Herbalife Paid a $200 Million Fine. Then the FTC Screwed it Up

February 2, 2017, 6:38 PM UTC

Three weeks ago, on Jan. 10, the Federal Trade Commission announced what sounded like great news for people who had lost money with Herbalife, the multi-level marketer of weight-loss shakes and nutritional supplements: Their checks were in the mail.

It was the final outcome in the FTC’s lengthy battle with Herbalife (HLF), which in July agreed to pay $200 million in a controversial settlement. And it was supposed to be a great victory for the hedge fund manager Bill Ackman, who had poured $1 billion into a bet against Herbalife stock and long argued that Herbalife was scamming immigrants into loading up on weight-loss shakes they’d never be able to sell at a profit.

But now that almost 350,000 checks have been mailed, a curious pattern has begun to emerge: Many of the people receiving money from the FTC don’t appear to be victims at all. In fact, of those who received the checks, the largest of which are more than $9,000, many are actually happy customers who still use the meal supplements. Some still work for Herbalife. Even members of the company’s president’s team, a special status that confers a larger product discount on high-volume distributors, have received a cut of the FTC settlement. What’s more, some check recipients say they plan to “flip” their settlement payout, i.e. use the money to buy more products from Herbalife.

That’s what Gracie Puga, an insurance salesperson in Beeville, Tx., says she’ll do. Puga, who has been buying the nutrition products since 2013, calls herself a “very satisfied Herbalife member.” Yet she received $649 from the FTC, and she plans to send it back to Herbalife. “This check was a blessing to me and my family,” Puga says. “We will turn around and use it to buy more of our amazing Herbalife product.”

In between collecting that big fine from Herbalife and cutting tens of millions of dollars worth of checks, the FTC’s plan seems to have gone awry. It was, perhaps, an inevitable conclusion to a polarizing saga in which both sides still insist they were right. Herbalife has resisted understanding for a long time. A little more than four years ago, Ackman, founder and CEO of Pershing Square, declared Herbalife a pyramid scheme. Others weren’t convinced, and Herbalife’s stock continued to defy Ackman, rising 18% since the hedge fund manager began shorting it. (For more on the debate, read Fortune’s investigation, “The Siege of Herbalife.”)

But the two-year investigation by the FTC was expected to settle the matter. Although the agency stopped short of labeling Herbalife a pyramid scheme and allowed it to keep operating, it found that the company had misled distributors with “deceptive” claims about the business opportunity in selling the company’s products. And then there was the $200 million fine. Ackman amped up his I-told-you-so refrain.

Now, the feedback from those who are receiving FTC payouts is raising questions about the settlement, and provoking a renewed examination of Herbalife. The FTC’s system for disbursing the money seems to have frequently rewarded those who sought no remedy, while shortchanging others who were hoping for much greater reparation. The result was that the FTC’s intentions of the Herbalife settlement have, in some ways, backfired.

To be sure, Herbalife victims do exist. “I’m not happy at all,” Maria David, a former Herbalife distributor in New York, told Fortune about getting a $777 check when she says she lost $25,000 with the company. After the product piled up in her house, she eventually gave up and threw the rest in the garbage.

Overall, it’s not clear how many who received a payout from the FTC are Herbalife enthusiasts like Puga, and how many are victims such as David—or how many victims didn’t receive a check at all. Neither the FTC nor Herbalife has any data on this, though the company has already heard from as many as 100 check recipients who say they never had any complaints, according to a person familiar with the situation. Herbalife had long claimed that a lot of people who might appear to be victims—dead-end distributors who bought product but didn’t sell it or recruit other sellers, who earned zero in commissions—were actually people just like Puga. Some 56% of distributors, according to Herbalife, had simply signed up for the wholesale discount on products they consumed themselves, not unlike a membership at Costco (COST).

