Herbalife Ltd. won dismissal of a lawsuit by a shareholder who said he lost money after hedge-fund manager William Ackman accused the nutrition company of being a pyramid scheme.
Ackman’s allegations aren’t evidence that Herbalife committed fraud, so investor Abdul Awad and two pension funds that joined his suit can’t show that losses they suffered were caused by the company’s alleged misrepresentations, U.S. District Judge Dale S. Fischer in Los Angeles wrote in a March 16 ruling. Herbalife rose 10.5 percent at 2:09 p.m. in New York after having earlier traded as much as 14 percent higher.
While the ruling marks a victory for Herbalife, it doesn’t bar other investors from suing. They could still come forward claiming to have proof that stock losses were caused by fraud. The case also has no bearing on a Federal Trade Commission investigation of Herbalife’s business practices, a probe that began last year.
Herbalife relies on an outside network of distributors to sell its weight-loss shakes, supplements and other nutrition products -- an approach known as multilevel marketing.
The company has consistently disclosed that it may be “susceptible to legal challenge because its business model contains multiple components that resemble those found in illegitimate pyramid schemes,” according to Fischer. That’s the main hurdle to the shareholders proving their case, the judge wrote.
Fischer didn’t address allegations that Herbalife misrepresented its business because the plaintiffs didn’t prove their losses were caused by fraud.
“We welcome the decision by the court to dismiss the case,” Julian Cacchioli, an Herbalife spokesman, said in a statement. “We are confident in the strong fundamentals of our business model.”
Awad, who bought 350 shares of Herbalife in 2013 and 2014, sued the Los Angeles-based company and senior executives last year. He alleged that it’s a pyramid scheme that they misrepresented as a legitimate marketing operation, violating federal securities laws.
He and the two funds -- the Oklahoma Firefighters Pension and Retirement Systems and the City of Atlanta Firefighters’ Pension Fund -- sought to sue on behalf of other investors.
Fischer gave the investors until April 8 to revise the complaint, noting that they “will likely fail absent allegations that identify particular misrepresentations concerning specific components of Herbalife’s operations.” In a separate ruling on March 16, the judge appointed the Oklahoma fund as lead plaintiff and removed the Atlanta fund from the role because it had made a profit during the period at issue.
Michael Goldberg and Robert Prongay, attorneys for Awad, didn’t immediately respond to phone and e-mail messages Wednesday seeking comment on the rulings. Jon Tostrud, an attorney for the pension funds, also didn’t immediately respond to phone and e-mail messages.
Ackman and his hedge fund, Pershing Square Capital Management, have waged a more than two-year campaign against Herbalife, saying the nutrition company is an illegal operation and can’t survive. More than 1,000 U.S. victims have come forward, Pershing Square said in a March 13 e-mailed statement. Herbalife has repeatedly denied the allegations and says it operates with integrity.
Ackman’s firm has bet against the company’s stock, starting with a $1 billion short position. At Herbalife’s current mid- $30s share price, the investment is close to breaking even, Ackman said last week.
The criticism prompted a probe by the FTC and pressured Herbalife into adjusting its business model, hampering sales growth. The stock has lost more than 30 percent of its value over the past year through Tuesday’s close. With Wednesday’s gain, the stock traded as high as $39.28 in New York.
Regulators also have probed possible manipulation of Herbalife stock by Ackman. Last week, the investigation extended to one of the hedge-fund manager’s outside consultants. The Federal Bureau of Investigation is reviewing whether false statements were made to regulators, two people familiar with the matter said.
Ackman said on March 13 that he and his firm hadn’t been served with a subpoena. The fund manager acknowledged that day that some of his contractors were contacted by the FBI, including Global Strategy Group, a government-relations firm working for Pershing Square. GSG said the same day that it has cooperated with the U.S. and isn’t a target of the probe.
Fran McGill, a spokesman for Pershing Square with Rubenstein Associates Inc., declined to comment Wednesday on the Awad case or the U.S. probe.
Separately, one of the signers of a letter complaining about Herbalife practices was subpoenaed last month to appear before a federal grand jury in New York, the Hartford Courant reported yesterday.
The case is Awad v. Herbalife Ltd., 14-cv-02850, U.S. District Court, Central District of California (Los Angeles).