The suit, filed in the Central District of California, had been brought by the Oklahoma Firefighters Pensions and Retirement System. It alleged that the company misrepresented its sales practices as legitimate and claimed that the company defrauded shareholders by concealing Herbalife’s inability to track retail sales.
The issue of sales numbers has hovered over the company for several years, ignited first by investor David Einhorn in an earnings call between company executives and stock analysts. Einhorn questioned how the company accounted for sales through its distributors. That raised the specter that clouds the results of all network marketing companies, namely the question of how many products are purchased for end use by consumers and how many are bought by distributors solely for the reason of qualifying for higher bonus levels. Einhorn’s questions seemed to open the door for activist investor William Ackman, who subsequently took a huge short position on Herbalife stock, valued at times at as much as $1 billion. Ackman has made frequent pyramid scheme accusations against Herbalife.
The plaintiffs have until August 27 to decide if they want to file an amended complaint.