I was forwarded a very interesting New York Times article this morning (thanks!) about William Ackman’s shady actions around his Herbalife (HLF) short. In 2012, Ackman, a hedge fund manager, announced he had taken a $1 billion short position in Herbalife. Basically, he bet $1B that the price of the stock would fall.
Herbalife is a global nutrition (aka weight loss) company. The Company sells weight management meals, snacks, and shakes through independent distributors (often similar to how Avon or Mary Kay operate). Ackman calls this a pyramid scheme that only stays afloat by recruiting new distributors and provided this as his reason for shorting the company.
However, Ackman’s short is only the first in a two-part effort – he is also attempting to cause the stock to drop through a variety of lobbying efforts against them. At a 2013 dinner with fellow fund managers, Ackman acknowledged that Representative Linda T. Sanchez, Democrat of California, had sent a letter to the Federal Trade Commission asking them to investigate the company. The wrinkle here is that at this point the commission hadn’t even stamped the letter as received or acknowledged it publicly. The only way Ackman knew about the inquiry is because he personally lobbied Rep. Sanchez to act. Scarily, when Sanchez’s office ultimately issued a news release a month later, it was backdated to make it appear as though it had been made public the day before Mr. Ackman’s dinner talk. On top of this, his lobbying team has helped organize protests, news conferences and letter-writing campaigns. (Side note: As a former lowly intern who had to reply to constituent letters, please save a tree and just don’t send them). You can read more details on the story at NYT.
In response, a Fortune writer just published an opinion piece that he doesn’t believe this is stock manipulation. In his words, “There doesn’t seem to be anything punishable in what Ackman may have done, other than that potentially phony letter… And isn’t pretty much every economic activity motivated by profit? I mean, Samsung is hoping to profit from the demise of Apple, and they spend a lot of money on commercials to bolster those efforts. Clearly manipulation.”
At this point I’m going to pivot from a general situation briefing and call this writer out on his BS. Even if Ackman’s actions are more questionable than illegal, there is something totally wrong with allowing this manipulative behavior to occur in the market. The author’s assertion that Ackman’s behind-closed-doors lobbying is the same as a marketing campaign is absurd. Threatening official government action is not the same as a 30 second ad spot, which is often followed by Apple’s own ads against Samsung.
Ackman’s actions are a sobering reminder of the disproportionate power between individual investors and large institutions throwing around billions of dollars. Individual investors are generally only privy to whatever information is publicly available, and cannot exert any influence on what happens to the stocks they invest in. Whether its Carl Icahn’s Apple tweet heard around the world or this more nefarious action, those with buying power in the billions can wield a lot of (unfair) control.
One reason I love the market is that (in theory) it is an equalizer. The anonymity of the market allows you to be successful solely on your merits, ideas, and research. This type of manipulative and morally-questionable behavior completely refutes that theory. I realize that there are inherent inequities in the market all the time and individual investors will always be at a disadvantage, but this type of manipulation (whether technically illegal or not) is, in my mind, completely unacceptable.