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16-03-2013, 12:49 PM
http://m.vanityfair.com/business/2013/04...-herbalife
Hedge-fund titan Bill Ackman has vowed to bring down Herbalife, the 33-year-old nutritional-supplement company, which he views as a pyramid scheme. With his massive shorting of Herbalife stock, the price plummeted, prompting two fellow billionaires—Ackman’s former friend Dan Loeb and activist investor Carl Icahn—to take the opposing bet on Herbalife. As the public brawl rivets Wall Street, William D. Cohan learns why, this time, it’s personal.
By William D. Cohan
The supremely confident billionaire hedge-fund manager Bill Ackman has never been afraid to bet the farm that he’s right.
In 1984, when he was a junior at Horace Greeley High School, in affluent Chappaqua, New York, he wagered his father $2,000 that he would score a perfect 800 on the verbal section of the S.A.T. The gamble was everything Ackman had saved up from his Bar Mitzvah gift money and his allowance for doing household chores. “I was a little bit of a cocky kid,” he admits, with uncharacteristic understatement.
Tall, athletic, handsome with cerulean eyes, he was the kind of hyper-ambitious kid other kids loved to hate and just the type to make a big wager with no margin for error. But on the night before the S.A.T., his father took pity on him and canceled the bet. “I would’ve lost it,” Ackman concedes. He got a 780 on the verbal and a 750 on the math. “One wrong on the verbal, three wrong on the math,” he muses. “I’m still convinced some of the questions were wrong.”
Not much has changed in the nearly 28 years since Ackman graduated from high school, except that his hair has gone prematurely silver. He still has an uncanny knack for making bold, brash pronouncements and for pissing people off. Nowhere is that more apparent than in the current, hugely public fight he and his $12 billion hedge fund, Pershing Square Capital, are waging over the Los Angeles–based company Herbalife Ltd., which sells weight-loss products and nutritional supplements using a network of independent distributors. Like Amway, Tupperware, and Avon, Herbalife is known as “a multi-level marketer,” or MLM, with no retail stores. Instead, it ships its products to outlets in 88 countries, and the centers recruit salespeople, who buy the product and then try to resell it for a profit to friends and acquaintances.
Ackman has called Herbalife a “fraud,” “a pyramid scheme,” and a “modern-day version of a Ponzi scheme” that should be put out of business by federal regulators. He says he is certain Herbalife’s stock, which in mid-February traded around $40 per share, will go to zero, and he has bet more than a billion dollars of his own and his investors’ money on just that outcome. (Ackman declines to discuss the specifics of his trade.) “This is the highest conviction I’ve ever had about any investment I’ve ever made,” he announced on Bloomberg TV. An interviewer on CNN reminded him that Herbalife had been around since 1980 and had withstood many previous challenges to its business plan. How long was he willing to “sit on this bet”? Ackman replied, “We’re not sitting. We’re shouting from the rooftops. They’ve never had someone like me prepared to say the truth about the company. I’m going to the end of the earth. If the government comes out and determines this is a completely legal business, then I will lobby Congress for them to change the law. I had a moral obligation. If you knew that Bernie Madoff was running a Ponzi scheme, and you didn’t tell anyone about it, and it went on for 33 years ... ”
Ackman says he suspected, when he “shorted” (i.e., bet against) Herbalife, that other hedge-fund investors would likely see the move as an opportunity to make money by taking the other side of his bet. What he hadn’t counted on, though, was that there would be a personal tinge to it. It was as if his colleagues had finally found a way to express publicly how irritating they have found Ackman all these years. Here finally was a chance to get back at him and make some money at the same time. The perfect trade. These days the Schadenfreude in the rarefied hedge-fund world in Midtown Manhattan is so thick it’s intoxicating.
“Ackman seems to have this ‘Superman complex,’ ” says Chapman Capital’s Robert Chapman, who was one of the investors on the other side of Ackman’s bet. “If he jumped off a building in pursuit of super-human powered flight but then slammed to the ground, I’m pretty sure he’d blame the unanticipated and unfair force of gravity.”
Lined up against the 46-year-old Ackman on the long side of the Herbalife trade were at least two billionaires: Daniel Loeb, 51, of Third Point Partners, who used to be Ackman’s friend, and Carl Icahn, 77, of Icahn Enterprises. Along for the ride are some smaller, well-regarded hedge-fund investors—who would like to be billionaires—John Hempton, of Bronte Capital, and Sahm Adrangi, of Kerrisdale Capital.
It’s Ackman’s perceived arrogance that gets to his critics. “The story I hear from everybody is that one can’t help but be intrigued by the guy, just because he’s somewhat larger than life, but then one realizes he’s just pompous and arrogant and seems to have been born without the gene that perceives and measures risk,” says Chapman. “He seems to look at other members of society, even legends such as Carl Icahn, as some kind of sub-species. The disgusted, annoyed look on his face when confronted by the masses beneath him is like one you’d expect to see [from someone] confronted by a homeless person who hadn’t showered in weeks. You can almost see him puckering his nostrils so he doesn’t have to smell these inferior creatures. It’s truly bizarre, given that his failures—Target, Borders, JCPenney, Gotham Golf, First Union Real Estate, and others—prove he’s as fallible as the next guy. Yet, from what I hear, he behaves that way with just about everybody.”
Another hedge-funder describes the problem he has with Ackman in more measured tones. “There is a saying in this business: ‘Often wrong, never in doubt.’ Ackman personifies it. . . . He is very smart—but he lets you know it. And he combines that with this sort of noblesse oblige that lots of people find offensive—me, generally not. On top of that he is pointlessly, needlessly competitive every time he opens his mouth. Do you know about the Ackman cycling trip with Dan Loeb?”
It’s Not About the Bike
The story of the Ackman-Loeb cycling trip is so widely known in the hedge-fund eco-system that it has practically achieved urban-legend status, and Loeb himself was eager to remind me of it.
It happened last summer when Ackman decided to join a group of a half-dozen dedicated cyclists, including Loeb, who take long bike rides together in the Hamptons. The plan was for Loeb, who is extremely serious about fitness and has done sprint triathlons, a half-Ironman, and a New York City Marathon, to pick up Ackman at Ackman’s $22 million mansion, in Bridgehampton. (Ackman also owns an estate in upstate New York and lives in the Beresford, a historic co-op on Manhattan’s Central Park West.) The two would cycle the 20 or so miles to Montauk, where they would meet up with the rest of the group and ride out the additional 6 miles to the lighthouse, at the tip of the island. “I had done no biking all summer,” Ackman now admits. Still, he went out at a very fast clip, his hypercompetitive instincts kicking in. As he and Loeb approached Montauk, Loeb texted his friends, who rode out to meet them from the opposite direction. The etiquette would have been for Ackman and Loeb to slow down and greet the other riders, but Ackman just blew by at top speed. The others fell in behind, at first struggling to keep up with the alpha leader. But soon enough Ackman faltered—at Mile 32, Ackman recalls—and fell way behind the others. He was clearly “bonking,” as they say in the cycling world, which is what happens when a rider is dehydrated and his energy stores are depleted.
While everyone else rode back to Loeb’s East Hampton mansion, one of Loeb’s friends, David “Tiger” Williams, a respected cyclist and trader, painstakingly guided Ackman, who by then could barely pedal and was letting out primal screams of pain from the cramps in his legs, back to Bridgehampton. “I was in unbelievable pain,” Ackman recalls. As the other riders noted, it was really rather ridiculous for him to have gone out so fast, trying to lead the pack, considering his lack of training. Why not acknowledge your limits and set a pace you could maintain? As one rider notes, “I’ve never had an experience where someone has gone from being so aggressive on a bike to being so hopelessly unable to even turn the pedals…. His mind wrote a check that his body couldn’t cash.”
Nor was Ackman particularly gracious about the incident afterward, not bothering to answer e-mails of concern and support from others in the group until months later.
In a recent interview on CNBC, the blunt-talking and cagey Icahn hinted there would be a concerted effort to take Ackman down a peg or two in the Herbalife battle, which “could be the mother of all the short squeezes,” he said, referring to a technique that can be used by a group of traders who band together to try to clobber a short-seller.
Chapman agrees. “This is like Wall Street’s version of the movie Kill Bill,” he says. “Bill Ackman has been so arrogant and disrespectful to so many people, presumably on the theory that he would never be in a position where these subjects of his disrespect could actually act on their deserved hatred for him But now, with JCPenney [which is down 20 percent from Ackman’s 2010 investment] and Herbalife going against Ackman, his ‘stock’ has moved down, allowing once again, a decade later, for those holding their Kill Bill puts [i.e., options they have been waiting to cash in] to exercise them against him.”
Ackman got the idea to short Herbalife in the summer of 2011 from Christine Richard, who had left a job as a reporter at Bloomberg News to join Diane Schulman at the Indago Group, a high-end investment-research boutique. Schulman and Richard are known around Manhattan as the Indago Girls. They have a handful of hedge-fund clients—among them David Einhorn’s Greenlight Capital and Ackman’s Pershing Square—who pay around $10,000 a month, plus expenses, for their exclusive ideas.
