After US multi-level marketing company Herbalife settled a probe of its sales practices with the US Federal Trade Commission (FTC) last month, top executives assured investors that the company would be able to thrive under the new rules.
The consumer protection agency had questioned the company’s sales methods.
Billionaire investor William Ackman in 2012 claimed the company was running a pyramid scheme, recruiting members with a promise of payment for enrolling others in distribution, rather than depending on the actual sale of its nutritional supplements and weight management products.
In its July 15 settlement Herbalife agreed to restructure its US business so distributors are rewarded for sales rather than for recruitment of sales agents and it agreed to pay a $200mn fine.
But Herbalife’s filings with the US Securities and Exchange Commission painted a much less optimistic picture than its presentation to analysts and investors, according to a private investor who flagged the differences to the SEC this month.
Matthew Handley, an investor based in Lakewood Ranch, Florida alleged Herbalife made “purposefully deceptive statements” in its August 3 quarterly earnings conference call and regulatory filings.
Handley, who is betting Herbalife’s stock price will fall, told Reuters about his outreach to the SEC and provided a copy of his letter to its whistleblower office.
“The transcript of the conference call, when compared directly against the actual language the company issued in their 10Q, depict a clear pattern of purposeful intent to deceive investors and the market,” Handley wrote in the August 16 letter.
“The things you say on the call and write in the filing have to match up, and I thought they just didn’t,” he later said in an interview with Reuters.
Because Herbalife’s conference call transcript and its SEC filings are publicly available, securities law experts said the company probably did not violate the SEC’s disclosure rules such as Regulation FD. Corporate filings are often more legalistic and technical than what executives say during presentations to analysts and investors, when they may sound optimistic about the company’s outlook, law professors and private lawyers noted.
But such presentations are usually highly scripted, with companies trying to ensure oral statements are not inconsistent with their filings, and the difference in tone and substance in Herbalife’s case is noteworthy, securities lawyers said.
“Securities laws say that you cannot lie,” said Yale law professor Jonathan Macey. “Reading these two documents (the filing and transcript of the conference call), would suggest they’ve changed their point of view,” he added.
Herbalife spokesman Alan Hoffman declined repeated requests from Reuters for comment.
Brian Lane, a partner at law firm Gibson Dunn, which vets Herbalife’s disclosures, did not respond to a call or email seeking comment.
Herbalife has disclosed inquiries from the SEC and other government authorities in the past.
SEC spokesman John Nester also declined to comment.
Herbalife hailed the FTC settlement as a victory for its business model as the FTC said the company may have deceived hundreds of thousands of people but stopped short of calling it a pyramid scheme.
In August executives assured analysts and investors on a conference call that Herbalife would suffer little financial damage from the settlement.
Chief Executive Michael Johnson said, “We have the greatest confidence in our ability to comply with the agreement and continue to grow our business in the US
and around the world.”
Chief Financial Officer John DeSimone saw “minimal disruption to the business” and President Desmond Walsh also struck an optimistic tone, saying, “The most important thing is that we don’t see any long-term impact in our business.”
Herbalife’s SEC filing was more circumspect though, saying the company does not currently expect the settlement to have a “long-term and materially adverse impact.”
However, the filing also noted “there is no guarantee that we will be able to fully comply with the consent order” and that “the company’s business and its member base, particularly in the United States, may be negatively impacted.”


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