Question 9

Read the following passage and answer the question that follows:

On Friday morning, Dieting supplement sales company Herbalife agreed to pay the US Federal Trade Commission a $200m fine. The FTC said Herbalife cheated hopeful salespeople out of hundreds of millions of dollars with a high-pressure multi-level marketing scheme.

Herbalife’s stock received an immediate 15% increase following the above news. The company also announced that it would hire a second former FTC commissioner in a press release describing the terms of the settlement.

Which of the following options would imply that the 15 percent increase in stock price is fair?

Solution

Option A: This option, if true, will incentivise cheating and hence is not the correct option.

Option B: This can be rejected on the same grounds as A.

Option C: Since this option is stating contrary to what happened, this is not the correct option.

Option D: If this option is true, then it would justify the increase in the stock price in a fair manner; acknowledgement of deceit increases the trust of investors in the company. Thus, this is the correct option.

Thus, the correct option is D.

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