Herbalife built a $5B business on a model the FTC called a pyramid scheme

Herbalife was founded in 1980 by Mark Hughes as a multi-level marketing company selling nutritional supplements. The business model relied on recruiting distributors who bought product and recruited others. By 2012, Herbalife had 4.5 million distributors worldwide and annual revenue of $4.1 billion. The model was questioned repeatedly, including a 2004 class-action settlement for $6 million over pyramid scheme allegations.

In December 2012, activist investor Bill Ackman publicly accused Herbalife of operating a pyramid scheme and announced a $1 billion short position. The stock dropped 20% in a day. The FTC opened an investigation in March 2014. In July 2016, Herbalife settled with the FTC for $200 million, the largest civil penalty the agency had ever obtained. The FTC said it was 'virtually impossible to make money selling Herbalife products.' The company agreed to fundamentally restructure its U.S. compensation model.

The restructuring required that at least 80% of sales be to non-distributors, that recruitment-based rewards be capped at one-third of total compensation, and that an external monitor oversee compliance for seven years. Herbalife also paid $20 million to the SEC in 2019 for false statements about China and $123 million to the DOJ in 2020 for bribery. The company survived and continued operating, but its growth was constrained and the Ackman short exposed the fragility of its business model.