Senior executives at Herbalife (HLF) are telling investors it’s all but certain the Federal Trade Commission will not shut down the company at the conclusion of its wide-ranging investigation, though they expect some form of disciplinary action, FOX Business Network has learned.
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Since March, the FTC has been investigating whether the nutritional supplement outfit operated as an illegal “pyramid scheme,” meaning its sales were largely derived from attracting people to distribute its product, rather than actual sales to customers. The FTC action follows claims by short seller Bill Ackman, who says the company’s business model violates a host of federal and state laws, and that Herbalife should be shut down by the government.
Despite the increased attention on the company, Herbalife executives have been speaking to attorneys, academics and former FTC officials, and have come to the conclusion that the chances of a shutdown are remote, according to people with direct knowledge of the matter. In recent weeks, senior executives have been making the rounds with Herbalife’s top investors and explaining while the FTC’s investigation hasn’t concluded, they feel confident the company will avoid a corporate death sentence.
An Herbalife spokeswoman declined to comment on the matter, but would not deny such conversations took place.
An FTC spokeswoman said she can’t comment on on-going investigations
A spokesman for Ackman did not have any immediate comment.
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The FTC has shut down a number of companies in recent years that, like Herbalife, operate as multi-level marketers. Such a business model, which involves attracting distributors who receive a fee when they bring on additional distributors to sell the product, becomes illegal if there are little, if any, real end-users of the product.
But Herbalife has vehemently denied it operates as a pyramid scheme and says its sales are to real end-users including its network of distributors who are also customers.
Herbalife executives feel confident they will avoid a shut down because the FTC usually acts more quickly to shut down firms the agency believes are operating in an illegal manner, investors who have been briefed by company officials say. The company also said such drastic action rarely comes as a result of a civil probe.
To be sure, much about what the FTC might do with Herbalife is unclear. The company isn’t involved in settlement negotiations with federal regulators, so it’s not clear when the inquiry will conclude, according to people with direct knowledge of the matter.
In addition, company officials concede the FTC will likely take some action at the end of its probe. Herbalife officials are bracing for a range of penalties, including fines and sanctions for failing to properly advise its distributors about the potential to make money from selling its nutritional products. Herbalife already changed some of its business practices as they relate to distributors over hyping the profit-making potential of selling Herbalife shakes and supplements.
The FTC could also impose further restrictions on the way the company’s distributors operate as part of any legal action. A move like that could squeeze future company earnings.
Still, inside the company’s corporate headquarters in Los Angeles, executives are increasingly more confident about the outcome of the civil probe—at least that’s what they are telling investors. On Monday the company announced it hired a former official from the FTC to lead its beefed-up compliance effort, a sign some investors believe show the sanctions won’t be severe. Indeed shares rose on the news of the hiring.
Still, shares of Herbalife have fallen more than 30% in recent months amid continued uncertainty about the company’s future and after a poor second-quarter earnings report. Herbalife will report third-quarter earnings on November 3, and some investors believe it will once again fall short of analyst estimates.
Ackman began shorting shares of Herbalife back in 2012, wagering $1 billion the company was operating illegally and would be shut down by the government with the value of its shares falling to zero. Over the past year, a number of prominent investors such as Carl Icahn and Post Holding William Stiriz have taken the opposite view, buying shares and openly opposing Ackman’s public attacks on the company.
Shares of Herbalife fell 1.7% in recent trading.