Ackman listened intently to Richard’s pitch about Herbalife, but was busy at the time with a highly successful proxy fight for control of Canadian Pacific Railway. He turned the Herbalife idea over to two of his employees, Shane Dinneen, a young Harvard graduate—who bears an uncanny resemblance to Conan O’Brien—and to Mariusz Adamski, whom Ackman had met on the tennis court and then hired as an intern. The two read public documents, reviewed old lawsuits, watched strange selling videos, and learned about Herbalife’s bizarre, charismatic founder, Mark Hughes. They discovered that, a few years earlier, Barry Minkow, a convicted felon and founder of the infamous 1980s swindle ZZZZ Best, had in 2008 publicly called into question Herbalife’s practices. To avoid a costly legal battle, Herbalife had paid him $300,000. (Minkow is now in prison, for another scam.)
On February 22, 2012, the Indago Girls finished their 100-page report describing how Herbalife had billions in revenues and millions of independent distributors globally (3.2 million at last count, according to CNBC), and claimed to have created millions of jobs in its 33-year existence. But, the Girls summarized, “it would be an impressive American success story if it were not based on a lie. Far from being a shining example of corporate beneficence, Herbalife is a story of stunning deception. It is a pyramid scheme whose revenue comes not from retail sales of its products, as it contends, but from capital lost by failed investors in its business opportunity. Our research has shown that through manipulation and misrepresentation, Herbalife conceals its true business model from distributors and from the investing public. Herbalife is not selling a ‘healthy lifestyle’ through nutritional supplements and weight management products; it is selling a highly risky financial product: an investment in the business opportunity of recruiting more Herbalife distributors. The merchandise is little more than a vehicle for selling the financial investment in the pyramid scheme.”
Dinneen agreed, but Ackman remained cautious. In the best of circumstances shorting stock can be a risky business, even for hedge-fund big shots. To do it, you have to borrow someone else’s stock (paying them a fee to do so) and then sell it into the market, collecting the proceeds from the sale. If the stock goes down, you can “cover” your short position by buying it back at the lower price and returning the borrowed stock to its original owner, keeping the profits. While a stock’s price can never go below zero—Nirvana for a short-seller—there is no cap on how high a stock can trade. That’s what makes shorting so risky. If you are wrong and, instead of going down, the stock price goes up, you can end up having to buy the stock back at a higher price—perhaps a much higher price—than you sold it for originally, making the potential losses nearly infinite when you have to return it to the original owner.
As the old Wall Street saw goes, “he who sells what isn’t his’n must buy it back or go to pris’n.”
Herbalife had been around for 33 years and had withstood previous attacks from the likes of Minkow and others, as well as the fact that, in May 2000, Hughes—despite his clean-living image—died of a toxic combination of alcohol and Doxepin (an antidepressant he was taking to sleep), causing the company nearly to collapse.
Reeling from Hughes’s death and lawsuits related to its use of the stimulant ephedrine—which would be banned in the U.S. from all nutritional supplements in 2004—Herbalife agreed to sell itself, in 2002, to its management, who had joined with two private-equity firms—Golden Gate Capital and Whitney & Co. The company went public again, in 2004, netting the private-equity firms a fortune estimated at $1.3 billion, a return of seven times their initial investment, according to the Indago Girls. Between 2005 and 2012, Herbalife’s stock increased 1,000 percent.
Taking on Herbalife would not be for the faint of heart.
The Indago Girls shared their Herbalife short idea with David Einhorn, and he too was skeptical at first. “Short-sellers had dashed themselves on these rocks, like, only 50 katrillion times,” says someone who knew Einhorn’s thinking. In the end, though, he was convinced by Schulman’s passion and detailed analysis, and he urged her to keep researching while he slowly built a short position in Herbalife. “Short-sellers have been attracted to multi-level marketers the way drunken sailors are always attracted to dirty girls at the end of the bar,” explains that person. “It’s just a match made in heaven.”
Einhorn and Ackman were once good friends. They met on a subway platform in 1998 after they both had attended an industry luncheon. In March 2010, when the two appeared together on CNBC, Einhorn said of Ackman, “Bill’s a phenomenal investor. . . . His returns are absolutely extraordinary. It shows there are a lot of different ways to go about things. He’s a fabulous investor.”
Without missing a beat, Ackman replied, “David is my marketing adviser.”
The relationship soured, however, around the time the Indago Girls were making their Herbalife pitch to both men. “David and I had what you might call a falling-out,” Ackman admits. It happened in June 2011, when Ackman was quoted in The New York Times revealing that Einhorn, a Milwaukee-area native, had wanted to buy the Milwaukee Brewers in 2004 but lost out to Mark Attanasio, another financial heavyweight. At that moment, Einhorn was trying to buy a piece of the New York Mets, and, Ackman says, Einhorn feared if the Mets knew of his previous interest in the Brewers they would conclude he was just another rich hedge-fund guy looking to buy a new toy, as opposed to being a serious Mets fan. Ackman says he was just trying to help show that his friend had a lifelong interest in baseball. There was some back-and-forth on e-mail between the two men, and that was that. “David and I are friendly, but it’s like we were boyfriend and boyfriend, and then one day we were just friends, and now we’re just friendly,” Ackman says. “I have enormous respect for him. But as a result of that, I stopped calling him and he stopped calling me, so that’s why I didn’t talk to him” about Herbalife. (Einhorn declined to discuss Herbalife or his relationship with Ackman, but lavishly praised Dan Loeb.)
On May 1, Dinneen was listening in on Herbalife’s first-quarter-2012 investor conference call when suddenly Einhorn spoke up and started asking questions, mostly about what percentage of the company’s sales was merely to distributors, who are required to buy the product each month, and what percentage to genuine consumers. At first, Des Walsh, the company’s president, said “70 percent or potentially in excess of that” went to consumers or distributors “for their own personal use.” Einhorn pushed Walsh for a clarification, and Walsh said he didn’t have “an exact percentage” because “we don’t have visibility to that level of detail.” This was a surprising answer, since that information should have been readily available. By the end of the day, Herbalife stock had plummeted to $56 per share, from $70 per share.
Had Ackman waited too long to bet against the stock?
Dinneen alerted Ackman that Einhorn was on the call and asking tough questions. “David asks his question, the stock plummets, and then Shane [Dinneen] is all upset,” Ackman recalls. “He thinks he’s done all this work for nothing. I said, ‘No, no, you’re wrong. This is great. Clearly David shorted the stock.’ ”
Now, Ackman believed, Pershing Square didn’t have to be the so-called catalyst, the guy who says the emperor has no clothes—which generally causes the company being shorted to go on the attack against the short-seller. “It sounds like David is prepared to go public with it,” he told Dinneen. “He’ll be the catalyst, and we can be short and we don’t have to deal with all the headaches of being the active short-seller.”
During the conference call Ackman decided to pull the trigger and started shorting Herbalife shares through Goldman Sachs, Pershing Square’s principal prime broker. His position eventually grew to more than 20 million shares. The move took major cojones because with such a large percentage on the short side, around 20 percent, in the hands of one person, those on the other side of the trade—who are betting the stock will go up—can try to orchestrate the aforementioned “short squeeze,” by buying up shares. This causes the thinly traded stock’s price to trade up, forcing the short-seller to buy back stock at far higher prices than he had hoped, which sends the price of the stock higher still.
In addition, Herbalife would no doubt be able to defend itself by using some of the $320 million or so in cash on its balance sheet to buy back and retire its stock, reducing the number of shares outstanding and potentially adding to Ackman’s whiplash. (Since the end of 2012, Herbalife has bought back four million shares at a cost of around $150 million.)
The Sohn and the Fury
The annual Ira Sohn Conference, in Manhattan, is where the leading hedge-fund managers share their investing ideas. With the 2012 edition scheduled for May 16, Ackman suspected that Einhorn would use his presentation there to tout his short in Herbalife and become the catalyst for the trade. It’s a tried-and-true strategy, and smacks of insider trading, but stays just this side of legality. Ackman, Icahn, and Einhorn, among others, have all used appearances at Sohn to tout their short or long positions, after having already accumulated them, knowing that their very words will move the market in their favor. Talking your book, as it’s known on Wall Street, is not exactly kosher, but it’s done all the time.
According to Ackman, just before his presentation, Einhorn put up a slide with the letters “MLM” on it. The audience, he believes, immediately took this as an indication that he was about to slam “multi-level marketers,” such as Herbalife. But Einhorn’s presentation turned out to be about Martin Marietta Materials, a company with the stock symbol MLM. When the market realized this, Herbalife stock moved smartly to finish up more than 10 percent.
“He did that kind of as a joke,” Ackman says.
Einhorn wasn’t going to be the Herbalife catalyst after all, so over the summer and fall Ackman and his team worked tirelessly to put together their version of the Herbalife story. Ackman wanted to unleash his monster on the world before Thanksgiving, but his team wasn’t ready, even though it had been working around the clock. So Ackman arranged with Douglas Hirsch, a co-chair of the Sohn Research Conference Foundation, for a special session to present the Herbalife idea on December 20.
“I go back to first principles for me, personally,” Ackman says. “The single most important thing to me, personally, is the ability to speak my mind. I’m a change-the-world guy, and I know that sounds like bullshit or whatever. I don’t like to make investments that are not good for America. You can say I’m self-righteous. You can say that I’m disingenuous. I have more money than I need. I don’t need to work for a living. I do this because I love what I do.”
After graduating from Harvard College and following a stint working for his father at the family’s commercial-mortgage real-estate business, Ackman went to Harvard Business School, the only program to which he had applied. As he had in college, Ackman rowed crew. He was co-captain of the business-school team that generated national controversy by wearing
T-shirts with dollar signs on the backs and painting dollar signs on the oars. At the annual Head of the Charles race, spectators booed the H.B.S. crew boats, causing Ackman to defend the decorations in an opinion column in the Harbus, the business-school newspaper. “Let’s face up to what Harvard Business School represents,” he wrote. “We spend 90 percent of our studies at HBS pursuing the maximization of the dollar.”
