When the Wolves Bite

by Scott Wapner

  The letters didn’t stop there.

  On May 17, 2013, it was the Hispanic Federation’s turn when the organization’s president, José Calderon, also urged Chairwoman Ramirez to investigate Herbalife.

  “It is our understanding that the company’s marketing materials promise riches for a few hours of work from home,” the letter read. “You can imagine that for immigrants, particularly those who are underemployed or have no papers, this promise can seem like their ticket to achieving the American Dream. We understand, however, that when you add expenses to acquire the product, lists and marketing materials, most distributors appear to actually lose money.”5

  The letters from the Latino-leaning advocacy groups were an important start, but on June 5, Ackman’s crusade got an even bigger gift. It was the news he had shared at that hedge-fund ideas dinner at the Manhattan restaurant where Paul Sohn and the other hedge-fund reps had gathered—the same night Ackman had revealed California Congresswoman Linda T. Sánchez had sent her letter to the FTC demanding action against Herbalife.

  The news got even better for Ackman the next month when Linda’s sister, Loretta, who was also a member of Congress, sent her own letter to Chairwoman Ramirez.

  It read in part, “After careful consideration, we would like to request that the Federal Trade Commission look into Herbalife’s business practices, specifically whether Herbalife’s participants are deceived by exaggerated earnings claims, and whether profits are derived primarily from selling to outside consumers or from recruiting others,” she wrote, along with Congresswoman Michelle Lujan Grisham.6

  Ackman canvassed Congress, estimating he visited fifteen to twenty different lawmakers to plead his case. He even once ran into Arizona Senator John McCain in the hallway, then went back to his office and bent his ear.

  “I spent fifteen, twenty minutes with him, and then we spent the rest of the time walking around his office, and he was showing me incredible mementos of his life. I thought he was great, but he ended up doing nothing,” Ackman said. “But that’s kind of what I did—told the story to anyone in Washington who would listen.”

  Ackman’s campaign to drum up support in Washington eventually got to the point where he stood in danger of violating federal lobbying laws, which restrict the number of hours one can spend making one’s case to elected officials. Ackman had an answer for that too—he hired professionals to do what he could not.

  In 2013, Ackman had more than a dozen lobbyists from a handful of firms on the Pershing payroll.7 One of those firms, according to a New York Times investigation, was the Global Strategy Group, which specialized in grassroots campaigns like the one Ackman hoped to start. Early in January, one of Global Strategy’s “opposition researchers” sent a letter to the FTC asking for the number of complaints made against Herbalife since 2001. The regulator’s assistant general counsel, Dione J. Stearns, wrote back, noting “721 pages of responsive complaints” against Herbalife.8

  On February 22, the FTC received a similar letter from Sullivan and Cromwell. The letter cited “100 responsive complaints” that consumers had made to the commission during an undisclosed time period.

  Pershing also hired the Ibarra Strategy Group, which was run by Mickey Ibarra, who’d served in the White House as director of intergovernmental affairs under President William J. Clinton. In 2008, Hispanic Magazine had named Ibarra one of the “25 Most Powerful Hispanics in Washington D.C.,” and lobbying records from 2013 showed the group was paid $30,000 by Pershing for their efforts. Another $84,000 went to the Moffett Group, a firm describing itself as a “unique government relations and strategic consulting firm.” Pershing also hired Wexler & Wexler, paying $150,000 for the firm’s public policy services.

  In some cases, Ackman went directly to the states, where he figured to make some quick headway. Pershing Square registered in Illinois for two lobbying firms to swamp the state’s attorney general’s office and members of the Illinois General Assembly.

