On May 5th, Herbalife ( HLF ) reported improved financial performance for the first quarter of the year and updated their regulatory disclosures as follows:
"The Company is currently in discussions with the FTC regarding a potential resolution of these matters. The possible range of outcomes include the filing by the FTC of a contested civil complaint and further discussions leading to a settlement which would likely include a monetary payment and injunctive and other relief. The Company is cooperating with the investigation and at this time it is difficult to predict the timing, and the likely outcome, of these matters. The discussions with the FTC are in the advanced stages, but there are still a number of material open issues that could preclude reaching final agreement. If discussions with the FTC do not continue to progress, it is likely that litigation would ensue. Although we are confident in our legal position, litigation outcomes by their very nature are difficult to predict and there can be no assurance of a particular outcome.
"The outcome of these matters with the FTC, whether by mutual resolution or through litigation, could have a material adverse impact on the Company's business operations, its results of operations or its financial condition. The Company believes it is reasonably possible that it may have incurred a loss.
At the present time, the Company's best estimate of the payment amount that would be made by the Company under a mutual resolution with the FTC is $-…… million. The Company has not accrued any amounts with respect to any potential monetary payments relating to this matter. If a resolution is not attained and litigation ensues, the Company is unable to estimate a range of potential loss, if any, relating to these matters."
The company's language provides greater specificity and introduces a narrower range of outcomes versus the company's -…-K, filed on February -5th, which stated:
"The possible range of outcomes include the filing by the FTC of a contestedcivil complaint, further discussions leading to a settlement which could include a monetary payment and other relief or the closure of these matters without action."
It is notable that the company removed the "closure of these matters without action" language from the recent -…-Q.
Investors reacted favorably to the company's disclosure apparently focusing on the modest size of Herbalife's estimate of the monetary portion of the settlement, less than two quarters of earnings, suggestive of an overall settlement that would be no more than a "slap on the wrist." While a $-…… million settlement would be one of the highest ever in an FTC consumer protection action, it would be immaterial to Herbalife. Investors, however, appear to ignore the fact that the company may not be able to settle with the FTC, and instead, will be sued by the FTC for being a pyramid scheme, or, alternatively, that a settlement's "injunctive and other relief" may materially impair HLF's future profitability and growth potential.
Recently, the FTC obtained significant injunctive and other relief in
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