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Why Herbalife Ltd. Shares Soared Today

By Jeremy Bowman – Jul 15, 2016 at 12:01PM

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The multilevel marketer's stock spiked as the FTC found that it was not a pyramid scheme.

Image Source: Herbalife.

What: Shares of Herbalife Ltd. (HLF) were spiking today, up 14% as of 10:52 a.m. EDT, on news that the Federal Trade Commission had closed its investigation, finding that the nutritional supplemental provider was not a "pyramid scheme."

So what: For years, Herbalife has been the subject of attacks from hedge fund manager Bill Ackman, who has insisted that the company was an illegal pyramid scheme, pushing the stock down as low as $20. Herbalife settled the investigation with the FTC, agreeing to pay $200 million for misrepresenting itself. As part of the arrangement, the agency will not classify the company as a pyramid scheme, ending a years-long saga.

The settlement will also require Herbalife to improve its disclosures about its distributors as well connect pay to actual retail sales and collect receipts.

Now what: The FTC seemed to come as close to calling Herbalife a pyrmaid scheme as possible without doin so, noting that "the retail sale of Herbalife product is not profitable or is so insufficiently profitable that any retail sales tend only to mitigate the costs to participate in the Herbalife business opportunity." 

Still, the victory over Ackman and his pyramid scheme claim was enough to push the stock higher. Activist investor Carl Icahn, who had battled with Ackman, will also be allowed to increase his stake in the company from 25% to 35%. 

While there could be negative effects on Herbalife's business from the settlement, in the near term it's a clear victory for the company.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Herbalife Nutrition Stock Quote
Herbalife Nutrition
HLF
$12.68 (%)

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