William A. Ackman, of Pershing Square Capital Management LP, has invested $1 billion in the short-sale of stock of Herbalife, a company selling vitamins and health supplements. The company accuses Ackman of using false statements to manipulate downward the stock price of Herbalife, and therefore profit from that decline. The company claims Ackman’s statements are illegal and has called on the United States Attorney’s office in Manhattan to investigate Ackman’s statements and actions regarding Herbalife.
Hedge funds often use a short sale of a company’s stock, that they believe will decline, to profit from such a decline in stock. Short-sale of a company’s stock, if betting that stock will decline, is an investment that can pay off quite well. But does it raise other questions, ethically and legally, if one is deliberately seeking to cause a company’s stock to decline, after one has invested in a short-sale betting that stock will decline?
In the summer of 2013, Ackman decided to take on Herbalife, betting $1 billion, as a hedge fund investor, in the decline or failure of Herbalife. Ackman has accused the company of operating a pyramid marketing scheme, and suggested they exploit Hispanics and African-Americans who make up a large percentage of their independent distributors, and has vowed to take his campaign against the company “to the end of the earth.” If his actions cause the company’s stock to decline soon enough, he and his hedge fund stand to profit greatly from investing in the short-sale, with $1 billion, of the company’s stock.
As the New York Times reported, Ackman informed others at a dinner in 2014 that Cong. Linda Sanchez (D-CA) had sent a letter to the Federal Trade Commission (FTC) asking them to investigate Herbalife. Ackman even read the letter from a copy from his cellphone.
“When Ms. Sánchez’s office ultimately issued a news release a month later, it was backdated as though it had been made public the day before Mr. Ackman’s dinner talk,” the New York Times reported.
Ackman and his allies have organized AstroTurf protests and letter-writing campaigns against the company in California, Nevada, Connecticut, New York and Illinois to pressure state and federal regulators to investigate Herbalife. In Connecticut, the state attorney general received several nearly identically worded letters against Herbalife in what appeared to be an AstroTurf letter-writing campaign generated by allies of Ackman.
Seeking to convince government regulators to go after Herbalife, Ackman spoke before a meeting at the headquarters of the Securities and Exchange Commission (SEC) before more than 400 enforcement lawyers, accountants and investigators regarding his claims against Herbalife.
Ackman has enlisted many high-powered and well-connected allies in his campaign against Herbalife. The Dewey Square Group, of Washington D.C., a firm that specializes in “grass-roots advocacy” was contracted by Ackman. In other moves Ackman made, he hired lobbyist Larry Rasky, who formerly worked for then Cong. Edward Markey (D-MA) and lobbyist Malcolm Grace, who is a former aide to Cong. Sanchez.
“The team (hired by Ackman) includes lobbying firms run by two former members of Congress: Toby Moffett, a Democrat who once represented Connecticut, and Robert S. Walker, a Republican from Pennsylvania. Mr. Ackman also hired firms run by former top White House aides for President Obama and President Clinton. Jim Papa, who handled legislative affairs for the Obama White House, also joined the effort, with his firm, Global Strategy Group, a longtime consultant to Mr. Ackman,” the New York Times reported.
Through the use of these allies and firms, and by seeking support from groups like the Hispanic Federation and the National Consumers League, Ackman and his allies have conducted a comprehensive campaign to destroy the reputation of Herbalife, paint them as exploiting Hispanics and African-Americans in their multi-level marketing strategies, and cause the stock of the company to decline in the process. If they could get government regulators or agencies to investigate the company, they seemed to believe that would cause a fall in the price of Herbalife stock.
Herbalife is striking back, and seeking government investigation of the actions of Ackman, and his firm Pershing Square Capital Management LP, accusing them of using false statements and claims about Herbalife in their campaign to lower the company’s stock price and profit from the hedge fund investment against the company’s stock.
“One of Herbalife’s latest overtures came in April after Mr. Ackman made a startling claim about Herbalife’s senior management, saying, “We know they have been or are looking to hire criminal defense counsel.” Mr. Ackman attributed his assertion to an unnamed yet “reliable” source,” the New York Times reported.
Attorneys for Herbalife claimed statements like that are illegal contacted the United States Attorney’s office in Mahhattan requesting they investigate Ackman and Pershing for such statements.
There may yet be an investigation by federal prosecutors and the Federal Bureau of Instigation (FBI) as reported by The Wall Street Journal.
“Prosecutors in the Manhattan U.S. attorney’s office and New York field office of the FBI have conducted interviews and sent document requests in recent months in connection with the investigation, which is looking into whether people, including some hired by Mr. Ackman, made false statements about Herbalife’s business model to regulators and others in order to spur investigations into the company and lower its stock price, the people said. Mr. Ackman’s firm, Pershing Square Capital Management LP, has made a huge bet on Herbalife shares declining,” The Wall Street Journal reported.
Former Cong. Bob Barr, writing a commentary for Roll Call, added his voice to those calling for a Congressional investigation of the actions of Ackman and Pershing in regard to the stock short-sale and campaign against Herbalife. Barr argues that while the technique of short-selling of a company’s stock is legitimate, the use of the political process and other tactics to deliberately cause a company’s stock to decline, so that some can profit from such short-selling, is another matter.
“Ackman is going after Herbalife, a 35-year-old company that sells health and wellness products through independent contractors across the U.S. and globally. Ackman has been aggressively pushing state and federal regulators to investigate Herbalife and declare it an unlawful “pyramid scheme;” hoping to score a major reward based on his investments in “shorting” Herbalife stock,” Barr wrote, “Ackman, of course, does not publicly admit the reason behind his anti-Herbalife crusade is to profit from shorting the company’s stock; but he has not hidden his desire to ruin the company.”
Ackman’s aggressive campaign against Herbalife raises questions of whether some of his tactics might cross ethical and possibly legal lines that shouldn’t be crossed by those who stand to also profit financially from efforts to misrepresent issues about company, in this instance Herbalife, in order to cause it’s stock to plummet and create a situation in which short-sale of that stock will bring handsome profits to those who invested in such a short-sale.
“Unfortunately, certain investors employ tactics other than careful market forecasting and analysis on which to base investment risks; relying instead on public relations ploys and regulatory pressure to deliberately cause the value of stock which they have “shorted” to drop,” Barr wrote about the kind of strategy employed by Ackman.
It would seem that Ackman and his allies are doing all they can to destroy the image and reputation of Herbalife and their stock price to profit greatly from a $1 billion hedge fund bet made against the company. If a billionaire hedge fund investor can leverage political connections, and stage AstroTurf campaigns that masquerade as “grass-roots” efforts, and use the political process to financially damage a company all to profit from the financially, it raises serious questions that will have to address by Congressional investigation if not also the possible criminal investigation of those involved, if the activities involved rise to the level of being provably illegal.
Additionally, what does this also say about our system if it’s possible to perhaps falsely engage in damaging financially a company and it’s stock price simply for the purposes of profiting from a short-sale of that company’s stock? If that kind of attack on a company, just to profit from the demise of such a company, is possible, then no companies may be safe from being attacked in this manner. These are all questions raised by Ackman’s campaign against Herbalife.