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Herbalife Soars as Judge Dismisses Lawsuit (revised) - Analyst Blog

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Shares of Herbalife Ltd. (HLF) jumped approximately 13% in response to the news that the lawsuit filed by shareholders alleging the company operating an illegal pyramid scheme, has been dismissed by the court.

Per media reports, U.S. District Judge Dale Fischer in Los Angeles dismissed the case citing insufficient proof to show that Herbalife conducted fraudulent activities.


Moreover, the judge stated that since no fraud was proven against Herbalife, shareholders could not claim that the losses they suffered were due to the company’s alleged misrepresentations. The health supplement maker welcomed the court’s decision stating its confidence in its strong fundamentals.


Herbalife has been in the spotlight for quite some time in the wake of accusations by Bill Ackman that the company was running a pyramid scheme business model. Per this model, the company boosts business through deceptive marketing practices. The company was accused of making money by recruiting sales personnel and not from sales.


In Dec 2012, Ackman revealed a $1 billion short position in Herbalife’s shares and accused it of employing such means to further its business. He even sent a letter to the company on Dec 24, 2013 about the improper recruiting methods.


Again, in Jan 2015, the billionaire investor accused Herbalife of operating illegally in China and warned investors about probable violation of multi-level market restrictions in the country. He also backed his allegations with a bet of $1 billion that the stock will fall to zero within a year. (Read: Herbalife Faces Another Ackman Attack)


Reportedly, Ackman tried to lobby Congress members to push for an investigation against Herbalife by state and federal regulators, especially the Federal Trade Commission. Such an attempt shows his determination to prove the charges. Herbalife, on the other hand, denied the charges all along.


But the company seems to have started out on a streak of good luck lately as the case dismissal closely followed another favorable incident. Last week, federal prosecutors and the Federal Bureau of Investigation (FBI) started questioning affiliates of Ackman, and requested documents from people who were reportedly hired by him to campaign against Herbalife. It is also being probed whether false statements were made about Herbalife’s business model to spur investigation into the company and lower its stock price. (Read: Herbalife Up as Tables Turn on Ackman, FBI Probes Claims)


Back-to-back allegations against the Zacks Rank #4 (Sell) company has made it difficult to recruit sales professionals to distribute its products. Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc. (NUS), USANA Health Sciences Inc. and Avon Products Inc. (AVP) also follow the same model.


(We have re-issued this blog to correct an inaccuracy. The original version, dated yesterday, March 19, 2015, should no longer be relied upon.)
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