It’s those Herbalife consumers, observers say, who seem to have received a disproportionate amount of the FTC settlement.”Almost all the checks went to distributors who were in fact discount customers,” says Bronte Capital hedge fund manager John Hempton, an Herbalife bull who has defended the company. Ackman, on the other hand, has maintained that few discount customers even exist.

However the money was divvied up, though, the FTC settlement has revealed a significant contingent of these distributors who looked like victims on paper but were really avid consumers. Part of the FTC agreement mandates that Herbalife distributors who were just in it for the discount, now convert to a status called “preferred member.” So far, more than 200,000 of the total 500,000 Herbalife distributors in the U.S. have switched over to preferred members, according to the company. Given that the FTC mailed almost 350,000 checks, it’s conceivable that many of those 200,000 discount buyers received them. Sherry White, for one, a former distributor who is now a preferred member, received a check from the FTC. “I too love the product!!!” she wrote on Facebook.

To fans like White, the fact that they are receiving settlement checks makes them skeptical about whether there was any wrongdoing at Herbalife to begin with, and whether it deserved to pay the $200 million fine. “It was settled, not determined it was truth,” White wrote in her post. “I personally don’t believe it was true, because I was a distributor and was never told anything dishonest about how or what I earned. But I’ll take the money and pay my bills.”

Randy Parker, a health coach in Raleigh, N.C., called the settlement a “massive scam” after his mother, “a happy Herbalife customer for 10 years or so,” received a check for nearly $700. “Be advised that the FTC, since they could find no real victims, has decided that YOU are a victim and will most likely be sending you a check since you ‘made no money’ in Herbalife,” Parker told his Facebook followers. “Take it! You were never trying to? Well, let’s not let that minor detail get in the way.”

Part of the problem is with how the FTC decided to distribute the checks. The agency was under the gun to send out the money before the Donald Trump administration took office and before its chairwoman Edith Ramirez, who had overseen the investigation, resigned in mid-January. Asking Herbalife distributors to submit claims for settlement funds would take far too long between outreach and processing time. Instead, the FTC came up with a simple formula: If you spent at least $1000 as an Herbalife distributor between 2009 and 2015 but got nothing, or next to nothing, back in commissions from the company, you could receive a check. The FTC’s rationale: Anyone who didn’t make money off of Herbalife was obviously a net loser.

That logic, however, had a fatal flaw. It doesn’t account for Herbalife’s most dedicated customers, many of whom bought thousands of dollars worth of shakes with the distributor’s discount and drank them, never expecting a financial return. In a settlement claims process, the FTC could have required Herbalife members to stipulate whether they were mere consumers or if they’d tried to sell the product. Without it, thought, the agency was flying blind. “You couldn’t make that determination,” Lois Greisman, an FTC attorney who heads its division of marketing practices, tells Fortune. “We had no eyes on that—no data on who sells, how much they sell, to whom do they sell, do they consume it themselves.”

Nor does the FTC seem to have taken into consideration whether someone was still actively buying product from Herbalife, which is potentially a sign of a happy customer, when it doled out the checks. “I guess it’s possible,” Greisman acknowledged. An FTC spokesperson later declined to confirm whether current Herbalife membership status was a criterion (or disqualifying factor) in paying out the settlement, saying the information was “nonpublic.” There is still money remaining in the settlement fund, and the FTC encourages those who believe they should have received a check to visit their website.

Meanwhile, the FTC just made a lot of Herbalife fans even happier—and a little bit richer. Herbalife is turning it into a sales opportunity. The company has been running promotions allowing those who let their membership with the company lapse to reactivate for free, using the settlement disbursal as an opening to re-recruit old customers and distributors. Current Herbalife distributors have taken up the mantra, encouraging those who received unexpected checks to cash them and “Buy more product!” “That’s the beauty of it!!,” April Gilson, a health and wellness coach in Michigan, wrote on Facebook. “Someone tried to take out Herbalife and now what they had to ‘pay’ out is coming back to them!!! MOST ppl are doing just that.”

If that happens, Herbalife will have more evidence to prove the FTC, and Ackman, wrong.

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