Editor’s note: This article was first published in May 2014; Ackman’s $1 billion short bet, Herbalife’s volatility, the US investigations described as ongoing and the estimated $20,000 profit all reflect that time.
The battle between investment funds betting for and against Herbalife makes the company a very volatile stock. The authorities are now investigating how, in 2012, a young man made $20,000 by getting ahead of the announcement of Bill Ackman’s short position.
Everything suggests, according to a report in DealBook, that the young man shares a flat with an employee of Pershing Square Capital Management, the hedge fund run by Bill Ackman, which has bet $1 billion that Herbalife’s shares will fall to zero.
Supposedly, the firm’s employee told his flatmate in confidence about the plan to open one of the biggest short positions in history. That was not illegal on the employee’s part, but the moment the flatmate decided to profit from this inside information, he may have crossed the line into illegality.
It is estimated that this young man made $20,000 on the trade by taking a short position before Bill Ackman made public his decision to bet against Herbalife.
(Read: The fascinating life and career of Bill Ackman)
As the famous fictional character Gordon Gekko used to say, information is power, and information put to good use can make you a lot of money.
And this would be one way to make more money than Herbalife’s own distributors earn in a whole year without having to sell a single one of the company’s products.
At the moment, Herbalife is still caught up in an investigation by the US authorities into whether its business model is legitimate or whether, on the contrary, it could be a pyramid scheme.
Further reading
Featured image: David (Flickr user: dbking), CC BY 2.0, via Wikimedia Commons.
