When the Wolves Bite

by Scott Wapner

  With everyone in the room in agreement, Johnson had called Herbalife’s lawyers to brief them on the idea. The suggestion was promptly met with silence, then a wholesale rejection by the attorneys, who thought letting regulators go down a rabbit hole could only bring more problems.

  The plan was quickly dropped, and Herbalife went back to business.

  So did Ackman.

  On February 13, 2014, Ackman appeared at the Harbor Investment Conference in Manhattan and addressed the run-up in the stock and his restructured position.

  “If it [Herbalife] was to disappear tomorrow, we’d make a lot more than had it just blown up the day after I gave my last presentation—although life would be easier,” Ackman said at the event.32

  At least, more recently, Ackman had reason to be hopeful. The Markey letter had stopped the company’s momentum in its tracks. By March 2014, Herbalife shares had fallen 17 percent from where they had started the year.

  Then, on March 9, the New York Times ran a front-page story documenting Ackman’s lobbying efforts and their own investigation, which revealed the great lengths to which he’d gone. Two days later, Ackman took the stage once again, this time to take on Herbalife’s Chinese operations—a key area for the company’s future growth. While Ackman was there to rail against China, he began his remarks by attempting to rebut what the Times reporters had concluded about the lobbying efforts in Washington, saying he had every right to ask the government to investigate Herbalife.

  The dogged presentation gave the impression that Ackman was keeping up his relentless push against Herbalife, but behind the scenes, it was a far different story. Within the highest ranks of Pershing Square—reaching all the way to Ackman himself—doubt had emerged over whether the investment was worth pursuing. Pershing Square’s advisory board had been discussing the position for weeks and whether it even made sense to keep going.

  It all came to bear on March 12, 2014, when advisory board members Stephen Fraidin, Martin H. Peretz, Michael Porter, Edward Meyer, Allen J. Model, Matthew H. Paull, and Ackman himself gathered around a table in a Pershing Square conference room for something of a reality check. It was a sobering conversation, with several of the advisors openly suggesting it might be time to throw in the towel on Herbalife. Even Ackman, who’d always had the ability to remain resolute through the ups and downs of the investment, seemed to have reached a tipping point, believing that the firm had done great research and was content that they had given it their best shot.

  Perhaps Ackman was thinking of the old pilot ejector seat that still sits in the corner of one of Pershing’s conference rooms to remind him that sometimes it’s safer to pull the ripcord than wait for a crash.

  A decision to cover the short had been all but made when the phone in the room rang, indicating an internal call. One of Pershing’s staffers was on the line and delivered what seemed like good news—Herbalife shares had been halted on Wall Street, with news pending from the company.

  What could it be? The men in the room openly wondered.

  “We had a debate in the board room,” Ackman said. “Is this Carl Icahn announcing a going-private transaction? Then I said, no way, no way, Carl loves money more than he hates me, and that would be a terrible investment.”

  Just before 2 p.m., Ackman and the others found out the news, when Herbalife itself made a bombshell announcement. In a statement, the company said the FTC was opening a formal civil investigation into its operations.

  Ackman, who had been only seconds away from moving to cover the short, was suddenly jubilant.

  “There is a god!” he said, as he threw his hands into the air. “It was a great day.”

  CNBC’s Herb Greenberg, an outspoken critic of Herbalife himself, jumped on television to react to the story in real time, while the rest of Wall Street tried to make sense of the shocker.

  “This is a long overdue move by the FTC,” Greenberg said, as the stock cratered nearly 10 percent to back under $60 a share.33

  The probe had surprised Herbalife, which said in a statement, “Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC. We are confident that Herbalife is in compliance with all applicable laws and regulations. Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years.”34

  The statement did little to convince investors. Herbalife shares fell as much as 17 percent on the day before recovering to end the day down “only” 7 percent in heavy trading.

  Herbalife was now under fire.

  More important for Ackman, the investment he had almost terminated in his boardroom was suddenly looking good again.

  12

  THE DEATH BLOW

  The news got even worse for Herbalife late in the afternoon on Friday, April 11, 2014, when the Financial Times reported that the FBI and Department of Justice had also opened probes into the company, this time criminal ones.1

  Herbalife shares, which had been down a little more than 2 percent before the news, plummeted 14 percent to $51.48 when the story went public.

  The agencies didn’t comment on their investigations in the FT, but Herbalife put out a statement saying the company was completely in the dark about an investigation.

  “We have no knowledge of any ongoing investigation by the DOJ or the FBI, and we have not received any formal nor informal request for information from either agency,” the company said. “We take our public disclosure obligations very seriously. Herbalife does not intend to make any additional comments regarding this matter unless and until there are material developments.”2

  Later that evening, Reuters reported the investigation had been going on “for some time” and that so far no criminal charges had been filed against anyone. The outlet’s sources also said the agencies were interviewing former distributors and seeking documents and information related to the company’s business practices.3

  Ackman was elated. After nearly hanging up on the trade altogether, he could now actually see a finish line.