  Lastly, they hired the Dewey Square Group’s Latinovations division, which claimed to have “deep and lasting relationships among the nation’s Hispanic communities.”9

  Much like they had earlier, the lobbying efforts paid off in spades. Letters from mayors, council members from several cities, including Boston, New York, Hartford and Waterbury, Connecticut, and Carson City, Nevada, started pouring in to the FTC.10 The majority leader of the Nevada State Senate, Mo Denis, even wrote to his state’s attorney general, Catherine Cortez Masto, saying, “it appears that Herbalife has an important hallmark of a pyramid scheme.”11

  Small business owners took up the cause, writing to the regulator and urging similar investigations. One such letter was sent on July 13, 2013, from Xenia Perrica of Manchester, Connecticut, who wrote, “As someone who is a small business owner, I understand how difficult it is to be effective in retail sales. That is why what Herbalife is doing needs an investigation.”12

  Three days later, a woman named Mary Ann Turner wrote similarly, “I am urging the Federal Trade Commission to open an investigation into allegations that the multi-level marketing company Herbalife Ltd. is a complex and abusive pyramid scheme.”13

  There was only one problem—the letter from Ms. Perrica was identical to the one sent by Mary Ann Turner, which in turn was a word-for-word copy of those sent by others. The discovery raised questions over whether the authors were really victims or if they’d been given a form letter by a lobbyist, or Pershing Square itself, to sign and send to the FTC and others. By now, some were questioning whether Ackman himself was going too far in his crusade against Herbalife, as former Securities and Exchange Commission Chair Harvey Pitt openly wondered in the story describing the Times investigation.

  “If you are trying to spread the truth, that is O.K.,” he said. “If you are trying to move the price of a stock to vindicate your investment philosophy, that’s not O.K.”14

  Ackman denied the assertion, arguing he was only doing what he set out to do in the first place—to show Herbalife as the fraud he claimed it was and get regulators to act against the company.

  “So the risk we took in making this investment was could we get the world to focus on the company,” he said at an event. “Could it get enough of a spotlight so that the SEC, the FTC, the 50 attorneys general around the country, the equivalent regulators in 87 countries, if any one of them, or at least any powerful member of that group, could we get them interested?”15

  “Herbalife’s a confidence game,” Ackman told me. “When people lose confidence, it’s done. It’s a con game. So, if we could share information that would cause distributors to jump ship, that’s one way [to attract regulators]. We basically ran a consumer protection campaign.”

  It may have been controversial, but Ackman’s lobbying strategy was working. On July 17, 2013, the FTC’s director of the Bureau of Consumer Protection, Jessica Rich, met with consumer activists for an hour, telling the group the bureau found Herbalife’s business practices “disturbing,” though it declined to reveal whether a full-scale investigation was in the offing.16

  The meeting was well timed.

  Later that day, Icahn was scheduled to appear at the Pierre Hotel in Midtown Manhattan for CNBC’s “Delivering Alpha” conference for a live onstage interview. And since it had been weeks since the investor had talked publicly about Herbalife, the room was packed with journalists and bloggers waiting for an update on his investment. Icahn didn’t disappoint, leaving little doubt about where he stood on the company. He even revealed he’d bought more shares and had already made a quarter of a billion dollars on the trade.

  Icahn also didn’t miss the opportunity to throw a few zingers Ackman’s way.

  “You’re not going to get me to say bad things about Ackman. I like Ackman,” he said as the room broke into laughter. “I’ve changed my thinking on Ackman. Anybody that makes me a quarter of a billion dollars I like.”17

  Icahn also revisited why he’d taken the other side of Ackman in the first place.r />
  “To be honest with you,” he told me onstage. “I never would have been looking at Herbalife if Ackman hadn’t come out with that report, and because I’m not a great fan of his, I decided to look at it, and I’ll tell you, when I read that report, what he wrote, I was looking at myself thinking, this makes no sense.… First of all, it’s stupid to take that big of a short position anyway, but if you do, the dumbest thing in my mind is that you get a room full of people and tell them that you’re short and then they tell you wow, wow, wow the stock is going to go down. I think the guy honestly believed that people were going to follow him, and you know he’s not the best thought-of man on Wall Street. Hey, but I like him now, so I’m not going to say anything bad.”

  The hundreds sitting in the Pierre’s Grand Ballroom ate it up, which only seemed to encourage Icahn to keep the one-liners coming—all, of course, at Ackman’s expense.

