Back in 2012, a Wall Street trader named Bill Ackman used his hedge fund to place a "short" on a public stock. And he went big. Ackman bet $1 billion that the stock price of just one company would fall Dramatically. And in December of 2012, he publicly stated that his goal was to drive the company - Herbalife - out of business.
Now a "short" has more in common with a Las Vegas gambler's bet than a traditional long term investment in a company that the rest of us make through our 401K retirement plans. It's actually the opposite of that. A hedge fund trader "borrows" stock shares from a broker who holds a large portfolio of different stocks. The trader sells those shares on the open market for whatever the current price happens to be. The trader holds that money for a limited period of time - betting that the stock price will fall. Once the previously agreed to time period expires, the trader buys the same stock - hopefully at a lower share price - and returns the "borrowed" shares to the original broker along with a fee. If the trader's original analysis of the stock was correct, there is a significant profit margin left over.
While this is not a simple stock market investment, the free market created it and the stock market has adapted to its use. When "short selling" is allowed to work in the free market, it empowers investors to publicly invest "against" the stock. But what happens if the trader's information is wrong? What if the stock doesn’t fall? Well, the hedge fund loses money. That's the free market.
But Bill Ackman didn’t like when that happened to his $1 billion bet. His initial push to raise public doubt about Herbalife didn't result in a massive decline in its stock price - let alone a collapse of its overall company. While the stock price dropped, it was nowhere near the level Ackman needed to pay off his investors.
So instead of accepting his losses, Ackman called his Democratic friends in Washington, DC. He and Pershing Square began to fund a lobbying campaign to tear down Herbalife - simply for the purpose of covering their bad bet.
The loudest voice in Congress calling for federal action was Senator Markey of Massachusetts. His letters to the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC) requested an investigation into Herbalife's business practices. And as is usual with any publicly traded company which becomes the target of Congressional ire and possible federal agency action, the share price of Herbalife immediately dropped.
Sadly an investigation by the Boston Globe newspaper could only find TWO Massachusetts residents who had a negative experience working with Herbalife. If that is the basis for a Federal investigation, shouldn't there be a LOT more investigations?
So why exactly have Democratic senators and members of the House been writing and calling various federal agencies? Why did they publicly raise questions about the company and its operations? Is it to help the citizens of their states or merely to try to help Ackman, their billionaire hedge fund buddy?
Should Ackman be allowed to do these things because he claims to be some sort of a market activist? That his actions should be allowed because his mission is for what he decides is the "greater good"? Or are these all simply blatant examples of crony capitalism at its worst?
Frankly Ackman's actions are nothing less than manipulation of the market - a potential criminal offense according to the Securities and Exchange Commission (SEC). And yet somehow because Ackman claims he will donate any "profit" to charity, it seems the Obama administration and the SEC have allowed Ackman to continue his crusade and negatively affect the stock market for YEARS.
Ackman hired Washington lobbyists to appeal for support from elected policymakers and officials in the Obama administration. He funded new puppet organizations in an effort to find disgruntled former employees. Ackman's lobbyists have succeeded in obtaining private meetings for him with senior SEC and FTC personnel. He has hired PR agencies to leak information to financial newspapers. His hired thugs have even convinced the Federal Trade Commission (FTC) to investigate the company - while ignoring the manipulative behavior of Ackman himself.
And to further inspire his Washington Democratic buddies, Bill Ackman began to make massive political donations. Before 2010 he had donated less than $200K over his entire career. Since 2010, he and his wife have donated more than $400,000! Ackman has further leveraged donations by the employees of his hedge fund to the tune of nearly another $400,000, a total of more than $800,000 in political donations just since 2010!
Enough is enough.
Each time Ackman lobbied policymakers, he made certain reporters cover the meeting. And as any investor would expect, when news coverage reveals a federal agency questioning the operations of a company, the stock price immediately drops. All of this simply for the purpose of making Bill Ackman more money. But it was never enough for Ackman to cover his losses.
Independent investors like us who hold stock in any company deserve the right to have the free market - not Bill Ackman and his lackeys - determine the proper price for any company's stock. Investors have a right to protection not simply from improperly operated companies, but also from market manipulators like Bill Ackman and Pershing Square.
On July 15th, the FTC concluded its investigations into Herbalife and agreed to a multimillion dollar settlement. Now it's past time for Congress to turn the tables and investigate the actions of Bill Ackman and his hedge fund, Pershing Square.
Chairman Jeb Hensarling and the House Financial Services Committee should review whether these years of self serving actions have surpassed the standard for market manipulation. Chairman Crapo and the Senate Banking Subcommittee on Securities, Insurance and Investment should investigate whether Ackman and his minions are acting improperly and even illegally.
Years of these actions is ridiculous. It's time to stop such blatant crony capitalism.