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Apparently, it all started with a tip from a reporter-turned-financial analyst named Christine Richard. According to the New York Times, it was Richard who seeded activist hedge fund manager Bill Ackman with the idea that nutrient supply company Herbalife Ltd. (NYSE:HLF) is a pyramid scheme. And after ostensibly completing the kind of rigorous due diligence expected of a successful hedge fund manager, it was the seed planted by Richard that bloomed into a short thesis, and the short thesis into a $1 billion bet that Herbalife would be outed as fraudulent and that the stock would plummet as a result.
This isn’t the first big bet that Pershing Square Capital Management, the hedge fund Ackman founded and manages, has made on a company it believes is corrupt or fraudulent. Ackman is known to pursue his theses with a particular conviction, putting not just enormous effort but enormous capital behind his position. He famously made a big short bet on bond insurer MBIA in 2002, arguing that the company was built on an excessively risky foundation — and he was right. Pershing Square banked its investors about $1.1 billion when the company nearly collapsed during the financial crisis.
However, the Herbalife bet is a much more complicated situation. Ackman has lobbied intensively for about fourteen months now with little success. Shares are down about 3.5 percent over the past two years, suffering dramatic, periodic declines whenever it looks like Ackman may be approaching a checkmate but otherwise rising gradually as the company continues to grow despite the media firestorm. Herbalife reported record sales of $4.8 billion in 2013, and analysts are expecting about 10 percent top-line growth in 2014.
On March 10, the New York Times published an article synthesizing the ordeal to date. Although the piece sidesteps taking a side on the issue, it generally presents Ackman’s extraordinary efforts as lacking merit. The evidence presented so far seems to support this, but it is still difficult to imagine someone like Ackman committing $1 billion and an enormous amount of effort to a fictitious campaign against a company that otherwise may have never made it into the headlines.
The damning evidence articulated by the Times is this: Despite spending hundreds of thousands of dollars scouring the country for victims of Herbalife’s alleged fraud, Ackman has yet to be able to turn up anyone with a credible story. Until consumers or investors are harmed in some way, it’s unlikely that regulators will take any meaningful action against the company. Without meaningful legal action, Ackman really doesn’t have any ammo. Without ammo, the stock will do what most stocks do: reflect some cocktail of the company’s fundamental value and the market’s expectation for future growth.
For its part, Herbalife responded to the Times article, framing Ackman’s efforts as an “unfounded, relentless and fraudulent public attack on Herbalife’s business model. … Ackman has, out of desperation, shifted his focus from Wall Street to Washington and key states across the country. Ackman’s unprecedented campaign to destroy Herbalife has now been exposed for what it is: a cynical, self-serving attempt to manipulate the market by buying his way into an investigation to cover his own reckless $1 billion dollar bet.”
But the criticism has not fazed Ackman, who has vowed to fight Herbalife “to the end of the Earth.” He made the statement at the Robin Hood Investors Conference in November but failed to convince the market with his conviction. Herbalife stock climbed as much as 5 percent on the morning he made the announcement.
Ackman will be spending some time this week making his case again, with at least one conference call planned. This type of public lobbying has attracted criticism from other money managers, like Carl Icahn. In response to Ackman’s short position, Icahn has taken a long position in Herbalife, saying in a March 2013 interview with Bloomberg that “I frankly don’t understand the criticism that Ackman makes about it. I frankly would like to buy more stock. I like the company,” he said, “but it’s not my job to try to convince anybody.”
Here’s Ackman’s presentation from the Robin Hood conference:
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