  “Carl Icahn Just Ended What May Be His Most Hilarious, Sarcastic, Awesome Interview Ever” wrote Business Insider’s Linette Lopez following the event.18

  Icahn was also about to get some more backup.

  On September 3, 2013, William P. Stiritz revealed in a regulatory filing that he’d taken a 5.2 percent stake in Herbalife.19 Stiritz was a respected businessman who’d turned around the pet-food company Ralston Purina in the 1980s and was now the nonexecutive chairman of Post Holdings. He was also highly regarded both on Wall Street and in the business community, which is probably why Herbalife shares, which had been sharply lower on the day, pared their losses on news of his new position.

  On October 28, Herbalife gave Stiritz reason to feel good about his investment when the company announced another strong quarter. (As it turns out, the company’s actual employees and activities do have some impact on its stock price.) CEO Michael Johnson said the earnings results report “demonstrates our belief that the macro trend of global obesity will increase worldwide consumer demand for our products.”20

  While the Stiritz investment had given the company a vote of confidence, Herbalife was also making moves of its own to improve its image. Buried in the earnings report was news that the company had appointed the former surgeon general of the United States, Dr. Richard H. Carmona, to its board of directors. It was part of a broader strategy by Herbalife to surround itself with notable names with rich resumes who would help vouch for the company’s legitimacy.

  Only a month earlier, Herbalife had named the former mayor of Los Angeles, Antonio Villaraigosa, as a senior advisor. They’d also hired the new consulting firm run by former secretary of state Madeleine Albright. Albright had even attended Herbalife events while advocating for the company’s products and its integrity.

  Between the string of strong earnings results and the new Stiritz stake, Herbalife shares pushed up more than 100 percent for the year. While some investors may have run for the hills at that point, Ackman made it clear he was willing to go even deeper.

  That fall, Ackman restructured his $1 billion short position to include over-the-counter put options, which could help protect him if Icahn followed through on the short-squeeze threat. In a letter to his investors dated October 2, 2013, Ackman explained the move:

  In order to mitigate the risk of further mark to market losses on Herbalife, in recent weeks we have restructured the position by reducing our short equity position by more than 40% and replacing it with long-term derivatives, principally over-the-counter put options. The restructuring of the position preserves our opportunity for profit—if the Company fails within a reasonable time frame we will make a similar amount of profit as if we had maintained the entire initial short position—while mitigating the risk of further substantial mark-to-market losses—because our exposure on the put options is limited to the total premium paid. In restructuring the position, we have also reduced the amount of capital consumed by the investment from 16% to 12% of our funds.

  “In my career, I have not seen a less attractive risk-reward ratio than a long investment in Herbalife common stock at current levels,” Ackman said as he concluded.21

  With Thanksgiving on the horizon and Ackman’s Herbalife investment already down $500 million on paper, he appeared at the Robin Hood Investment Conference on November 22 to rip Herbalife yet again.

  Ackman branded Herbalife “Robin Hood in Reverse” in a play off the title of the well-attended charity event. He detailed recent enforcement actions the SEC had taken against other alleged pyramid schemes and showed a slide of what the commission had designated as a “hallmark” of a pyramid scheme—an emphasis on recruiting. Ackman showed clips from some of the cheesy videos from Herbalife extravaganzas where distributors got up onstage in front of thousands of people and preached the virtues of the company.

  “If you want to move the check, you need to find other people that want to make money and represent the Herbalife products and Herbalife opportunity,” one of the company’s Founder’s Circle members said on the tape.

  In roughly twenty minutes onstage, Ackman showed sixty-five slides before concluding with a piece of data purported to be from Herbalife’s own statements—that only “the top 1% of distributors received 87% of all commissions.”22

  Following his appearance, Ackman did a television interview and shot down any suggestions he’d soon be covering the short. If anything, he sounded more resolute than ever.

