It was announced late Friday night that Herbalife had settled their class action suit brought on by Dana Bostick of California. Longs and bulls are celebrating this like it has anything to do with the FTC matter, and it doesn’t. This settlement decision will not affect the FTC’s decision on whether or not Herbalife is a mathematical fallacy as a business, whether it harmed many more millions of customers than those in the class, and whether or not RICO violations took place. The FTC and government’s investigation played no part in this case, which was settled by the company, likely to avoid pissing away money they don’t have on litigation.
Yes, this is a good headline for the company – but it is meaningless news in the long term. What matters now is the company’s upcoming earnings, followed by the outcome of the SEC, FBI, AG’s and FTC’s investigation into the company.
Herbalife’s press release stated the following:
On October 31, 2014, global nutrition company, Herbalife Ltd. (NYSE:HLF) entered into a settlement agreement that, if approved by the court, will resolve a class action lawsuit against the company.
The company has been aggressively defending itself against the plaintiffs allegations set forth in Bostick v. Herbalife (HLF) ever since the lawsuit was filed in 2013. Yet, the potential cost, as well as the distraction, disruption and burden of prolonged litigation on the company and its management team, led the company to decide that the terms set forth in the settlement agreement provided the best path for moving forward.
The company notes that the settlement does not contain an admission of liability or wrongdoing and still asserts that the suit has no merit. Additionally, the company notes that the plaintiffs counsel acknowledge that a finder of fact could reasonably conclude there is substantial demand for Herbalife product and Herbalife is not in violation of the law.
Mark Friedman, general counsel of Herbalife, stated: We are fully confident that we would have prevailed. Settling this matter, however, is in the companys best interest as it allows us to put it behind us and focus on the future growth of the company.
It’s being tossed around on Twitter that there’s two class funds set up – the first, $15M for a cash distribution, the second is two pockets of $2.5M for product returns. While $15M-$20M certainly isn’t an amount that I find to be commensurate with the underlying actions of the company over the last 30 years, it is worth noting that Herbalife chose to settle this action instead of watching it play out.
Additionally, as part of the settlement, the company can no longer call its distributors “members”. Remember Michael Johnson’s original defense in this CNBC interview? He claimed that the only confusion is that “our customers are sometimes called distributors.” Just one more layer of corporate reform that the company is taking on to try and keep itself alive – the more rules they play by, the more chance the company begins to stall on its own:
The settlement came just about an hour after Tim Ramey got off CNBC predicting it would happen – notable timing.
This was after Melissa Lee called Ramey out for getting a paycheck from Post and pushing Herbalife stock as an analyst at Pivotal. Recall, Ramey slapped a three digit price target on Herbalife last year before the stock promptly wound up under $50. Ramey made the quizzical statement that “Post has nothing to do with Herbalife.” As we all know, Post’s chair Bill Stiritz is an enormous Herbalife investor. Not quite sure what’s going on in Ramey’s head there. After Ramey’s comments, the Options Action panel lambasted Herbalife, despite the video just showing just one of the panelists critical of the company. Kudos to Melissa Lee for holding Ramey’s feet to the fire.
Back to the settlement. With terms that are seemingly favorable to the company, it’s interesting to wonder why the company chose to disclose this on Friday after hours and not with earnings when the company reports this upcoming Monday. The PR states that the settlement was signed today, so from a disclosure standpoint, waiting until Monday morning shouldn’t have been out of the question.
Earnings will be out this Monday and will offer a much deeper look into the bowels of how the company has been operating for the last three months. The obvious questions I’ll have for the earnings report can be summed up in this great earnings preview article by Matt Stewart.
Of course, the only action that really matters to the company from this point forward is the FTC’s investigation of the company. The result of that investigation will ultimately determine the fate of the company’s future going forward.
I continue to have my faith that the FTC will see this company for what it truly is, and act accordingly.