Supplement company Herbalife sees pyramid-scheme suit tossed

Herbalife (Facebook photo)

LOS ANGELES — A judge dismissed a lawsuit by Herbalife shareholders who claimed that the business structure and marketing practices of the weight loss and nutritional supplements company violated the law and that they lost money because it amounts to a pyramid scheme.

Plaintiffs did not show that accusations by activist investor Bill Ackman proved fraud by Herbalife, U.S. District Judge Dale Fischer in Los Angeles wrote in his ruling Tuesday.

Ackman, who runs Pershing Square Capital Management, bet heavily against the company’s stock, describing Herbalife as a pyramid scheme.

Because no fraud was proven, the judge said, the shareholders can’t show that losses they suffered were caused by the company’s perceived misrepresentations.

Herbalife said it welcomed the judge’s decision.

“We are confident in the strong fundamentals of our business model,” Julian Cacchioli, a company spokesman, said in a statement.

Shareholder Abdul Awad sued and later was joined by the Oklahoma Firefighters Pension and Retirement System and the City of Atlanta Firefighters’ Pension Fund. A lawyer for the pension funds, Maya Saxena, said Wednesday that her clients were considering whether to amend the complaint.

Fischer gave the investors until April 8 to make revisions.

The case relied heavily on accusations made by Ackman in a three-hour presentation in New York last year. He focused on Herbalife’s “nutrition clubs,” private settings where Herbalife distributors sell the company’s products – such as weight-loss shakes – and recruit new members.

Ackman said that because the clubs run by Herbalife’s distributors focus on recruiting instead of selling products, the clubs are by definition a pyramid scheme.

He repeatedly tried to persuade other investors to bet against Herbalife, most memorably in a shouting match with billionaire investor Carl Icahn on live television in January 2013. Icahn has defended Herbalife.

Herbalife has vigorously denied Ackman’s arguments and says it operates like a multi-level marketing company similar to Avon, Amway and Mary Kay.

Nutrition clubs have become an increasingly lucrative business model for Herbalife in the last 10 years, with more than 4,000 operating in the U.S. alone, according to the company.

Ackman alleged that those attending nutrition clubs were not actually consumers of the products. Instead, they were often recruits to become nutrition club operators of their own. These recruits should not be thought of as customers, but rather the next layer in the pyramid, he said.

Pyramid schemes are illegal because they eventually collapse once there are no more people to recruit.