Herbalife Pyramid Scheme Lawsuit Moves Forward

Oct 17 2013 | 1:57pm ET

A lawsuit echoing William Ackman's allegation against nutritional supplements company Herbalife has survived the company's dismissal bid.

A federal judge in Los Angeles said that the plaintiff, a former Herbalife distributor, had sufficiently argued his allegation to allow the claim to move forward. Dana Bostick argues, like the Pershing Square Capital Management founder, the Herbalife is a pyramid scheme, and rewards distributors more for recruiting other distributors than for actual sales.

Bostick further alleges that those sales were made impossible by the larger discount given to distributors higher up the chain.

Herbalife in May asked U.S. District Judge Beverly Reid O'Connell to toss the suit, arguing that Bostick "gave up on his distributorship once he discovered that he was unable to resell the Herbalife products he purchased by merely relying on a Web site to his work for him," and that, "rather than return the purchased products to Herbalife for a full refund, as he concedes he could have done, Bostick sued."

Ackman is December announced a $1 billion short bet against Herbalife, leading to a public feud with Carl Icahn, who backs the company. To date, Icahn has had the better of the battle, with Pershing Square suffering big losses as Heralife shares have surged. Ackman recently restructured his short bet to cut some of its risk.

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