Editor’s note: This article was first published in March 2013, three months into Bill Ackman’s public campaign against Herbalife. The story has since moved on: Ackman’s short position was eventually closed, and Herbalife settled with the US Federal Trade Commission in 2016 without being classified as a pyramid scheme.
Investor Bill Ackman, CEO of Pershing Square Capital Management, is attacking Herbalife again. A few months ago, Ackman managed to put Herbalife in the authorities’ sights by claiming that the company is built on an illegal pyramid scheme.
Bill Ackman has given Herbalife a price target of 0 dollars, saying the company won’t survive. He has already got the Federal Trade Commission to open a serious investigation into Herbalife, its business model and its possible pyramid scheme, accusing the company of misleading consumers and distributors in more than 80 countries around the world. (Read: How much do Herbalife distributors earn?)
So far, you could say everything is normal: anyone can set a price target or make a forecast about a stock, and even make an accusation and get an investigation opened. But we should remember that Bill Ackman, through his investment fund, took out a huge short (bearish) position. In other words, the worse Herbalife does, the more money Mr Ackman makes. Put another way, if Herbalife goes bust, Mr Ackman strikes gold. I even doubt that what he’s doing is legal, since he may well be encouraging thousands of investors to dump the shares, to his own personal profit.
Of course, Bill Ackman has said in a statement that everything he makes from his short position will be donated in full to charity, specifically to the Pershing Square Foundation, which, as it happens, is a foundation he set up himself.
Regardless of whether Herbalife’s business is legal or not, or a pyramid scheme or not, what’s clear is that Ackman can’t do what he’s doing: every public statement he makes comes with an obvious conflict of interest, since he profits from those statements, and certainly from spreading rumours of this magnitude in the market.
After Bill Ackman’s first statements about Herbalife three months ago, he managed to send the stock down more than 35% in just a few sessions.
Featured image: Mtaylor848, CC BY-SA 4.0, via Wikimedia Commons.
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