  “We’re going to take this to the end of the Earth,” Ackman said.23

  Herbalife responded that Ackman had presented nothing new at the event and pilloried the investor for what it said was “hundreds of millions of dollars of losses for his investors.”24

  Icahn had a similar reaction, telling another interviewer the same day, “I continue to believe Herbalife has a great future, and in my opinion, many of the things Ackman says about it are simply the rantings of a sore loser.”25 Icahn also alluded to what had become fodder for the media and the cadre of Ackman haters in the marketplace—that whenever Ackman spoke about Herbalife the stock seemed to move higher rather than the other way around. It was like schadenfreude on steroids.26

  The investor Robert Chapman, who himself had gone long on Herbalife shortly after Ackman revealed his short position, described the climate at the conference in a memorable phrase: “Kill Bill.” The list of Ackman’s enemies seemed to continuously grow.27

  By the end of 2013, Herbalife shares had risen an astonishing 139 percent, putting Ackman ever further on the defensive. As 2014 opened, Herbalife shares hit a high of $82.

  Little did Ackman know at the time, but he was about to get the biggest break yet in his billion-dollar bet against Herbalife.

  On Thursday, January 23, 2014, Senator Markey, whose staff Ackman and company had lobbied, sent off three letters—one to the Securities and Exchange Commission, one to the Federal Trade Commission, and one to Herbalife itself, calling for a probe into the company’s practices. To the FTC, Markey wrote, “There have been suggestions that Herbalife may not, in fact, be organized as a multi-level marketing company, but instead may be a pyramid scheme, based on Herbalife’s business operations.”28 Markey’s letter to the SEC was similar in nature, but began with a more direct request. “I am writing to ask that you look into the business practices of Herbalife,” he wrote to the agency’s chairwoman, Mary Jo White.29

  When news of the letters broke in the morning, Herbalife shares immediately plunged 14 percent.

  Along with his letters to regulators, Markey put out a press release, saying, “There is nothing nutritional about possible pyramid schemes that promise financial benefit but result in economic ruin for vulnerable families.”30

  At the same time, some questioned Markey’s motives and whether he was swayed to write them, in part, because he’d gotten a $500 political contribution from Ackman’s sister years earlier. Ackman was incensed at the suggestion.

  “The notion that a senator gets bought by a five-hundred-dollar mail-order solicitation from my sister is ridiculous,” Ackman said. “And then they say, Mr. Ackman ga
ve $30,000 to the Democratic National Committee on the same day of Markey’s primary. First of all, the year before, I’d given to the Republican Senatorial Campaign Committee. So, by their calculation, if any senator got involved they would somehow have been influenced. I have never met or spoken to Markey. I certainly didn’t know when his primary was. The whole thing was ridiculous. It drove me crazy.”

  The accusations aside, the Markey letters were a huge victory, and Ackman knew it.

  So did Herbalife CEO Johnson, who got the news while in the most unlikely of places. He’d scheduled a weekend of exhilarating backcountry skiing with two friends in the mountains of Jackson Hole. Johnson had waited months for the trip—had secured the most sought-after guide—and was standing in the parking lot of Teton Sport, coffee in hand, waiting for the shop to open, when the emails began appearing.

  After letting out an expletive as he watched the stock drop before his eyes, Johnson went back to his hotel to spend the rest of the day talking by phone with the team of lawyers and consultants Herbalife had hired. Johnson flew back to Los Angeles the next morning, a Friday, to face the hard reality of what the letter could mean.

  A spokesperson for Herbalife, Barbara Henderson, said the company had received Markey’s letter and looked forward to meeting with the senator to “introduce the company to him and address his concerns at his earliest convenience.”31

  While the Markey letter might have come as a surprise, ironically, Johnson had considered going to the FTC himself months earlier to ask for an investigation, to once and for all end the questions about his company. On one Sunday afternoon, Johnson had asked his executive team to come to his house in Malibu and, over cold beers, billiards, and football, they had hatched a plan to self-report—to take the whole thing out of Ackman’s hands, believing they had nothing to hide.