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