Judge Dismisses Securities Lawsuit Against Herbalife 11149

A federal court in California has dismissed for the second time a lawsuit that claims Herbalife Ltd. and its chief executive, Michael Johnson, violated federal securities laws.

Oklahoma Firefighters Pension and Retirement System [Oklahoma] failed to sufficiently plead or allege so-called scienter—namely that Herbalife and Johnson acted with intent to deceive investors or were reckless as to the truth or falsity of their statements, U.S. District Judge Dale Fischer found. The judge gave Oklahoma until Aug. 27 to file and serve an amended lawsuit.  

Fischer also struck three expert reports attached to Oklahoma’s amended complaint, but she denied a request to eliminate Oklahoma as the lead plaintiff.

Los Angeles-based Herbalife is under investigation by state and federal regulators including the FTC, but the global nutrition company has repeatedly denied allegations that its multi-level marketing business is nothing more than an unlawful pyramid scheme. The company welcomed the dismissal of the amended complaint. “As we have consistently stated, we are confident in the strong fundamentals of our business model and remain committed to helping people and communities improve their nutrition," Herbalife said in a statement.

One of the lawyers representing Oklahoma did not immediately respond Thursday to a request for comment on the ruling.

Plaintiff’s Allegations

Oklahoma had asserted that numerous entities had begun probing Herbalife’s business practices, and “senior executives" anticipated “some form of disciplinary action" to come. The complaint also noted Herbalife had changed its business practices, and the company’s creditors cut its borrowing capacity.

“These allegations arguably permit the inference that Herbalife will be penalized for business practices consistent with those of pyramid schemes. The allegations do not, however, permit the inference that Defendants misrepresented Herbalife’s operations with deliberate recklessness or an intent to deceive," Fischer wrote in a 10-page order. As the judge said she noted in a previous order, “Herbalife openly discussed that it was susceptible to legal challenge precisely because its practices occupy the gray area between legitimate multi-level marketing and illegal pyramid scheme."

In support of its securities lawsuit, Oklahoma also cited statements by Herbalife concerning its retail sales, including a top executive’s acknowledgement in May 2012 that the company did not know the specific sales of Herbalife products to customers outside its network of distributors. Oklahoma also alleged that during a 14-month period, Johnson sold 2.3 million shares of stock for more than $126 million before Herbalife made the admission.

But Fischer concluded the allegations were inadequate to establish an inference that Herbalife and Johnson had acted with the requisite state of mind to sustain the securities fraud case.

Reuters first reported on the ruling early Wednesday.

Earlier this year, a federal court approved a class-action settlement in a pyramid scheme lawsuit that was filed against Herbalife, although a group of former Herbalife distributors who objected to the agreement recently asked the judge to reconsider her decision.