Plus One for Ackman: FTC Opens Investigation Into Herbalife

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It’s been a busy day for Herbalife Ltd. (NYSE:HLF) — hell, it’s been crazy for Herbalife since December 2012 when Pershing Square Capital Management, a hedge fund run by Bill Ackman, accused Herbalife of operating a fraudulent pyramid scheme veiled behind a multi-level marketing business model. Five months later, in May, Pershing Square Capital took a $1 billion short position on Herbalife stock.

This accusation and activism on the part of Ackman have haunted Herbalife for the past 14 months, and on Wednesday the issue came to a head when the Federal Trade Commission opened an investigation into the company. Herbalife stock, which was up as much as 5 percent at $69.41 in early trading, was briefly halted before re-opening down nearly 15 percent, hitting a low of $54.59. The price recovered to about $61.50 by the close of the trading session.

Until the announcement on Wednesday, it appeared as if Ackman’s year-long campaign to oust Herbalife as the pyramid scheme he believes it is was going poorly. Despite his conviction and lobbying, he has failed to turn up any credible victims of the alleged pyramid scheme. Regulators generally won’t investigate a company unless there is evidence of wrongdoing, such as the existence of credible victims.

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. Although the synthesis doesn’t fully articulate Ackman’s argument, it does highlight the dubious and, arguably, morally suspect nature of his campaign. That is, it’s strange — if not outright inappropriate — that Ackman is lobbying to effectively topple Herbalife when he has such an enormous financial incentive to succeed.

For the record, should he be successful, Ackman has promised to contribute all of his personal proceeds to charity. This takes some of the sting out of the financial incentive, but cashing in on his short bet will still be a windfall for Pershing Square Capital — and, of course, losing the bet will mean taking a huge loss. Ackman revealed in November 2013 that Pershing Square Capital was down as much as half a billion on the position, but the hedge fund manager is known for his commitment to a thesis. He vowed that he would hold the position “to the end of the earth” and has said that he will continue to fight Herbalife as a personal project no matter what the outcome of the short position.

The public nature of Ackman’s efforts have attracted an enormous amount of criticism, including — or, perhaps chiefly — from another hedge fund titan, Carl Icahn. Even before the Herbalife ordeal even began the two had a fairly tense history with each other. In the clip below, Icahn describes Ackman as a “crybaby in the schoolyard,” but as the Herbalife situation unfolds, Icahn has emerged as one of Ackman’s biggest critics.

In a March 2013 interview with Bloomberg, Icahn said 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.” The clip below is from a much more heated exchange on CNBC.

Herbalife responded to the FTC investigation with this statement: “Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC. We are confident that Herbalife is in compliance with all applicable laws and regulations. Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years.”

Ackman held a conference call on Tuesday to re-make his case to interested parties, and will likely be spending some time in the coming weeks supporting his claims. Here’s the presentation he gave at the Robin Hood Investors Conference in November.

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