Pivotal Research analyst Timothy Ramey in a research note discussed Herbalife's (NYSE: HLF) FTC disclosure in its recent 10-Q, and related short arguments. In his view, there will likely be a monetary settlement and "small palatable changes." He also doesn't think the words "injunctive relief" communicate anything.

Ramey explained, "Shorts believe the FTC is pressing for a Vemma-like resolution to HLF. This might require that HLF set up a preferred customer status; preferred customers would not be eligible for commissions – they would be true discount buyers. In Vemma, there is “the 51% rule” – to earn commissions, the distributor must make 51% of sales to preferred customers. The theory is that many distributors, which the company characterized as discount buyers, are really failed distributors. If, as HLF states, they are just discount buyers, there should be no pushback for registering as a preferred customer, right?"

"So far, so good. But what about nutrition/fit clubs? Clubs have sales where someone comes in and purchases a shake. Would Vemma rules require that the customer register as a “preferred customer” and get an ID? If so, that would be clear regulatory over-reach. But it might be necessary for the fit club operator to earn a commission on club sales. The bear camp thinks this is the position of the FTC. If so, the FTC would be promulgating new law by consent decree; it would ignore the doctrine of personal consumption that goes back to the Burnlounge precedent. It might not survive in court and it might be both onerous and odious enough that HLF would choose to litigate," continued the analyst.

Commenting on the disclosure, the analyst said, "If onerous changes to the marketing plan were required by the FTC, CFO John DeSimone, who takes accounting very seriously, would not say that 'discussions with the FTC are in the advanced stages.' Saying that a settlement is 'reasonably possible' must mean that, generally, the terms being negotiated are palatable. If the FTC is pressing for onerous or odious changes, it would not be logically correct that HLF would state that 'discussions with the FTC are in the advanced stages.' Similarly, a radical change to the comp plan that is 'reasonably possible' might well have resulted in HLF suspending guidance. It would be impossible to estimate what the earnings would be, faced with radical changes to the business plan. Nor Could the FTC, as some bears believe, be about to lower the 'Illegal Pyramid Scheme' hammer? Not if you take DeSimone at his word that discussions are reasonably close."

Ramey added, "Some have fixated on the words 'Injunctive relief.' The FTC wants to send signals to the industry with the Herbalife consent decree as injunctions. The worst business practice associated with HLF, and the only place where real victims existed, was at the end of the chain of a lead-generator. We suspect HLF will be enjoined from lead-generation, even though it never did it directly, and it has not tolerated distributors doing it for three years. Enjoined from making false and misleading statements on income claims? Sure. Enjoined from making false and misleading statements on product claims? Yep. The words injunctive relief does not communicate anything, per se, about what behavior is being proscribed."

The analyst concluded, "It is possible that the FTC may want something that HLF won't give them. But we don't think they would have made the disclosure they made if that was so. We are still in a wait and see mode but the chances that the deal the FTC makes with HLF will be palatable are very high. And soon. And very likely all about a monetary settlement and small palatable changes."

Pivotal Research has a Buy rating on Herbalife (NYSE: HLF) with a price target of $90.00

For an analyst ratings summary and ratings history on Herbalife click here. For more ratings news on Herbalife click here.

Shares of Herbalife closed at $63.62 yesterday.