At Harvard, Ackman met David Berkowitz, who had studied engineering as an undergraduate at M.I.T. After graduation Ackman and Berkowitz formed Gotham Partners, their own hedge fund, in a windowless office in Midtown Manhattan. Starting with $250,000 from Marty Peretz, a college professor of Ackman’s and the then editor and owner of The New Republic (and the father of V.F. contributing editor Evgenia Peretz), they raised $3 million. “We did incredibly well for five years,” Ackman recalls. Most important, in 2002, Ackman made a huge bet that M.B.I.A. Inc., the publicly traded municipal-bond insurer, was fatally overvalued. The company protested that Ackman was trying to manipulate its stock price. Both the S.E.C. and Eliot Spitzer, then the New York State attorney general, investigated. “Not to put it too impoliticly,” Spitzer told The New York Observer in 2011, “but we put [Ackman] through the wringer.”
Ackman recalls he told the investigators, “If you guys don’t pursue M.B.I.A., and you allow it to continue, there will be a financial crisis of unbelievable proportions. That’s what will happen.” No charges were ever filed against Ackman, and he was proven correct after M.B.I.A. nearly collapsed during the financial crisis. Ackman and his investors made around $1.4 billion in profit. By that time, though, he and Berkowitz had parted company, and Gotham was dissolved.
On his own in 2004, and then with people he had met serendipitously—one sharing a cab in a rainstorm, another while bone-fishing in Argentina—Ackman started Pershing Square, named after the area just south of Grand Central Terminal. Over the years, Ackman has had some notable wins—with Canadian Pacific Railway (doubling his $1.4 billion investment in less than a year), Fortune Brands, McDonald’s, Burger King, and General Growth Properties—and some notable mistakes, namely Borders (which went bankrupt) and the call options of Target Corporation, an investment that declined, at its nadir, 90 percent, according to Ackman, costing him and his investors some $1.5 billion. The loss caused Ackman to issue a rare apology: “Bottom line, [the Target investment] has been one of the greatest disappointments of my career to date,” he wrote his investors.
Faced with the hedge-fund firepower lined up against him—to say nothing of Herbalife’s wrath—someone with a lesser ego might have had some doubts. Not Ackman. Although Herbalife is his first activist short since the M.B.I.A. war—which took nearly seven years for him to win—he claims he is not even remotely worried that he might be wrong. “By the way, there is no other investment in my portfolio about which I feel better,” he says. “I can give you all the concerns I have about everything else we own. JCPenney … Canadian Pacific has gone from $46 to $117 a share. O.K.? Are there risks? Absolutely, absolutely. Every one of my other investments. Not this one.”
The day before Ackman’s presentation at Sohn, he called CNBC reporter Kate Kelly. “We wanted the right people there,” he says. “We wanted the right people to listen. And if you don’t know what company it is, you’re not going to just go [to a presentation] randomly. But I wanted everyone who owned Herbalife stock watching, and I wanted people who were interested in the story, and I wanted Hispanic media there. They’re not going to come to some hedge-fund presentation.”
By around two p.m. on December 19, Kelly was reporting on-air that Pershing Square had “a major new short position,” and, she explained, Ackman would be making a full presentation the next day. Ackman’s media ploy worked. Some 500 people assembled at the AXA Equitable Center, in Midtown Manhattan—along with another 1,300 people watching online—as Ackman, Dinneen, and David Klafter, Pershing’s general counsel, denounced Herbalife for more than three hours, without interruption, using some 330 slides. The title of the presentation was “Who Wants to Be a Millionaire?”
Ackman was smooth, confident, and unrehearsed. “Tennis, I practice,” he tells me. “Presentations, I don’t. Never.”
Onstage, Ackman said he would donate any money he personally made from the trade—“blood money,” he called it—to his foundation, the Pershing Square Foundation, which gave $7 million to Andrew Youn and his One Acre Fund, to relieve hunger and poverty in East Africa, and $25 million to the Newark, New Jersey, public schools (to which Mark Zuckerberg gave $100 million). Ackman also announced—on the spur of the moment, he says—that he would donate $25 million to the Sohn foundation, which supports pediatric cancer care and research. “You know what?” he says he told Douglas Hirsch. “It’s time for me to do something for cancer.” He later explained to me, “By the way, I was diagnosed with skin cancer. Within a week of the event. Basal cell carcinoma, and I had it removed. You’ve got to see this scar.”
Throughout the presentation, CNBC’s Kate Kelly kept ducking out to report what Ackman was saying, and after it was over Ackman himself hit the airwaves, talking up a storm to Andrew Ross Sorkin, on CNBC, and on Bloomberg TV. He positioned himself as the champion of the victims of the alleged scheme. “You’ve had millions of low-income people around the world who’ve gotten their hopes up that there’s an opportunity for them to become millionaires or hundred-thousand-aires or some number like that, and they’ve been duped,” he told Sorkin. “We simply want the truth to come out. If distributors knew the probability of making $95,000 a year—which is the millionaire team, as they call it—was a fraction of 1 percent, no one would ever sign up for this. And we simply exposed that fact. The company has done their best to try to keep that from the general public.”
Chapman counters, “If anybody buys this ‘He’s out to save the little guy’ routine, they’re just outright gullible and naïve. Arguably, the number of Herbalife employees, suppliers, and their employees, and of course non-complaining distributors who may be harmed by Ackman’s quest for profits massively outnumber those distributors who fail to succeed as they had hoped.” (As for Chapman, Ackman says, “He’s a lunatic. And I think, by the way, that he’s proud to be a lunatic, and he’s even said as much, that it’s part of his strategy, as an activist, to make the other side think you’re crazy.”)
But the presentation did work as Ackman had planned: Herbalife’s stock went from $42.50 per share on December 18 to a low of $26 on Christmas Eve.
Not surprisingly Herbalife began fighting back. “Herbalife operates with the highest ethical and quality standards,” the company wrote in a press release. “Herbalife also hires independent, outside experts to ensure our operations are in full compliance with laws and regulations. Herbalife is not an illegal pyramid scheme.” (The company’s C.E.O., Michael Johnson, declined an interview request.)
The Long and Short of It
Dan Loeb watched the December 20 presentation with amazement and thought the entire hedge-fund industry would look at Ackman’s highly promoted announcement as an opportunity to take the other side of the bet. Loeb met with me in his serene, art-filled Lever House office, on Park Avenue. He is a yoga enthusiast and surfer from California, a cool customer, and more than a tad condescending. “It took us a little while to do our work, because we had no reason to think he was right or wrong,” Loeb explained. “We just wanted to understand the company. And we weren’t like super-focused on it, but sometime during the holiday we got very, very focused on it.”
Most of Loeb’s Third Point enterprise is based in Manhattan. But one of his key partners, Jim Carruthers, works in Silicon Valley, where he and an analyst, Scott Matagrano, research potential short ideas. “They have a massive fucking budget for research and analysis,” says an observer, who knows them. “They are deepwater shorts,” meaning that, when they get a conviction about a short idea, they put a lot of money behind it and stick with it. As the Indago Girls had during the summer of 2011, Carruthers and Matagrano studied the multi-level-marketing industry in depth. “Their opinion is very point-blank,” says the observer, adding that the “industry is shot through with lies, deceit, and fraud.” At the end of their research, they decided to short two publicly traded multi-level marketers, Nu Skin and Usana, but they weren’t sure what to do about Herbalife, in part because it appeared others had lost money shorting the stock in the past. When they heard that Einhorn had shorted it, they decided not to join him. “They backed off of Herbalife because it’s just too big, and once Einhorn started sniffing around it was going to become a very crowded trade immediately,” this person continues.
But on December 20, when the Herbalife stock fell to $26, Loeb decided that Ackman had created a unique opportunity for him and other hedge-fund investors to go long Herbalife—in part because Herbalife was a cash machine that had been around for 33 years, in part because even if the Federal Trade Commission closed down Herbalife’s U.S. business (a prospect that Loeb considered highly unlikely) it represented only 20 percent of the company’s total, and in part because of the short-squeeze opportunity on Ackman.
Loeb consulted with Carruthers, who told him he didn’t like Herbalife but didn’t hate it enough to want to short it. “This is a company that should be a normalized $40 to $50 stock trading in the 20s,” Loeb argued, according to the observer. “And Ackman has created a situation where if this company buys back stock and declares a dividend or two it can run up into $60 or $70.” With the understanding that Loeb was just looking to make some quick money for his investors, Carruthers endorsed Loeb’s plan.
There was also the matter of the growing antipathy between Loeb and Ackman. “My understanding is that they dislike each other profoundly,” the observer says. In 2007, with the market booming and Third Point’s assets growing considerably, Loeb invested around $200 million of Third Point’s $6 billion in a blind pool of money that Ackman had assembled. Ackman had promised investors it would be as successful as his McDonald’s investment, which had earned hundreds of millions of dollars, but it turned out to be the notorious Target loss of nearly 90 percent, leaving many unhappy investors, especially Loeb. He says he had invested with Ackman, who was coming off a super-hot hand with his McDonald’s investment, because he trusted Ackman’s judgment and process. In retrospect he believes he was crazy to do so and has vowed never to do anything like it again.
