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Herbalife Ltd. and the Federal Trade Commission have reached a long-awaited settlement agreement resolving an investigation of the Los Angeles-based nutrition company that began more than two years ago. The deal, which requires Herbalife to make specific changes to its U.S. operations and pay $200 million, will be studied closely by the wider direct selling channel.

Herbalife also reached a settlement with the Illinois Attorney General, resulting in the company agreeing to pay $3 million to the office, separate from the FTC agreement.

Company executives and investors responded positively to the settlements, with shares in the company trading above $66 at midday, an increase of more than 10 percent.

“The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms,” Herbalife Chairman and CEO Michael O. Johnson said in a statement announcing the settlement. The statement went on to say that the company believes many of the allegations made by the FTC are factually incorrect but that the settlement is in the company’s best interest in light of the financial cost and distraction of protracted litigation. Herbalife said management can now focus all of its energies on continuing to build the business.

The FTC commenced an investigation into Herbalife 26 months ago, following accusations by hedge fund manager Bill Ackman that the company is defrauding customers. Ackman launched a campaign against the supplement seller in December 2012, backing his claims with a $1 billion short position in Herbalife stock.

As part of the deal, the company will pay a $200 million judgment and has agreed to various business procedures and policy enhancements. The $200 million figure is what Herbalife had floated in its first-quarter financial report as the company’s best estimate of a settlement. The FTC said this is the largest such consumer redress settlement obtained by the FTC and that it will provide information at a later date about how it will make those funds available for consumers.

The business procedures and policy enhancements included in the settlement pertain largely to Herbalife’s compensation model and marketing claims, which the FTC criticized in its complaint against the company. The settlement stipulates that the company must distinguish between individuals looking to build an Herbalife business and those who sign up simply to purchase products at a discount—a practice Herbalife management, in fact, implemented several years ago. Discount buyers are not eligible to sell product or earn rewards. The company is also required to ensure that at least two-thirds of rewards paid out to distributors are based on verified retail sales, rather than distributors’ personal consumption. And, 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. If that threshold is not met, rewards to distributors must be reduced.

The company also agreed to:

  • require distributors to complete their first year, as well as a business training program, before opening a Nutrition Club,
  • increase protections on income and lifestyle claims put forth by those promoting the business,
  • pay for any shipping costs of unopened product associated with returns by business opportunity participants, and
  • require specific training for business opportunity participants as they begin the business.

In a press conference following the settlement announcement, FTC Chairwoman Edith Ramirez said the FTC hopes the principles embodied in the agreement will set an example for the multi-level marketing industry and that the commission plans to provide more guidance to the industry. “I think what we achieved in this case is unprecedented,” Ramirez said. “I think the protections that we have in place here are aimed to ensure that going forward Herbalife operates legitimately, but I do think they provide important guidance to the rest of the MLM industry about what they need to focus on in order to ensure they are not engaging in unfair or deceptive practices.”

Herbalife also acknowledged the likelihood of its settlement agreement having an impact on the wider direct selling community, much like the FTC’s Amway decision in 1979. In its press release, Herbalife said it “believes that while some of the additional terms do not have significant impact on the company, these provisions will improve policies throughout the industry.”

Herbalife’s board unanimously approved the settlement and formed an Oversight Committee to ensure compliance with the terms. The board also appointed Jonathan Leibowitz, partner in the law firm of Davis, Polk and Wardell, and former Chairman of the Federal Trade Commission, as a Senior Advisor to the Board. Henry Wang, currently Deputy General Counsel and Chief Compliance Officer, was put in place to lead implementation efforts and report directly to the committee, with Pamela Jones Harbour, Senior Vice President of Global Member Practices and Compliance and former FTC Commissioner, overseeing implementation of new distributor compliance initiatives.

The company also said it has granted billionaire investor Carl Icahn, an ally in its battle against Ackman, the right to increase his stake in Herbalife to up to 34.99 percent of the company’s outstanding shares, a jump from a previous max of 25 percent. Icahn currently own 17 million shares of Herbalife’s common stock, or about 18.3 percent.

“I have always believed in Herbalife’s strong fundamentals and am pleased the Board has decided to increase my ownership limit from 25 percent to 34.99 percent of the Company’s outstanding shares. A significant part of my investment success is directly tied to our in-depth investment research and understanding of often complex and unique issues facing companies,” Icahn said in the announcement.

“I have the greatest confidence in Herbalife’s CEO, Michael Johnson, and the entire management team, who have skillfully led the company through adversity, including holding firm against a high-profile PR campaign against the company by Bill Ackman where it was alleged more than once that the company would be shut down. Obviously, we are still here.”

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