  Icahn, on the other hand, seemed unfazed by the news, giving no indication he was wavering on Herbalife even if the Feds had put the company under a brighter microscope. And even if Icahn was growing more skeptical, he was limited in what he could say publicly since the agreement that gave the investor seats on the Herbalife board came with strict regulatory rules.

  That made the afternoon of Wednesday, July 16 all the more intriguing.

  Shortly after 4:30 p.m., Icahn once again walked out from behind the golden curtain at the Pierre Hotel for a conversation at CNBC’s Delivering Alpha event—only this time with a surprise guest lurking backstage. As he had been the previous year, Icahn was billed as the closer of the conference—the last speaker before the crowd would break for cocktails to mark the end of the event. Icahn had grown more nervous in recent weeks about the stock market’s high valuation and worried that the Federal Reserve’s easy-money policies of the previous years had artificially inflated the market. Icahn feared that once those policies ended it could get ugly.

  “What happens when the low interest rate environment ends, no one knows. No one can know,” Icahn said as he pondered worryingly of how stocks might react.4

  The topic then turned to Herbalife, with Icahn admitting he now owned seventeen million shares of the company. Onstage with him, I pressed Icahn to elaborate on his position. He said he hadn’t lightened up his stake at all and then made it clear he wasn’t about to get too specific.

  “I will say one thing, that we bought seventeen million shares at an average of $37 and we haven’t sold one share. Now that’s all I can say, and I think we have to drop it there,” Icahn said abruptly as he gave me a menacing “move-on” look.

  If only it were that simple.

  Those in the audience had been promised a “mystery guest” in their
programs, with the event’s organizers remaining tight-lipped about who it might be. Few could have expected to see the man who walked onstage at my prompting.

  It was Ackman himself.

  Some in attendance gasped as Ackman, smiling along with the long-planned gag, eagerly made his way toward Icahn, who was in cahoots with the whole thing. The two embraced, somewhat awkwardly, before they each accepted a T-shirt that read, “Icahn and Ackman: Back Together Again.” They shared a laugh, then sat for a twenty-minute chat that was perfectly cordial. The two exchanged pleasantries and spoke about Herbalife, agreeing to disagree on the company’s outlook. Perhaps the ease with which the men handled the encounter was because they’d already broken the ice privately. In late April, Ackman had called Icahn to try to put their beef behind them. The two agreed to move on and even discussed the possibility of investing together in the future.

  “I respect Bill,” said Icahn on the Delivering Alpha stage. “It’s almost crazy that we’re at these loggerheads.… I mean, what the hell are we fighting ourselves for?” Icahn asked.

  “It’s not about winning,” said Ackman lightheartedly before getting serious again. “Look, I would love to find a way to get Carl out of the stock. He bought seventeen million shares at $32 a share. He can get out at a very nice profit. That would be a great outcome for Carl, and that would be wonderful for us, so, Carl, maybe we should have a conversation.”

  For a moment, it actually appeared as though the war that had dominated Wall Street for the better part of a year and a half might be about to run its course—that Ackman and Icahn would make peace right then and there and head on to other things.

  “Icahn and Ackman Publicly End Feud with an Embrace” read a headline on the New York Times’s DealBook site later that evening, reflecting the apparent detente.5

  What no one knew that evening, as the two men sat and spoke on the Delivering Alpha stage, was that Icahn and Ackman had met in secret around two months prior in Icahn’s offices atop the GM Building on 59th Street. Ackman had initiated the meeting and had come over to pitch Icahn on the idea of buying him out. After meeting as a group with their associates, Icahn and Ackman had retired to the titan’s private office to talk some more, but the conversation had ended without a deal.

  Even if Ackman wanted Icahn out, his actions less than a week later would make it crystal clear he was still going all-out to win. On July 22—six days after “The Hug” made headlines—Ackman appeared on CNBC’s Halftime Report to set the stage for his next major presentation on Herbalife, which was set for the following morning in Manhattan, once again at the AXA Center.

  This time, Ackman would go after Herbalife’s nutrition clubs, which the researcher Christine Richard had painstakingly documented in her initial pitch of the Herbalife short. Asked on TV what investors would learn during the event, Ackman didn’t hold back in the least.

  “You’re going to learn why Herbalife is going to collapse,” he said before openly taunting the company’s management. “And that’s a pretty strong statement, but this is the largest fraud in terms of scale, of countries involved, doing harm to people. I want to make clear that Michael Johnson and his senior management team is welcome to come to the presentation. We’ll be happy to sit them in the front row if they would like.”6

  Ackman had thrown barbs Herbalife’s way for months, with the company mostly either staying silent or choosing to respond by a sharply worded press release. But less than twenty-four hours away from facing another Ackman onslaught, they’d clearly had enough.