Loeb’s funds eventually lost around $175 million with Ackman, and today Ackman remains contrite. “Dan was very unhappy, as he should be, when the thing went down,” says a person who knows both men. He adds that Loeb was the angriest of Ackman’s investors about the Target debacle and got out of it as soon as Ackman made that possible; had he been more patient and stayed in he would have gotten most of his money back as the investment rebounded.
Loeb says his decision to invest in Herbalife was not about getting revenge on Ackman. “Everything I do is driven to generate returns for my investors, so the fact that Bill is involved here is coincidental,” he claims.
On January 9, Loeb filed a 13-G report with the Securities and Exchange Commission, announcing that he had acquired 8.9 million Herbalife shares, or 8.24 percent of the stock—making him the company’s second-largest shareholder—at a cost of around $300 million. That same day he wrote a letter to his investors explaining he had acquired most of the stock “during the panicked selling that followed the short seller’s dramatic claims.”
In his letter, Loeb refuted them and wrote that he believed the stock “could easily” return to its April 2012 price of around $70 per share. At a minimum, he wrote, the stock should be valued at between $55 and $68 per share, offering Third Point “40–70% upside from here and making the company a compelling long investment.”
The market took notice of Loeb’s purchase and sent the stock up around 10 percent.
Sahm Adrangi was one of the traders who agreed with Loeb. “After you’d done your work on Herbalife and you viewed Ackman’s three-and-a-half-hour presentation, you could see the holes in his argument,” says Adrangi. “Ackman has three points: the F.T.C. is going to shut it down because they’re in regulatory violation of pyramid-scheme laws, distributors are going to jump ship because they’re going to realize that they’re being duped, and you’re going to see an unwinding of the business because of the ‘pop-and-drop’ dynamics [where sales shoot up when Herbalife enters, and then quickly subside]. Those three points are very easy to debunk. Is the F.T.C. going to shut it down? MLMs have been around for 30 years. There’s really no evidence that Herbalife is the worst of the bunch, and the government would also have to shut down Amway, Avon, Tupperware. The second point, that distributors are going to view his video and quit in droves—I mean, 80 percent of the business is outside the U.S., so to think that lower-income Brazilians and Paraguayans and Malaysians will view his video and decide to quit becoming Herbalife distributors is very silly. And his third thesis, that the pop-and-drop dynamics are going to cause an unwind internationally, is also absurd. The reason Herbalife and these other global MLMs are very sustainable businesses and grow year after year at impressive rates is because they’re very diversified.”
Ackman was on his private Gulfstream 550 jet, on the way to Myanmar for some exotic scuba diving, when he got the news of Loeb’s purchase, via the onboard high-speed Internet. “I had no idea Loeb was about to do that,” he says, though he could have had an inkling something might be up, because, the day before, Chapman, who had also built a long position in Herbalife equal to “35 percent of his fund” (the size of which is unknown), had had an exchange with Charlie Gasparino, of Fox Business, in which Chapman had claimed there would be “big news” coming shortly on Herbalife—about which Gasparino tweeted.
Ackman thought Loeb was in Herbalife merely to make a quick buck: “While Dan’s investment letter gave the impression that he’s in Herbalife for the long term, I think he’s too smart for that. I think it’s just a trade.” Within weeks he said he suspected Loeb had already started selling his stake. “I don’t know if it’s true,” he said. “I have no idea. But I think if he’s selling he’s got problems.” Ackman was too diplomatic to say on the record he meant that Loeb could be accused of a “pump and dump” scheme, in which a prominent investor talks up a stock he owns, then sells it, making good money. (Loeb declined to comment.)
Grudge Match
Matters got even more interesting on January 16 when news reports claimed that Carl Icahn, whose net worth has been estimated by Bloomberg to be $20.2 billion, had acquired a “small” stake in Herbalife, joining forces with Loeb in the battle against Ackman.
That Icahn would do so was clearly sport for him. He and Ackman first met in 2003, when Ackman was in the process of liquidating Gotham Partners. One of the companies in which he owned a large stake, Hallwood Realty, was trading for around $60 per share. Ackman believed the stock was worth $140, but he decided to sell, and he approached Icahn with a deal. “I checked him out,” Icahn told The New York Times in 2011. “He was in trouble with the S.E.C.; he had investors leaving him. A few of my friends called me up and said, ‘Don’t deal with this guy,’ ” but, Icahn says, he ignored their advice.
He and Ackman agreed to a deal for $80 a share for Hallwood, along with a contract that gave Ackman “schmuck insurance” in the form of a written agreement to split any profit above a 10 percent return for Icahn if Icahn sold Hallwood within three years. In April 2004, Icahn merged Hallwood Realty with HRPT Properties Trust for nearly $138 per share in cash—surprisingly close to what Ackman thought Hallwood was worth in the first place. Under the terms of their agreement, Ackman believed he was owed another $4.5 million. He waited a few days and then called Icahn to try to collect.
“First off, I didn’t sell,” Icahn told him. He said he had voted against the merger, but his shares were cashed out anyway.
“Well, do you still own the shares?” Ackman asked.
“No,” Icahn replied, “but I didn’t sell.”
Ackman threatened to sue Icahn for the money.
“Go ahead, sue me,” Icahn told him.
Ackman did, in 2004. The case was finally resolved in Ackman’s favor in October 2011, and Icahn paid Ackman $9 million, including several years’ worth of accrued interest.
Speaking at a conference in March 2012, Ackman mentioned Icahn and said he didn’t respect him. Icahn returned the favor later that day in an interview with The Wall Street Journal: “Any criticism from Bill Ackman I consider a compliment.”
On January 24, after taking his stake in Herbalife, Icahn went live on Bloomberg TV. “It’s no secret to the world and Wall Street that … I don’t like Ackman,” he fumed. Telling Trish Regan, the anchor, that he didn’t approve of Ackman’s approach, he elaborated: “I think if you’re short, you go short, and, hey, if it goes down, you make money. You don’t go out and get a roomful of people to bad-mouth the company. If you want to be in that business, why don’t you go and join the S.E.C.”
He said he was also critical of Ackman’s announcement at the Sohn Conference that he would give any profit he made on the short to charity, because Ackman’s limited partners would still benefit, which would then accrue to Ackman’s benefit as well. “I dislike the guy,” he continued. “I don’t respect him. . . . I don’t think he did this in the right way Don’t be holier than thou and say, ‘Look, I’m doing this for the good of the world and I want to see sunshine on Herbalife.’ I mean, that’s bullshit.”
The gloves were off.
The next afternoon on CNBC, when Ackman was defending himself against Icahn’s claims, Icahn called in to the show, and the CNBC producers, realizing they had all the makings of cable-TV fireworks, patched him in. Suddenly Icahn and Ackman were going at it live, causing electrified trading floors all over New York to stop dead in their tracks as the traders whistled, stomped, clapped, and guffawed at the two billionaires mixing it up on national television.
“I’ve really sort of had it with this guy Ackman,” Icahn said. “He’s like the crybaby in the schoolyard. I went to a tough school in Queens, and they used to beat up the little Jewish boys. He was like one of these little Jewish boys, crying that the world was taking advantage of him. He was almost sobbing, and he’s in my office, talking about this Hallwood, and how I could help him.”
Einhorn announced in late January that he had made money on his Herbalife short, but, tellingly, he added that he had closed out the position in 2012.
But Ackman says he is in it for the long haul. On January 29, he told me he was just days away from sharing with the world several bombshell announcements that would blow the lid off Herbalife once and for all and send its stock to zero. But on February 20, he softened his language some, saying he believes there will be more market-moving news to come.
His convictions, though, are as strong as ever. “Every day is a happy day for me,” Ackman tells me. “You don’t know me well enough. But I know Herbalife is a pyramid scheme. It is a certainty. It’s just a question of when the rest of the world figures it out.”
Adrangi is not persuaded. “We have high-conviction ideas, and, oops, it doesn’t work out,” he says. “But what’s important is to pay attention to what the other side is saying, and to revise your thesis. . . . Since Ackman’s presentation, more information has come out. Bob Chapman put together a very good, five-page letter on why Herbalife is a long. Dan Loeb has done the same thing. The company’s response presentation was excellent Ackman is making this moral,” Adrangi continues. “He runs a hedge fund, right? His duty is not to the world. If you want to save the world, go donate some money to charity. I’m pretty confident that if he does not cover his short position his fund will be smaller, materially, in two years’ time.”
Icahn seems to be doing his best to make Adrangi’s prophecy come true. On February 14, Icahn announced that he had accumulated a surprisingly large, 12.98 percent stake in Herbalife and that he intended to meet with the company’s management to discuss “enhancing shareholder value,” including possibly a going-private transaction. Herbalife’s stock soared throughout the day on the Icahn news and traded as high as $46.22, a 21.4 percent increase from the previous day’s close. “Carl Icahn just delivered Bill Ackman a valentine he’ll never forget,” Chapman gleefully e-mailed me. The soaring stock price allowed some of the more risk-averse traders to make some money. Chapman, for one, sold his entire Herbalife position in mid-February at a tidy profit, while Loeb, who had been selling Herbalife stock for weeks, his spokesman admitted, also sold another portion into the Icahn-induced rally.
But Ackman, who knew some of his biggest hedge-fund rivals were still lined up against him, remains unflappable. We’d been sitting together in the conference room just off his spacious office. Grabbing a banana from a bunch on a table, he said of Herbalife’s stock, “I’ll be happy at zero,” and smiled.
NOTE: A previous version of this article misstated when Ackman got the idea to short Herbalife. It was the summer of 2011. The previous version also approximated the size of Robert Chapman Jr.'s fund. That figure is unknown.
