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Herbalife Wins another Dismissal in “Pyramid Scheme” Lawsuit

— July 30, 2015


Courtesy of
Courtesy of

In Los Angeles Federal Court on Tuesday, District Judge Dale Fischer dismissed another lawsuit against nutritional products producer, Herbalife, which was accused of being a “pyramid scheme.” The suit was filed against the company by the Oklahoma Firefighters Pension and Retirement System accusing Herbalife of lying to investors about the legitimacy of its business operations. The lawsuit derives from a two-year battle between the company and billionaire hedge-fund manager, William Ackerman, who called the company an illegitimate pyramid scheme and predicted that it will eventually topple. The plaintiff’s cited Ackerman’s comments as fueling stock losses affecting their investment in the company. Judge Fischer did not believe that the plaintiffs proved that CEO Michael O. Johnson knew of any wrongdoing, which is a requirement for investor lawsuits to proceed. The judge also ruled that Ackerman’s words alone do not prove illegal activity by Herbalife. Judge Fischer dismissed an earlier version of the suit for similar reasons in March, when the Oklahoma firefighter fund joined Atlanta’s counterpart, along with a private investor.

Although a victory for Herbalife, the ruling does not prevent additional legal action against the company, nor does it affect an ongoing two-year Federal Trade Commission (FTC) probe into the company’s business practices. Herbalife operates through independent distributors who sell the products, similar to other companies such as Amway and Mary Kay in a process known as multilevel marketing. In the March dismissal as well as Tuesday’s ruling, Judge Fischer contested that the investors should have known the nature of the company’s business model, writing that “Herbalife openly disclosed that it was susceptible to legal challenge precisely because its practices occupy the gray area between legitimate multi-level marketing company and illegal pyramid scheme.” The most recent suit also noted Johnson’s selloff of roughly 12 percent of his stake in the company over the past year to be evidence of the top-level of a pyramid scheme. Judge Fischer called the sale, “undeniably large,” however he did not see that as proof, nor did he cite that the company’s disclosure that its executives expected “some disciplinary action” due to the federal probes. Despite the admissions, the judge did not regard the evidence to be sufficient actual proof of fraud.

Ackerman, who runs the Pershing Square Capital Management fund, has placed a $1 billion bet against the company to coincide with his public statements calling the company illegitimate. His comments set the FTC probe in motion. Ackerman claimed in March that his investment was close to breaking even following a 30 percent loss in Herbalife’s stock value since the claims were made. A federal judge in another district granted a $15 million class-action settlement in favor of Herbalife distributors who claimed that the company misled them. Herbalife has continued to deny any wrongdoing in the lawsuits. Although the Oklahoma fund’s attorney Maya Saxena was disappointed with the ruling, she said that she “will determine our next steps after consultation with the client.” Judge Fischer gave the plaintiffs until August 27th to file an amended complaint.




Bloomberg Business – Erik Larson

Bloomberg Business – Sophia Pearson Edvard Pettersson and Duane Stanford

Reuters – Jonathan Stempel



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