15 November 2018
Herbalife has long denied it is a pyramid scheme. Photo: Bloomberg
Herbalife has long denied it is a pyramid scheme. Photo: Bloomberg

US court dismisses pyramid scheme lawsuit against Herbalife

A US court has dismissed a lawsuit claiming Herbalife Ltd. fraudulently portrayed itself as a legitimate firm and that shareholders lost money because it was actually an illegal pyramid scheme.

US District Judge Dale Fischer in Los Angeles said shareholders of the maker of weight-loss and nutritional products, led by two pension funds, failed to show that the company had fraudulently inflated its stock price, Reuters reported.

Hedge fund manager William Ackman and his Pershing Square Capital Management LP have campaigned against Herbalife since December 2012, when they revealed they had placed a US$1 billion bet against the Los Angeles-based company.

Herbalife has long denied it is a pyramid scheme.

Fischer rejected claims in the proposed class action that news about concerns from Massachusetts senator Edward Markey, a Federal Trade Commission probe, weak quarterly results and even questions raised by Ackman and hedge fund manager David Einhorn were “corrective disclosures” that revealed Herbalife’s fraud.

“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.”

Herbalife said it welcomed Fischer’s decision.

“We are confident in the strong fundamentals of our business model and remain committed to helping people and communities improve their nutrition,” it said.

Critics have said Herbalife misleads distributors about how much they can earn, and that its success depends more on recruiting distributors than selling products.

Ackman told CNBC last week that federal investigators examining possible manipulation of Herbalife’s stock price have subpoenaed people hired by a consulting group working for Pershing.

On May 11, another federal judge in Los Angeles will consider final approval of Herbalife’s US$15 million settlement with distributors who said the company misled them.

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