Herbalife and the Hedge Fund Activist

Dan Horowitz
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Posted: Dec 04, 2015 2:00 PM
Herbalife and the Hedge Fund Activist

Over the past few years, several Members of Congress have contacted Federal Agencies to demand investigations into the business practices of a single publicly traded company - Herbalife. While such requests are normal actions of nearly every Member of the House and Senate, usually such specific and financially impactful actions are carefully thought through, researched and evaluated. More to the point, these official actions are supposed to be ethically constrained to be on behalf of constituents or in the national interest. Federal investigations are not supposed to be requested merely to assuage the financial needs of a single flailing hedge fund manager focused on recouping a poor stock market bet.

But sadly, all of the bureaucratic paper pushing and Congressional angst over Herbalife has been revealed to simply assist one person, Bill Ackman, a ultra-wealthy hedge fund manager who chose to make a $1 BILLION wager that the public stock price of Herbalife would fall to a record low.

How and why this single wealthy Wall Street limousine liberal has been able to continue to drag out his multi-year effort is a convoluted tale, but one worth uncovering - likely by the staff of Senate Chairman Ron Johnson or House Chairman Jason Chaffetz and their Government Oversight Committees.

In January of last year, Senator Ed Markey (D-MA) led this strange effort. Sending letters to both the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC), Markey requested an investigation into Herbalife's business practices. And, as is usual with publicly traded stocks who become the target of Federal investigations, the publicly traded share price of Herbalife immediately dropped. For as those same savvy traders anticipated, a few short weeks later, both the SEC and FTC launched separate investigations into Herbalife.

But as usual in Washington, the devil is in the details. Senator Markey was fairly open about launching his quest for "justice" on behalf of constituents who had experienced financial hardship while doing business with Herbalife. However a all-too-brief investigation by the Senator's own hometown paper, the Boston Globe, found that only TWO citizens of the state of Massachusetts had in fact been the basis of the Senator's concern. Worse, those citizens had been impacted far less than they were portrayed in the Senator's press release.


The Globe, like the New York Times before it, found that the angst of Senator Markey was in fact caused by hedge fund billionaire, William Ackman. While Ackman professes to dislike Herbalife because of its business model, he says nothing about the value and success of its leading product. (Astounding as it seems, Herbalife's nutritional shake sells more than three times its nearest competitor, SlimFast.)

Mr.. Ackman's concern over Herbalife is centered on its business model, which utilizes Multi-Level Marketing (MLMs) to promote, sell and distribute its products. Sadly, perhaps Mr. Ackman should have done some research into MLMs and the companies built on this system before making such a foolhardy $1 billion bet.


MLMs have been around for decades. The Securities and Exchange Commission has repeatedly reviewed Multi-Level Marketing corporations. MLMs are companies we all know and have been household names for decades. Avon, Tupperware, Melaluca, NU Skin and yes, HerbaLife are just a few examples.

This means that every one of the people you and I know who happen to work with one of the companies is part of a vast intertwined network. Each of these companies market and sell products to consumers. Yes, rather than a traditional wholesale/retail advertising and distribution network used by your local grocery store, MLMs utilize no store front. But that doesn't make them a pyramid scheme. More akin to the now normal Internet based websites which sell direct to consumers and adopting more of the social media use and innovative marketing every week. For decades, the FTC has carefully laid out the difference between MLMs and pyramid schemes. As Herbalife has been in business for decades and publicly traded since 1986, the company has been reviewed many times by the FTC, SEC and countless times by individual investors.

However that logical background aside, Mr. Ackman is like an addicted riverboat gambler. He bet big and now that the cards he needs aren't showing, he is attempting to pull some better cards from his sleeve.

One card is hiring PR operatives to create a faux grassroots coalition. They have combed websites and trolled chatrooms seeking the disgruntled and the exploitable. They have established coalitions of the willing. Another card pulled by Ackman is hiring lobbyists to reach out to Members of Congress. Lobbyists who succeeded in getting those Members to write letters to the FTC encouraging an investigation. Finally, Ackman pulled a final card from his sleeve and used those same lobbyists to gain access to make presentations directly to the FTC, to the SE and to legislators in several states across the country.

Regardless of one's opinion of MLMs in general or Herbalife in particular, one piece of common ground should be in the belief that the super rich should not get bailed out by the government.

William Ackman's ridiculous and long-lived attempt to rescue his investment needs to end. Its too bad that his $1 billion short sale didn't work, but to continual to double down, even triple down on his original poor investment, is ridiculous. His riverboat gambling tactics must be halted. In fact, Ackman's sleazy attempts to subvert the official actions of federal agencies and public officials in a naked effort to cause a publicly traded stock to drop suggests an entirely different investigation may be required of the SEC -- and by Congress itself.