Investigation covered years’ worth of operations
The agreement relates to a The US Department of Justice and the US Securities and Exchange Commission investigation of Herbalife’s business practices within China prior to 2016. In Herbalife’s recently filed 10-Q form pertaining to the company’s first quarter of fiscal 2020 the company revealed the tentative agreement with federal authorities. The case was filed over alleged violations of the Foreign Corrupt Practices Act that is meant to restrain US companies from engaging in activities in foreign markets, such as the payment of bribes, that are prohibited by US law.
In that document Herbalife said it would, “[E]nter into an administrative resolution with the SEC with respect to alleged violations of the books and records and internal controls provisions of the FCPA. The Company would separately enter into a deferred prosecution agreement (“DPA”) with DOJ, under which DOJ would defer criminal prosecution of the Company for a period of three years related to a conspiracy to violate the books and records provisions of the FCPA.”
The document went on to delineate a three year period in which it would agree to certain reporting requirements.
If Herbalife complies, the criminal charge would be dismissed with prejudice, meaning it could not be refiled. Among other things, Herbalife said it “would also undertake compliance self-reporting obligations for the three-year term of the respective agreements with the SEC and DOJ. If the Company remains in compliance with the DPA during its three-year term, the deferred charge against the Company would be dismissed with prejudice. In addition, the Company would agree to pay the SEC and DOJ aggregate penalties, disgorgement and prejudgment interest of approximately $123 million.”
Other issues relating to China operations
In September of 2019, Herbalife agreed to pay a $20 million fine in an SEC case that alleged the company had misled investors as to the precise nature of how it paid commissions to its distributors in China. SEC had alleged that the commission structure within China was not materially different than in other markets, meaning the company was skating close to the edge of Chinese government restrictions on MLM actives and this amounted to a risk that was not disclosed to investors.
In addition, according to a Reuters report, in November 2019 two Herbalife former executives, Yanliang Li, also known as Jerry Li, and Hongwei Yang, also known as Mary Yang, were charged with FCPA violations. The pair had reportedly run a bribery scheme in China for more than a decade on the company’s behalf, though Herbalife itself was reportedly not named in the indictment.
In January of 2019 Herbalife CEO Rich Goudis, who had only been in the top spot briefly after long career in lower executive positions within the company, resigned abruptly. Herbalife at the time said his resignation was due to statements he had made before taking the promotion “that are contrary to the company’s expense-related policies and business practices.”
It was subsequently in the Wall Street Journal that Goudis had been recorded telling another company employee to ignore company accounting policies when it came to entertainment related expenses within China. That recording reportedly made its way into the hands of federal investigators.
Herbalife recorded $1.3 billion in sales in its first quarter of fiscal 2020, or a year-over-year rise of more than 10% when currency fluctuations were taking into account. The company recorded $43.6 million of net income, or 32 cent per share, even after setting aside $83 million toward the SEC settlement. The company had set aside $40 million previously in anticipation of such a deal with federal regulators.