Herbalife to settle class action lawsuit over 'pyramid scheme' for $15M

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Civil rights groups alleged in 2013 Herbalife unfairly targets minorities
Herbalife made $4.8 billion in sales last year and uses a wide network of independent distributors to sell products
Lawsuit claims they company’s independent distributors earn more money recruiting new sales people than they do selling its products
The company has entered into a settlement agreement that would end the class action for $15 million
It still needs approval
The settlement does not contain any admission of liability or wrongdoing
Herbalife stock has lost about a third of its value this year

Published: 21:36 EST, 31 October 2014 | Updated: 09:53 EST, 1 November 2014

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Marketing giant Herbalife Ltd would pay $15 million to settle an 18-month battle over a class action lawsuit brought by a former distributor claiming that the nutrition and supplements company is running an alleged pyramid scheme, according to a U.S. court filing.

The company would pay $15 million in cash, plus up to $2.5 million for product returns, according to the court filing that granted preliminary approval for the settlement on Friday.

Under terms of the settlement, Herbalife would also make 'numerous changes' to its business model for at least three years after the settlement receives final approval, the court filing said.

Short-sellers and other critics have accused companies such as Herbalife, NU Skin Enterprises Inc and USANA Health Sciences Inc of running pyramid-type schemes, questioning their sales model under which distributors make money not only from their own sales but from people they recruit as distributors.

Settling: Global nutrition company, Herbalife Ltd. entered into a settlement agreement that, if approved by the court, will resolve a class action lawsuit against the company for $15 million. Pictured here is the company's offices in Los Angeles

Final court approval is still needed.

Dana Bostick, a California housing inspector, filed the lawsuit in April last year, claiming that hundreds of thousands of other distributors have failed to make much money by trying to sell the products.

'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,' Herbalife said in a statement on Friday.

The company said the settlement did not contain an admission of liability or wrongdoing.

Herbalife gave Carl Icahn three additional seats on its board earlier this year, after the activist investor openly voiced his support for the company.

Pitted against him is the company's most prominent critic, fellow activist William Ackman, who unveiled a $1.16 billion short position against Herbalife in December 2012.

Under the agreement, Herbalife must make a number of changes to its corporate policies, including how it defines its distributors, paying shipping charges for products that are legitimately returned by members and making clarifications in its membership agreement to make them less confusing.

The product return fund would be available to distributors who file valid claims for the return of unused and unopened products, according to Friday's settlement.

The plaintiff lawyers expect to seek fees equal to 30 percent of the combined sum of the settlement amount, the court filing said.

'In return for the economic and corporate policy changes provided in the settlement agreement, the settlement class will agree to fully release Herbalife from all claims that were or could have been raised in the complaints in this action,' Judge Beverly Reid O'Connell said in the filing.

Herbalife shares closed up about 3.7 percent at $52.46 on the New York Stock Exchange on Friday.

The stock has lost about a third of its value so far this year.

A sharp sell-off was sparking over reports the FBI were probing Herbalife over the alleged pyramid scheme.