Hedge-fund titan Bill Ackman has vowed to bring down Herbalife, the 33-year-old nutritional-supplement company, which he views as a pyramid scheme. With his massive shorting of Herbalife stock, the price plummeted, prompting two fellow billionaires—Ackman’s former friend Dan Loeb and activist investor Carl Icahn—to take the opposing bet on Herbalife. As the public brawl rivets Wall Street, William D. Cohan learns why, this time, it’s personal.
By William D. Cohan
The supremely confident billionaire hedge-fund manager Bill Ackman has never been afraid to bet the farm that he’s right.
In 1984, when he was a junior at Horace Greeley High School, in affluent Chappaqua, New York, he wagered his father $2,000 that he would score a perfect 800 on the verbal section of the S.A.T. The gamble was everything Ackman had saved up from his Bar Mitzvah gift money and his allowance for doing household chores. “I was a little bit of a cocky kid,” he admits, with uncharacteristic understatement.
Tall, athletic, handsome with cerulean eyes, he was the kind of hyper-ambitious kid other kids loved to hate and just the type to make a big wager with no margin for error. But on the night before the S.A.T., his father took pity on him and canceled the bet. “I would’ve lost it,” Ackman concedes. He got a 780 on the verbal and a 750 on the math. “One wrong on the verbal, three wrong on the math,” he muses. “I’m still convinced some of the questions were wrong.”
Not much has changed in the nearly 28 years since Ackman graduated from high school, except that his hair has gone prematurely silver. He still has an uncanny knack for making bold, brash pronouncements and for pissing people off. Nowhere is that more apparent than in the current, hugely public fight he and his $12 billion hedge fund, Pershing Square Capital, are waging over the Los Angeles–based company Herbalife Ltd., which sells weight-loss products and nutritional supplements using a network of independent distributors. Like Amway, Tupperware, and Avon, Herbalife is known as “a multi-level marketer,” or MLM, with no retail stores. Instead, it ships its products to outlets in 88 countries, and the centers recruit salespeople, who buy the product and then try to resell it for a profit to friends and acquaintances.
Ackman has called Herbalife a “fraud,” “a pyramid scheme,” and a “modern-day version of a Ponzi scheme” that should be put out of business by federal regulators. He says he is certain Herbalife’s stock, which in mid-February traded around $40 per share, will go to zero, and he has bet more than a billion dollars of his own and his investors’ money on just that outcome. (Ackman declines to discuss the specifics of his trade.) “This is the highest conviction I’ve ever had about any investment I’ve ever made,” he announced on Bloomberg TV. An interviewer on CNN reminded him that Herbalife had been around since 1980 and had withstood many previous challenges to its business plan. How long was he willing to “sit on this bet”? Ackman replied, “We’re not sitting. We’re shouting from the rooftops. They’ve never had someone like me prepared to say the truth about the company. I’m going to the end of the earth. If the government comes out and determines this is a completely legal business, then I will lobby Congress for them to change the law. I had a moral obligation. If you knew that Bernie Madoff was running a Ponzi scheme, and you didn’t tell anyone about it, and it went on for 33 years ... ”
Ackman says he suspected, when he “shorted” (i.e., bet against) Herbalife, that other hedge-fund investors would likely see the move as an opportunity to make money by taking the other side of his bet. What he hadn’t counted on, though, was that there would be a personal tinge to it. It was as if his colleagues had finally found a way to express publicly how irritating they have found Ackman all these years. Here finally was a chance to get back at him and make some money at the same time. The perfect trade. These days the Schadenfreude in the rarefied hedge-fund world in Midtown Manhattan is so thick it’s intoxicating.
“Ackman seems to have this ‘Superman complex,’ ” says Chapman Capital’s Robert Chapman, who was one of the investors on the other side of Ackman’s bet. “If he jumped off a building in pursuit of super-human powered flight but then slammed to the ground, I’m pretty sure he’d blame the unanticipated and unfair force of gravity.”
Lined up against the 46-year-old Ackman on the long side of the Herbalife trade were at least two billionaires: Daniel Loeb, 51, of Third Point Partners, who used to be Ackman’s friend, and Carl Icahn, 77, of Icahn Enterprises. Along for the ride are some smaller, well-regarded hedge-fund investors—who would like to be billionaires—John Hempton, of Bronte Capital, and Sahm Adrangi, of Kerrisdale Capital.
It’s Ackman’s perceived arrogance that gets to his critics. “The story I hear from everybody is that one can’t help but be intrigued by the guy, just because he’s somewhat larger than life, but then one realizes he’s just pompous and arrogant and seems to have been born without the gene that perceives and measures risk,” says Chapman. “He seems to look at other members of society, even legends such as Carl Icahn, as some kind of sub-species. The disgusted, annoyed look on his face when confronted by the masses beneath him is like one you’d expect to see [from someone] confronted by a homeless person who hadn’t showered in weeks. You can almost see him puckering his nostrils so he doesn’t have to smell these inferior creatures. It’s truly bizarre, given that his failures—Target, Borders, JCPenney, Gotham Golf, First Union Real Estate, and others—prove he’s as fallible as the next guy. Yet, from what I hear, he behaves that way with just about everybody.”
Another hedge-funder describes the problem he has with Ackman in more measured tones. “There is a saying in this business: ‘Often wrong, never in doubt.’ Ackman personifies it. . . . He is very smart—but he lets you know it. And he combines that with this sort of noblesse oblige that lots of people find offensive—me, generally not. On top of that he is pointlessly, needlessly competitive every time he opens his mouth. Do you know about the Ackman cycling trip with Dan Loeb?”
It’s Not About the Bike
The story of the Ackman-Loeb cycling trip is so widely known in the hedge-fund eco-system that it has practically achieved urban-legend status, and Loeb himself was eager to remind me of it.
It happened last summer when Ackman decided to join a group of a half-dozen dedicated cyclists, including Loeb, who take long bike rides together in the Hamptons. The plan was for Loeb, who is extremely serious about fitness and has done sprint triathlons, a half-Ironman, and a New York City Marathon, to pick up Ackman at Ackman’s $22 million mansion, in Bridgehampton. (Ackman also owns an estate in upstate New York and lives in the Beresford, a historic co-op on Manhattan’s Central Park West.) The two would cycle the 20 or so miles to Montauk, where they would meet up with the rest of the group and ride out the additional 6 miles to the lighthouse, at the tip of the island. “I had done no biking all summer,” Ackman now admits. Still, he went out at a very fast clip, his hypercompetitive instincts kicking in. As he and Loeb approached Montauk, Loeb texted his friends, who rode out to meet them from the opposite direction. The etiquette would have been for Ackman and Loeb to slow down and greet the other riders, but Ackman just blew by at top speed. The others fell in behind, at first struggling to keep up with the alpha leader. But soon enough Ackman faltered—at Mile 32, Ackman recalls—and fell way behind the others. He was clearly “bonking,” as they say in the cycling world, which is what happens when a rider is dehydrated and his energy stores are depleted.
While everyone else rode back to Loeb’s East Hampton mansion, one of Loeb’s friends, David “Tiger” Williams, a respected cyclist and trader, painstakingly guided Ackman, who by then could barely pedal and was letting out primal screams of pain from the cramps in his legs, back to Bridgehampton. “I was in unbelievable pain,” Ackman recalls. As the other riders noted, it was really rather ridiculous for him to have gone out so fast, trying to lead the pack, considering his lack of training. Why not acknowledge your limits and set a pace you could maintain? As one rider notes, “I’ve never had an experience where someone has gone from being so aggressive on a bike to being so hopelessly unable to even turn the pedals…. His mind wrote a check that his body couldn’t cash.”
Nor was Ackman particularly gracious about the incident afterward, not bothering to answer e-mails of concern and support from others in the group until months later.
In a recent interview on CNBC, the blunt-talking and cagey Icahn hinted there would be a concerted effort to take Ackman down a peg or two in the Herbalife battle, which “could be the mother of all the short squeezes,” he said, referring to a technique that can be used by a group of traders who band together to try to clobber a short-seller.
Chapman agrees. “This is like Wall Street’s version of the movie Kill Bill,” he says. “Bill Ackman has been so arrogant and disrespectful to so many people, presumably on the theory that he would never be in a position where these subjects of his disrespect could actually act on their deserved hatred for him But now, with JCPenney [which is down 20 percent from Ackman’s 2010 investment] and Herbalife going against Ackman, his ‘stock’ has moved down, allowing once again, a decade later, for those holding their Kill Bill puts [i.e., options they have been waiting to cash in] to exercise them against him.”
Ackman got the idea to short Herbalife in the summer of 2011 from Christine Richard, who had left a job as a reporter at Bloomberg News to join Diane Schulman at the Indago Group, a high-end investment-research boutique. Schulman and Richard are known around Manhattan as the Indago Girls. They have a handful of hedge-fund clients—among them David Einhorn’s Greenlight Capital and Ackman’s Pershing Square—who pay around $10,000 a month, plus expenses, for their exclusive ideas.
Ackman listened intently to Richard’s pitch about Herbalife, but was busy at the time with a highly successful proxy fight for control of Canadian Pacific Railway. He turned the Herbalife idea over to two of his employees, Shane Dinneen, a young Harvard graduate—who bears an uncanny resemblance to Conan O’Brien—and to Mariusz Adamski, whom Ackman had met on the tennis court and then hired as an intern. The two read public documents, reviewed old lawsuits, watched strange selling videos, and learned about Herbalife’s bizarre, charismatic founder, Mark Hughes. They discovered that, a few years earlier, Barry Minkow, a convicted felon and founder of the infamous 1980s swindle ZZZZ Best, had in 2008 publicly called into question Herbalife’s practices. To avoid a costly legal battle, Herbalife had paid him $300,000. (Minkow is now in prison, for another scam.)
