Judge Dismisses Lawsuit Accusing Herbalife Of Running A Pyramid Scheme

After two years of accusations calling Herbalife a pyramid scheme, the company has won the dismissal of a lawsuit against it alleging it was set up to only enrich those few at the top of its multi-level marketing business.

The lawsuit from shareholders led by two pension funds claimed that the company behind weight-loss and nutritional products fraudulently portrayed itself as a legitimate company that could make money for distributors at the bottom level of the operation, reports Reuters.

Instead, shareholders alleged in the suit, it is an illegal pyramid scheme that rewarded those at the top only. That alleged misrepresentation of its business modelresulted in a loss of shareholders’ money, the suit claimed.

Herbalife sells its products directly, by using a network of independent distributors. Those distributors then sell the products and make money with those sales, as well as getting commissions from other people they set up in the business.

But U.S. District Judge Dale Fischer in Los Angeles said this week that the shareholders failed to show that questions about its business raised by hedge fund manager William Ackman and various investigators showed that the company had fraudulently inflated its stock price.

The plaintiffs had claimed that news about an investigation from the Federal Trade Commission, concerns from Sen. Edward Markey and questions raised about the value of the stock by Ackman and his hedge fund were “corrective disclosures” that showed Herbalife’s alleged misrepresentations caused the stock’s price to decline. But Judge Fischer said that nothing that later proved to be true had been concealed on Herbalife’s part.

“Just as black swans may exist, there may theoretically be some form of opinion that is factual or revelatory in nature such that it qualifies as a corrective disclosure,” Fischer wrote in a footnote. “Such an opinion would need to reveal to the market something previously hidden or actively concealed. That is not this case.”

Ackman, of Pershing Square Capital Management, has been crusading against Herbalife since December 2012, though Herbalif has maintained the entire time that it’s not a pyramid scheme.

“Girl Scouts sell cookies on a direct-selling method, and nobody attacks them,” said CEO Michael O. Johnson in 2013.

Herbalife hadn’t commented yet on the lawsuit’s dismissal.

Herbalife wins dismissal of U.S. ‘pyramid scheme’ lawsuit [Reuters]

by Mary Beth Quirk via Consumerist