procure sales permits and influence an investigation into Herbalife. They were also accused of offering bribes to
China Economic Net to influence media coverage. In response, Herbalife committed $40 million to resolve the issues, and began negotiations with both the DOJ and SEC. In August 2020, Herbalife agreed to pay $123 million to the DOJ and the U.S. Securities and Exchange Commission. ==Sports sponsorships==