Herbalife Ltd. has agreed to pay $200 million in a settlement with the Federal Trade Commission (FTC) to resolve claims involving an alleged pyramid scheme. This came after investor class actions and an Illinois Attorney General investigation. The company will have to fully restructure its operations and pay the stated amount to compensate consumers after deceiving them into believing they could make huge sums of money by becoming a distributor.
The company has created an oversight committee of board members and appointed Jonathan Leibowitz, a Davis Polk partner and former FTC chairman, as a senior adviser to the company. It will also pay a $3 million settlement to Illinois to end that investigation. Like Tupperware Brands Corp., Amway Corp. and Mary Kay Inc., Herbalife is what’s known as a multilevel marketer. Instead of selling directly to customers, it relies on a recruited sales force, which buys its products and then tries to resell them for a profit.
The FTC said Herbalife’s compensation structure was unfair because it rewards distributors for recruiting others to join and buy its products to advance the marketing program, rather than in response to actual consumer demand for the products.
In October 2014, Herbalife agreed to pay more than $15 million to members of its sales force who filed a different class action accusing the company of being a pyramid scheme. The company would pay the class $15 million and up to $2.5 million in returned products that its salespeople bought.
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