On February 22, 2012, the Indago Girls finished their 100-page report describing how Herbalife had billions in revenues and millions of independent distributors globally (3.2 million at last count, according to CNBC), and claimed to have created millions of jobs in its 33-year existence. But, the Girls summarized, “it would be an impressive American success story if it were not based on a lie. Far from being a shining example of corporate beneficence, Herbalife is a story of stunning deception. It is a pyramid scheme whose revenue comes not from retail sales of its products, as it contends, but from capital lost by failed investors in its business opportunity. Our research has shown that through manipulation and misrepresentation, Herbalife conceals its true business model from distributors and from the investing public. Herbalife is not selling a ‘healthy lifestyle’ through nutritional supplements and weight management products; it is selling a highly risky financial product: an investment in the business opportunity of recruiting more Herbalife distributors. The merchandise is little more than a vehicle for selling the financial investment in the pyramid scheme.”
Dinneen agreed, but Ackman remained cautious. In the best of circumstances shorting stock can be a risky business, even for hedge-fund big shots. To do it, you have to borrow someone else’s stock (paying them a fee to do so) and then sell it into the market, collecting the proceeds from the sale. If the stock goes down, you can “cover” your short position by buying it back at the lower price and returning the borrowed stock to its original owner, keeping the profits. While a stock’s price can never go below zero—Nirvana for a short-seller—there is no cap on how high a stock can trade. That’s what makes shorting so risky. If you are wrong and, instead of going down, the stock price goes up, you can end up having to buy the stock back at a higher price—perhaps a much higher price—than you sold it for originally, making the potential losses nearly infinite when you have to return it to the original owner.
As the old Wall Street saw goes, “he who sells what isn’t his’n must buy it back or go to pris’n.”
Herbalife had been around for 33 years and had withstood previous attacks from the likes of Minkow and others, as well as the fact that, in May 2000, Hughes—despite his clean-living image—died of a toxic combination of alcohol and Doxepin (an antidepressant he was taking to sleep), causing the company nearly to collapse.
Reeling from Hughes’s death and lawsuits related to its use of the stimulant ephedrine—which would be banned in the U.S. from all nutritional supplements in 2004—Herbalife agreed to sell itself, in 2002, to its management, who had joined with two private-equity firms—Golden Gate Capital and Whitney & Co. The company went public again, in 2004, netting the private-equity firms a fortune estimated at $1.3 billion, a return of seven times their initial investment, according to the Indago Girls. Between 2005 and 2012, Herbalife’s stock increased 1,000 percent.
Taking on Herbalife would not be for the faint of heart.
The Indago Girls shared their Herbalife short idea with David Einhorn, and he too was skeptical at first. “Short-sellers had dashed themselves on these rocks, like, only 50 katrillion times,” says someone who knew Einhorn’s thinking. In the end, though, he was convinced by Schulman’s passion and detailed analysis, and he urged her to keep researching while he slowly built a short position in Herbalife. “Short-sellers have been attracted to multi-level marketers the way drunken sailors are always attracted to dirty girls at the end of the bar,” explains that person. “It’s just a match made in heaven.”
Einhorn and Ackman were once good friends. They met on a subway platform in 1998 after they both had attended an industry luncheon. In March 2010, when the two appeared together on CNBC, Einhorn said of Ackman, “Bill’s a phenomenal investor. . . . His returns are absolutely extraordinary. It shows there are a lot of different ways to go about things. He’s a fabulous investor.”
Without missing a beat, Ackman replied, “David is my marketing adviser.”
The relationship soured, however, around the time the Indago Girls were making their Herbalife pitch to both men. “David and I had what you might call a falling-out,” Ackman admits. It happened in June 2011, when Ackman was quoted in The New York Times revealing that Einhorn, a Milwaukee-area native, had wanted to buy the Milwaukee Brewers in 2004 but lost out to Mark Attanasio, another financial heavyweight. At that moment, Einhorn was trying to buy a piece of the New York Mets, and, Ackman says, Einhorn feared if the Mets knew of his previous interest in the Brewers they would conclude he was just another rich hedge-fund guy looking to buy a new toy, as opposed to being a serious Mets fan. Ackman says he was just trying to help show that his friend had a lifelong interest in baseball. There was some back-and-forth on e-mail between the two men, and that was that. “David and I are friendly, but it’s like we were boyfriend and boyfriend, and then one day we were just friends, and now we’re just friendly,” Ackman says. “I have enormous respect for him. But as a result of that, I stopped calling him and he stopped calling me, so that’s why I didn’t talk to him” about Herbalife. (Einhorn declined to discuss Herbalife or his relationship with Ackman, but lavishly praised Dan Loeb.)
On May 1, Dinneen was listening in on Herbalife’s first-quarter-2012 investor conference call when suddenly Einhorn spoke up and started asking questions, mostly about what percentage of the company’s sales was merely to distributors, who are required to buy the product each month, and what percentage to genuine consumers. At first, Des Walsh, the company’s president, said “70 percent or potentially in excess of that” went to consumers or distributors “for their own personal use.” Einhorn pushed Walsh for a clarification, and Walsh said he didn’t have “an exact percentage” because “we don’t have visibility to that level of detail.” This was a surprising answer, since that information should have been readily available. By the end of the day, Herbalife stock had plummeted to $56 per share, from $70 per share.
Had Ackman waited too long to bet against the stock?
Dinneen alerted Ackman that Einhorn was on the call and asking tough questions. “David asks his question, the stock plummets, and then Shane [Dinneen] is all upset,” Ackman recalls. “He thinks he’s done all this work for nothing. I said, ‘No, no, you’re wrong. This is great. Clearly David shorted the stock.’ ”
Now, Ackman believed, Pershing Square didn’t have to be the so-called catalyst, the guy who says the emperor has no clothes—which generally causes the company being shorted to go on the attack against the short-seller. “It sounds like David is prepared to go public with it,” he told Dinneen. “He’ll be the catalyst, and we can be short and we don’t have to deal with all the headaches of being the active short-seller.”
During the conference call Ackman decided to pull the trigger and started shorting Herbalife shares through Goldman Sachs, Pershing Square’s principal prime broker. His position eventually grew to more than 20 million shares. The move took major cojones because with such a large percentage on the short side, around 20 percent, in the hands of one person, those on the other side of the trade—who are betting the stock will go up—can try to orchestrate the aforementioned “short squeeze,” by buying up shares. This causes the thinly traded stock’s price to trade up, forcing the short-seller to buy back stock at far higher prices than he had hoped, which sends the price of the stock higher still.
In addition, Herbalife would no doubt be able to defend itself by using some of the $320 million or so in cash on its balance sheet to buy back and retire its stock, reducing the number of shares outstanding and potentially adding to Ackman’s whiplash. (Since the end of 2012, Herbalife has bought back four million shares at a cost of around $150 million.)
The Sohn and the Fury
The annual Ira Sohn Conference, in Manhattan, is where the leading hedge-fund managers share their investing ideas. With the 2012 edition scheduled for May 16, Ackman suspected that Einhorn would use his presentation there to tout his short in Herbalife and become the catalyst for the trade. It’s a tried-and-true strategy, and smacks of insider trading, but stays just this side of legality. Ackman, Icahn, and Einhorn, among others, have all used appearances at Sohn to tout their short or long positions, after having already accumulated them, knowing that their very words will move the market in their favor. Talking your book, as it’s known on Wall Street, is not exactly kosher, but it’s done all the time.
According to Ackman, just before his presentation, Einhorn put up a slide with the letters “MLM” on it. The audience, he believes, immediately took this as an indication that he was about to slam “multi-level marketers,” such as Herbalife. But Einhorn’s presentation turned out to be about Martin Marietta Materials, a company with the stock symbol MLM. When the market realized this, Herbalife stock moved smartly to finish up more than 10 percent.
“He did that kind of as a joke,” Ackman says.
Einhorn wasn’t going to be the Herbalife catalyst after all, so over the summer and fall Ackman and his team worked tirelessly to put together their version of the Herbalife story. Ackman wanted to unleash his monster on the world before Thanksgiving, but his team wasn’t ready, even though it had been working around the clock. So Ackman arranged with Douglas Hirsch, a co-chair of the Sohn Research Conference Foundation, for a special session to present the Herbalife idea on December 20.
“I go back to first principles for me, personally,” Ackman says. “The single most important thing to me, personally, is the ability to speak my mind. I’m a change-the-world guy, and I know that sounds like bullshit or whatever. I don’t like to make investments that are not good for America. You can say I’m self-righteous. You can say that I’m disingenuous. I have more money than I need. I don’t need to work for a living. I do this because I love what I do.”
After graduating from Harvard College and following a stint working for his father at the family’s commercial-mortgage real-estate business, Ackman went to Harvard Business School, the only program to which he had applied. As he had in college, Ackman rowed crew. He was co-captain of the business-school team that generated national controversy by wearing
T-shirts with dollar signs on the backs and painting dollar signs on the oars. At the annual Head of the Charles race, spectators booed the H.B.S. crew boats, causing Ackman to defend the decorations in an opinion column in the Harbus, the business-school newspaper. “Let’s face up to what Harvard Business School represents,” he wrote. “We spend 90 percent of our studies at HBS pursuing the maximization of the dollar.”
