A federal judge has dismissed a lawsuit accusing Herbalife Ltd and its chief executive officer of misrepresenting the weight-loss and nutritional products maker’s sales practices as legitimate when the company was “at its core” a pyramid scheme.
U.S. District Judge Dale Fischer in Los Angeles, who dismissed a version of the complaint in March, said on Tuesday the Oklahoma Firefighters Pension and Retirement System did not show the defendants defrauded shareholders by concealing the company’s inability to track retail sales.
The judge also said that CEO Michael Johnson’s reducing his Herbalife stake by a net 12 per cent over roughly one year, while “undeniably large,” did not raise suspicions, nor did disclosures that top executives expected “some form of disciplinary action” over the company’s business practices.
“Herbalife openly disclosed that it was susceptible to legal challenge precisely because its practices occupy the grey area between legitimate multi-level marketing company and illegal pyramid scheme,” Fischer wrote.
The lawsuit seeks class-action status from Feb. 23, 2011 and March 10, 2014. Fischer said the plaintiff may file an amended complaint by Aug. 27.
“We are disappointed with the ruling and will determine our next steps after consultation with the client,” Maya Saxena, a lawyer for the Oklahoma fund, said in an email on Wednesday.
Herbalife did not immediately respond to requests for comment about the ruling. It has denied wrongdoing.
A pyramid scheme often occurs when participants earn more money by recruiting others to sell products than by selling the products.
Billionaire hedge fund manager William Ackman has also accused Herbalife of being a pyramid scheme. He said in December 2012 that his firm, Pershing Square Capital Management LP, had made a $US1 billion bet against Los Angeles-based Herbalife.
In May, another federal judge granted final approval to Herbalife’s $US15 million settlement with distributors who said the company misled them.
Herbalife shares added 0.1 per cent to $US50.66 in Wednesday trading, and remained above levels at the time Ackman revealed his short bet.
The case is In re: Herbalife Ltd Securities Litigation, U.S. District Court, Central District of California, No. 14-02850.
(Reporting by Jonathan Stempel in New York; Editing by Jeffrey Benkoe)
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