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HLF: Why Bill Ackman’s Henchmen Are Under Investigation

Why is Bill Ackman hiding behind third parties in the Herbalife Ltd. (NYSE:HLF) battle?

HLF: Why Bill Ackman’s Henchmen Are Under InvestigationHe’s a world-class hedge fund manager who has made some brilliant investments and great short-selling calls. He made his pitch to the media on Herbalife, as well as to federal regulators.

So why spend $75 million to hire third parties to stir the pot even further, with work that is under federal investigation to see if “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,” according to the Wall Street Journal?

The answers are clear if you know Bill Ackman’s history.

Bold History

He makes big bets, throws big resources at those bets, stages big dog-and-pony shows to support those bets … and needs to win big.

He also wants to stay one step removed from it all, because last time he tried this, he was investigated by federal authorities.

As detailed in the book Confidence Game, Bill Ackman tried to warn both state and federal authorities that bond insurer MBIA Inc. (NYSE:MBI), and many other companies, were vastly undercapitalized to withstand a housing collapse. Because he was short-selling these companies, authorities instead investigated him, suspecting he was using the government and the media to undermine the public’s confidence in those companies.

He turned out to be more right than anyone could ever believe and made a killing and, rightly, was never charged with a crime.

Now he’s made a billion-dollar short bet on HLF, and using the same tactics on steroids.

Questionable Tactics

According to the New York Times, Bill Ackman has already made presentations to the SEC, the FTC and state authorities. That alone is a reasonable tactic — bring the goods to the authorities and let them do their thing.

However, Ackman hasn’t stopped there, and it gives rise to two vital issues.

The first issue is buying influence in the government to profit. This is akin to the putrid tactic of rent-seeking. Wal-Mart Stores, Inc. (NYSE:WMT) presses for government handouts to lower-income families, so that they’ll turn around and spend that money at Walmart.

It’s no different than a hedge fund manager trying to buy influence with government officials to induce them to investigate a company so his firm can profit from the company’s stock decline.

According to both the Times and, Ackman has personally solicited members of Congress to get involved. After Sen. Ed Markey (D-Mass.) called for the FTC to investigate HLF, the stock fell, and it fell again when the FTC publicly announced it would investigate Herbalife based on the Senator’s claims.

By couching this campaign as a play for “social justice,” Bill Ackman is more easily able to solicit allies on the left, who are more sympathetic to a cause against a big, bad corporation.

These tactics are bad enough. However, the difference between the housing crisis and Herbalife bets is that Ackman was telling the truth about the deficiencies in the housing market to government authorities, but his proxies might have made false statements to the government to induce them into an investigation of Herbalife.

That’s the second vital issue.

According to Business Insider, FTC regulators not only received letters from people who don’t recall sending them, but some of these letters were nearly identical. According to the WSJ, the Connecticut AG received 26 form letters making allegations against Herbalife, none of which he could substantiate.

The FBI and DoJ are investigating someone, to be sure. Bill Ackman says neither he nor his firm are under investigation. The firm he hired, Global Strategy Group, said it was not under investigation, either. So, if we’re drawing conclusions, it sounds like people that GSG hired may be the ones in trouble.

Drawing the Lines

Let me be clear: There is nothing wrong with shorting a stock. There is nothing wrong with betting that a company is going to fail, or that its stock is overvalued, or that there is something wrong with how it conducts its business.

The tactics of short-sellers, however, are to be as scrutinized as “pump-and-dumpers,” because there are lines as to what is both reasonable and legal.

If a big hedge fund manager can leverage the media and the government into taking action against a company, where there is reasonable evidence of illegal activity occurring, then there’s nothing wrong with that approach. That’s why law enforcement like the SEC and DoJ exist — so citizens can file reports on suspicious activity.

If one attempts this to profit, I consider it to be odorous rent-seeking, but that’s my opinion.

However, one thing that’s true in any case: You cannot lie about the company to government regulators, or have proxies spread false or misleading statements about it.


Our country is built on freedom of speech. Freedom is be used, and not abused. We also must take personal responsibility for our actions, so that if we hear something, we investigate on our own.
If anyone involved with shorting Herbalife stock is indeed found to have spread false or misleading information, they are to be excoriated.

If false or misleading information was delivered with an intent to induce an investigatory body to act against Herbalife, either directly to an agency or indirectly by those with influence, then the offending party should be convicted and punished to the fullest extent of the law.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 20 years’ worth of experience in the stock market and has written more than 1,200 articles on investing. As of this writing, he did not hold a position in any of the aforementioned securities. He can be reached at

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