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Federal Agency Says Herbalife Is Sketchy, But Won't Say If It's A Pyramid Scheme

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The Federal Trade Commission announced today a settlement in which Herbalife, an L.A.-based health products company, will pay $200 million to consumers for what the agency deemed as "unfair" practices, reports the L.A. Times.

The settlement comes after a two-year investigation into the company's business model. The investigation was spurred by allegations from Bill Ackman, a big player in the hedge-fund game, who said that Herbalife was basically a pyramid scheme.

According to the U.S. Securities and Exchange Program, a pyramid scheme "typically does not involve a genuine product. The purported product may not exist or it may be 'sold' only to other people who also become distributors." The money is generated entirely from people buying into the program and becoming "distributors." Basically, there is nothing legitimate to sell, and there's little effort on the organizers' part to market the goods; all the promotion comes from lower-level members who are seeking new recruits.

Some people, like Ackman, have noted that Herbalife's practices are akin to a pyramid scheme. As noted in The Atlantic, Herbalife is not a "direct-selling company," meaning you can't buy its goods from stores. Rather, it distributes its products through the 3.7 million members worldwide. Those members not only earn money from the direct sales they make, they also get a cut from the sales made by other members they've recruited. What's also notable is that to get the products to sell, members have to purchase them in bulk. They can either sell the product or consume it themselves; either way, they are stuck with the goods if they can't sell them or return them within a specific window of time.

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This business model, which you may or may not consider a pyramid scheme, is what is known as "multilevel marketing," reports CNN Money. It's the same model used by companies such as Tupperware and Mary Kay.

The FTC said it has not found sufficient evidence to formally label Herbalife as a pyramid scheme, though investigators said that the company does, indeed, have some questionable practices.

"We didn't allege a pyramid deception count. But what we did allege was an unfairness count," said FTC Chairwoman Edith Ramirez, according to the Times.

Ramirez said that the company's "compensation structure unfairly rewards recruiting that is ultimately unrelated to retail demand" and that it will now have to "start operating legitimately, making only truthful claims about how much money its members are likely to make" and "compensate consumers for the losses."

Herbalife, in turn, said that it believes the FTC's accusations are "factually incorrect" but have decided to agree to the settlement to put a rest to the two-year investigation. It seems as if investors, too, are happy that the investigation has ended; CNN Money reports that Herbalife stock shot up by 15% today.

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As part of the settlement, Herbalife has also agreed to have an independent contractor monitor its operations for the next seven years.