At Harvard, Ackman met David Berkowitz, who had studied engineering as an undergraduate at M.I.T. After graduation Ackman and Berkowitz formed Gotham Partners, their own hedge fund, in a windowless office in Midtown Manhattan. Starting with $250,000 from Marty Peretz, a college professor of Ackman’s and the then editor and owner of The New Republic (and the father of V.F. contributing editor Evgenia Peretz), they raised $3 million. “We did incredibly well for five years,” Ackman recalls. Most important, in 2002, Ackman made a huge bet that M.B.I.A. Inc., the publicly traded municipal-bond insurer, was fatally overvalued. The company protested that Ackman was trying to manipulate its stock price. Both the S.E.C. and Eliot Spitzer, then the New York State attorney general, investigated. “Not to put it too impoliticly,” Spitzer told The New York Observer in 2011, “but we put [Ackman] through the wringer.”
Ackman recalls he told the investigators, “If you guys don’t pursue M.B.I.A., and you allow it to continue, there will be a financial crisis of unbelievable proportions. That’s what will happen.” No charges were ever filed against Ackman, and he was proven correct after M.B.I.A. nearly collapsed during the financial crisis. Ackman and his investors made around $1.4 billion in profit. By that time, though, he and Berkowitz had parted company, and Gotham was dissolved.
On his own in 2004, and then with people he had met serendipitously—one sharing a cab in a rainstorm, another while bone-fishing in Argentina—Ackman started Pershing Square, named after the area just south of Grand Central Terminal. Over the years, Ackman has had some notable wins—with Canadian Pacific Railway (doubling his $1.4 billion investment in less than a year), Fortune Brands, McDonald’s, Burger King, and General Growth Properties—and some notable mistakes, namely Borders (which went bankrupt) and the call options of Target Corporation, an investment that declined, at its nadir, 90 percent, according to Ackman, costing him and his investors some $1.5 billion. The loss caused Ackman to issue a rare apology: “Bottom line, [the Target investment] has been one of the greatest disappointments of my career to date,” he wrote his investors.
Faced with the hedge-fund firepower lined up against him—to say nothing of Herbalife’s wrath—someone with a lesser ego might have had some doubts. Not Ackman. Although Herbalife is his first activist short since the M.B.I.A. war—which took nearly seven years for him to win—he claims he is not even remotely worried that he might be wrong. “By the way, there is no other investment in my portfolio about which I feel better,” he says. “I can give you all the concerns I have about everything else we own. JCPenney … Canadian Pacific has gone from $46 to $117 a share. O.K.? Are there risks? Absolutely, absolutely. Every one of my other investments. Not this one.”
The day before Ackman’s presentation at Sohn, he called CNBC reporter Kate Kelly. “We wanted the right people there,” he says. “We wanted the right people to listen. And if you don’t know what company it is, you’re not going to just go [to a presentation] randomly. But I wanted everyone who owned Herbalife stock watching, and I wanted people who were interested in the story, and I wanted Hispanic media there. They’re not going to come to some hedge-fund presentation.”
By around two p.m. on December 19, Kelly was reporting on-air that Pershing Square had “a major new short position,” and, she explained, Ackman would be making a full presentation the next day. Ackman’s media ploy worked. Some 500 people assembled at the AXA Equitable Center, in Midtown Manhattan—along with another 1,300 people watching online—as Ackman, Dinneen, and David Klafter, Pershing’s general counsel, denounced Herbalife for more than three hours, without interruption, using some 330 slides. The title of the presentation was “Who Wants to Be a Millionaire?”
Ackman was smooth, confident, and unrehearsed. “Tennis, I practice,” he tells me. “Presentations, I don’t. Never.”
Onstage, Ackman said he would donate any money he personally made from the trade—“blood money,” he called it—to his foundation, the Pershing Square Foundation, which gave $7 million to Andrew Youn and his One Acre Fund, to relieve hunger and poverty in East Africa, and $25 million to the Newark, New Jersey, public schools (to which Mark Zuckerberg gave $100 million). Ackman also announced—on the spur of the moment, he says—that he would donate $25 million to the Sohn foundation, which supports pediatric cancer care and research. “You know what?” he says he told Douglas Hirsch. “It’s time for me to do something for cancer.” He later explained to me, “By the way, I was diagnosed with skin cancer. Within a week of the event. Basal cell carcinoma, and I had it removed. You’ve got to see this scar.”
Throughout the presentation, CNBC’s Kate Kelly kept ducking out to report what Ackman was saying, and after it was over Ackman himself hit the airwaves, talking up a storm to Andrew Ross Sorkin, on CNBC, and on Bloomberg TV. He positioned himself as the champion of the victims of the alleged scheme. “You’ve had millions of low-income people around the world who’ve gotten their hopes up that there’s an opportunity for them to become millionaires or hundred-thousand-aires or some number like that, and they’ve been duped,” he told Sorkin. “We simply want the truth to come out. If distributors knew the probability of making $95,000 a year—which is the millionaire team, as they call it—was a fraction of 1 percent, no one would ever sign up for this. And we simply exposed that fact. The company has done their best to try to keep that from the general public.”
Chapman counters, “If anybody buys this ‘He’s out to save the little guy’ routine, they’re just outright gullible and naïve. Arguably, the number of Herbalife employees, suppliers, and their employees, and of course non-complaining distributors who may be harmed by Ackman’s quest for profits massively outnumber those distributors who fail to succeed as they had hoped.” (As for Chapman, Ackman says, “He’s a lunatic. And I think, by the way, that he’s proud to be a lunatic, and he’s even said as much, that it’s part of his strategy, as an activist, to make the other side think you’re crazy.”)
But the presentation did work as Ackman had planned: Herbalife’s stock went from $42.50 per share on December 18 to a low of $26 on Christmas Eve.
Not surprisingly Herbalife began fighting back. “Herbalife operates with the highest ethical and quality standards,” the company wrote in a press release. “Herbalife also hires independent, outside experts to ensure our operations are in full compliance with laws and regulations. Herbalife is not an illegal pyramid scheme.” (The company’s C.E.O., Michael Johnson, declined an interview request.)
The Long and Short of It
Dan Loeb watched the December 20 presentation with amazement and thought the entire hedge-fund industry would look at Ackman’s highly promoted announcement as an opportunity to take the other side of the bet. Loeb met with me in his serene, art-filled Lever House office, on Park Avenue. He is a yoga enthusiast and surfer from California, a cool customer, and more than a tad condescending. “It took us a little while to do our work, because we had no reason to think he was right or wrong,” Loeb explained. “We just wanted to understand the company. And we weren’t like super-focused on it, but sometime during the holiday we got very, very focused on it.”
Most of Loeb’s Third Point enterprise is based in Manhattan. But one of his key partners, Jim Carruthers, works in Silicon Valley, where he and an analyst, Scott Matagrano, research potential short ideas. “They have a massive fucking budget for research and analysis,” says an observer, who knows them. “They are deepwater shorts,” meaning that, when they get a conviction about a short idea, they put a lot of money behind it and stick with it. As the Indago Girls had during the summer of 2011, Carruthers and Matagrano studied the multi-level-marketing industry in depth. “Their opinion is very point-blank,” says the observer, adding that the “industry is shot through with lies, deceit, and fraud.” At the end of their research, they decided to short two publicly traded multi-level marketers, Nu Skin and Usana, but they weren’t sure what to do about Herbalife, in part because it appeared others had lost money shorting the stock in the past. When they heard that Einhorn had shorted it, they decided not to join him. “They backed off of Herbalife because it’s just too big, and once Einhorn started sniffing around it was going to become a very crowded trade immediately,” this person continues.
But on December 20, when the Herbalife stock fell to $26, Loeb decided that Ackman had created a unique opportunity for him and other hedge-fund investors to go long Herbalife—in part because Herbalife was a cash machine that had been around for 33 years, in part because even if the Federal Trade Commission closed down Herbalife’s U.S. business (a prospect that Loeb considered highly unlikely) it represented only 20 percent of the company’s total, and in part because of the short-squeeze opportunity on Ackman.
Loeb consulted with Carruthers, who told him he didn’t like Herbalife but didn’t hate it enough to want to short it. “This is a company that should be a normalized $40 to $50 stock trading in the 20s,” Loeb argued, according to the observer. “And Ackman has created a situation where if this company buys back stock and declares a dividend or two it can run up into $60 or $70.” With the understanding that Loeb was just looking to make some quick money for his investors, Carruthers endorsed Loeb’s plan.
There was also the matter of the growing antipathy between Loeb and Ackman. “My understanding is that they dislike each other profoundly,” the observer says. In 2007, with the market booming and Third Point’s assets growing considerably, Loeb invested around $200 million of Third Point’s $6 billion in a blind pool of money that Ackman had assembled. Ackman had promised investors it would be as successful as his McDonald’s investment, which had earned hundreds of millions of dollars, but it turned out to be the notorious Target loss of nearly 90 percent, leaving many unhappy investors, especially Loeb. He says he had invested with Ackman, who was coming off a super-hot hand with his McDonald’s investment, because he trusted Ackman’s judgment and process. In retrospect he believes he was crazy to do so and has vowed never to do anything like it again.
Loeb’s funds eventually lost around $175 million with Ackman, and today Ackman remains contrite. “Dan was very unhappy, as he should be, when the thing went down,” says a person who knows both men. He adds that Loeb was the angriest of Ackman’s investors about the Target debacle and got out of it as soon as Ackman made that possible; had he been more patient and stayed in he would have gotten most of his money back as the investment rebounded.
Loeb says his decision to invest in Herbalife was not about getting revenge on Ackman. “Everything I do is driven to generate returns for my investors, so the fact that Bill is involved here is coincidental,” he claims.
On January 9, Loeb filed a 13-G report with the Securities and Exchange Commission, announcing that he had acquired 8.9 million Herbalife shares, or 8.24 percent of the stock—making him the company’s second-largest shareholder—at a cost of around $300 million. That same day he wrote a letter to his investors explaining he had acquired most of the stock “during the panicked selling that followed the short seller’s dramatic claims.”
In his letter, Loeb refuted them and wrote that he believed the stock “could easily” return to its April 2012 price of around $70 per share. At a minimum, he wrote, the stock should be valued at between $55 and $68 per share, offering Third Point “40–70% upside from here and making the company a compelling long investment.”
The market took notice of Loeb’s purchase and sent the stock up around 10 percent.
Sahm Adrangi was one of the traders who agreed with Loeb. “After you’d done your work on Herbalife and you viewed Ackman’s three-and-a-half-hour presentation, you could see the holes in his argument,” says Adrangi. “Ackman has three points: the F.T.C. is going to shut it down because they’re in regulatory violation of pyramid-scheme laws, distributors are going to jump ship because they’re going to realize that they’re being duped, and you’re going to see an unwinding of the business because of the ‘pop-and-drop’ dynamics [where sales shoot up when Herbalife enters, and then quickly subside]. Those three points are very easy to debunk. Is the F.T.C. going to shut it down? MLMs have been around for 30 years. There’s really no evidence that Herbalife is the worst of the bunch, and the government would also have to shut down Amway, Avon, Tupperware. The second point, that distributors are going to view his video and quit in droves—I mean, 80 percent of the business is outside the U.S., so to think that lower-income Brazilians and Paraguayans and Malaysians will view his video and decide to quit becoming Herbalife distributors is very silly. And his third thesis, that the pop-and-drop dynamics are going to cause an unwind internationally, is also absurd. The reason Herbalife and these other global MLMs are very sustainable businesses and grow year after year at impressive rates is because they’re very diversified.”
Ackman was on his private Gulfstream 550 jet, on the way to Myanmar for some exotic scuba diving, when he got the news of Loeb’s purchase, via the onboard high-speed Internet. “I had no idea Loeb was about to do that,” he says, though he could have had an inkling something might be up, because, the day before, Chapman, who had also built a long position in Herbalife equal to “35 percent of his fund” (the size of which is unknown), had had an exchange with Charlie Gasparino, of Fox Business, in which Chapman had claimed there would be “big news” coming shortly on Herbalife—about which Gasparino tweeted.
Ackman thought Loeb was in Herbalife merely to make a quick buck: “While Dan’s investment letter gave the impression that he’s in Herbalife for the long term, I think he’s too smart for that. I think it’s just a trade.” Within weeks he said he suspected Loeb had already started selling his stake. “I don’t know if it’s true,” he said. “I have no idea. But I think if he’s selling he’s got problems.” Ackman was too diplomatic to say on the record he meant that Loeb could be accused of a “pump and dump” scheme, in which a prominent investor talks up a stock he owns, then sells it, making good money. (Loeb declined to comment.)
Grudge Match
Matters got even more interesting on January 16 when news reports claimed that Carl Icahn, whose net worth has been estimated by Bloomberg to be $20.2 billion, had acquired a “small” stake in Herbalife, joining forces with Loeb in the battle against Ackman.
That Icahn would do so was clearly sport for him. He and Ackman first met in 2003, when Ackman was in the process of liquidating Gotham Partners. One of the companies in which he owned a large stake, Hallwood Realty, was trading for around $60 per share. Ackman believed the stock was worth $140, but he decided to sell, and he approached Icahn with a deal. “I checked him out,” Icahn told The New York Times in 2011. “He was in trouble with the S.E.C.; he had investors leaving him. A few of my friends called me up and said, ‘Don’t deal with this guy,’ ” but, Icahn says, he ignored their advice.
He and Ackman agreed to a deal for $80 a share for Hallwood, along with a contract that gave Ackman “schmuck insurance” in the form of a written agreement to split any profit above a 10 percent return for Icahn if Icahn sold Hallwood within three years. In April 2004, Icahn merged Hallwood Realty with HRPT Properties Trust for nearly $138 per share in cash—surprisingly close to what Ackman thought Hallwood was worth in the first place. Under the terms of their agreement, Ackman believed he was owed another $4.5 million. He waited a few days and then called Icahn to try to collect.
“First off, I didn’t sell,” Icahn told him. He said he had voted against the merger, but his shares were cashed out anyway.
“Well, do you still own the shares?” Ackman asked.
“No,” Icahn replied, “but I didn’t sell.”
Ackman threatened to sue Icahn for the money.
“Go ahead, sue me,” Icahn told him.
Ackman did, in 2004. The case was finally resolved in Ackman’s favor in October 2011, and Icahn paid Ackman $9 million, including several years’ worth of accrued interest.
Speaking at a conference in March 2012, Ackman mentioned Icahn and said he didn’t respect him. Icahn returned the favor later that day in an interview with The Wall Street Journal: “Any criticism from Bill Ackman I consider a compliment.”
On January 24, after taking his stake in Herbalife, Icahn went live on Bloomberg TV. “It’s no secret to the world and Wall Street that … I don’t like Ackman,” he fumed. Telling Trish Regan, the anchor, that he didn’t approve of Ackman’s approach, he elaborated: “I think if you’re short, you go short, and, hey, if it goes down, you make money. You don’t go out and get a roomful of people to bad-mouth the company. If you want to be in that business, why don’t you go and join the S.E.C.”
He said he was also critical of Ackman’s announcement at the Sohn Conference that he would give any profit he made on the short to charity, because Ackman’s limited partners would still benefit, which would then accrue to Ackman’s benefit as well. “I dislike the guy,” he continued. “I don’t respect him. . . . I don’t think he did this in the right way Don’t be holier than thou and say, ‘Look, I’m doing this for the good of the world and I want to see sunshine on Herbalife.’ I mean, that’s bullshit.”
The gloves were off.
The next afternoon on CNBC, when Ackman was defending himself against Icahn’s claims, Icahn called in to the show, and the CNBC producers, realizing they had all the makings of cable-TV fireworks, patched him in. Suddenly Icahn and Ackman were going at it live, causing electrified trading floors all over New York to stop dead in their tracks as the traders whistled, stomped, clapped, and guffawed at the two billionaires mixing it up on national television.
“I’ve really sort of had it with this guy Ackman,” Icahn said. “He’s like the crybaby in the schoolyard. I went to a tough school in Queens, and they used to beat up the little Jewish boys. He was like one of these little Jewish boys, crying that the world was taking advantage of him. He was almost sobbing, and he’s in my office, talking about this Hallwood, and how I could help him.”
Einhorn announced in late January that he had made money on his Herbalife short, but, tellingly, he added that he had closed out the position in 2012.
But Ackman says he is in it for the long haul. On January 29, he told me he was just days away from sharing with the world several bombshell announcements that would blow the lid off Herbalife once and for all and send its stock to zero. But on February 20, he softened his language some, saying he believes there will be more market-moving news to come.
His convictions, though, are as strong as ever. “Every day is a happy day for me,” Ackman tells me. “You don’t know me well enough. But I know Herbalife is a pyramid scheme. It is a certainty. It’s just a question of when the rest of the world figures it out.”
Adrangi is not persuaded. “We have high-conviction ideas, and, oops, it doesn’t work out,” he says. “But what’s important is to pay attention to what the other side is saying, and to revise your thesis. . . . Since Ackman’s presentation, more information has come out. Bob Chapman put together a very good, five-page letter on why Herbalife is a long. Dan Loeb has done the same thing. The company’s response presentation was excellent Ackman is making this moral,” Adrangi continues. “He runs a hedge fund, right? His duty is not to the world. If you want to save the world, go donate some money to charity. I’m pretty confident that if he does not cover his short position his fund will be smaller, materially, in two years’ time.”
Icahn seems to be doing his best to make Adrangi’s prophecy come true. On February 14, Icahn announced that he had accumulated a surprisingly large, 12.98 percent stake in Herbalife and that he intended to meet with the company’s management to discuss “enhancing shareholder value,” including possibly a going-private transaction. Herbalife’s stock soared throughout the day on the Icahn news and traded as high as $46.22, a 21.4 percent increase from the previous day’s close. “Carl Icahn just delivered Bill Ackman a valentine he’ll never forget,” Chapman gleefully e-mailed me. The soaring stock price allowed some of the more risk-averse traders to make some money. Chapman, for one, sold his entire Herbalife position in mid-February at a tidy profit, while Loeb, who had been selling Herbalife stock for weeks, his spokesman admitted, also sold another portion into the Icahn-induced rally.
But Ackman, who knew some of his biggest hedge-fund rivals were still lined up against him, remains unflappable. We’d been sitting together in the conference room just off his spacious office. Grabbing a banana from a bunch on a table, he said of Herbalife’s stock, “I’ll be happy at zero,” and smiled.
NOTE: A previous version of this article misstated when Ackman got the idea to short Herbalife. It was the summer of 2011. The previous version also approximated the size of Robert Chapman Jr.'s fund. That figure is unknown.