  The company took to Twitter to rip Ackman, saying, “Paying people to spread bad information isn’t OK but Pershing Square thinks so,” alluding to the intense lobbying he’d done. Herbalife concluded the social media shot with a hashtag that read “the worst of Wall Street” in reference to the man who’d relentlessly attacked them for eighteen months.

  “We have not paid anyone to spread bad information about Herbalife,” Ackman said, promising the information he had would be a “death blow” to the company.

  “This will be the most important presentation that I have made in my career,” Ackman said. “So how’s that for raising expectations? But we won’t disappoint.”7

  Ackman had thrown down the gauntlet.

  The next morning, at 8:28 a.m., a metallic blue Mercedes sport utility vehicle pulled into the underground parking garage of the AXA Center on Seventh Avenue.8 With a documentary film crew waiting for his arrival, Ackman climbed out of the front seat of the vehicle looking calm and confident. He threw on his suit jacket and walked alone through the bowels of the building until he wound up backstage, where an audio technician was waiting to put on Ackman’s lavalier microphone.

  “Count up,” Ackman said to the engineer, referring to the digital time keeper that would track the presentation’s length. Normally, such clocks would count down to keep a presenter honest, but Ackman was making it clear he planned to go as long as he could.9

  Ackman wanted the made-for-TV event to be flawless.

  He sat for makeup and had his hair combed perfectly into place while telling the artist doing the work not to go overboard. “I just need to be authentic,” he said.10

  Nearly ready to head out onstage, Ackman first wanted to watch the highly anticipated undercard happening at the same moment. Herbalife CFO John DeSimone had flown out from Los Angeles for a rare live interview with me on CNBC. Not wanting to miss the public appearance, Ackman had the interview fed live into the auditorium, where people, coffees in hand, were beginning to gather and get comfortable.

  Surrounded by several of his Pershing Square associates, Ackman sat and watched as DeSimone spoke, staring at the TV as though he were transfixed.11

  “He has made some outrageous statements,” DeSimone said of Ackman. “He has made 435 accusations over the last 18 months—each one is the latest and greatest until it’s proven not to be. I’m not worried about the substance of what he has. This is anecdotal. It’s very propaganda based. What he’s missing is that fundamentally we have millions of customers who use the product, who love the product. We have complete confidence in our compliance as it relates to regulations. I think the FTC inquiry will actually be something that kind of puts this behind us.”12

  Intent on using the appearance to debunk some of Ackman’s expected ammunition, DeSimone cited a company-funded study released earlier that morning claiming to back Herbalife’s long-stated view that it operated legitimately.

  “It is a study we commissioned, but it’s an independent person that had no ties to Herbalife. But we commissioned it so that a former FTC economist would look at our business.”13

  As the clocked ticked toward 10 a.m., the arranged start time of the event, Ackman made an ominous prediction about where Herbalife stock would go and what his response should be if it defied his expectations and actually went up instead of down.

  “It’s not going up, OK,” Ackman said matter-of-factly. “The question is whether it opens again.”14

  Pressed again for a more thoughtful answer from his public relations consultant, Ackman wouldn’t give in.

  “The stock’s not going up, OK. It’s a certainty. The stock’s irrelevant!” he said even more forcefully to make his point.

  Then it was time.

  “Ladies and gentlemen, please welcome the founder and CEO of Pershing Square Capital Management, Mr. Bill Ackman,” said the announcer as Ackman walked out from behind the curtain to begin.

  Ackman had spent months prepping and had stayed up until two or three in the morning putting the finishing touches on the presentation. With only four hours of sleep but looking fresher than the short night would suggest, Ackman began by zeroing in on Herbalife’s nutrition clubs.

  He questioned how they made money, saying Richard had visited ten shady sites in Queens alone to do her research.

  “This doesn’t seem to be a particularly good business model,” he said.

  Hour one went by, then hour two.

&n
bsp; At 12:15 p.m., Ackman opened the forum for questions and was immediately put on the defensive.

  “I don’t understand something,” said a man sitting toward the back of the room. “You got this nice presentation that you spent a lot of money on. Everybody’s clueless except for you. I don’t understand. Tell me. Why is Carl Icahn making a mistake? Show me every illegality Herbalife is doing to get this company shut down. I don’t see it, and why is everybody else on the other side?”15

  “It’s a great question,” Ackman answered. “We’ve had an army working on this project. Hundreds of people. Investigators, lawyers. Carl Icahn didn’t do the kind of due diligence we did. The nutrition club thing is designed to be secretive. This is an ingenious fraud. You go after people who are the lowest income, the least sophisticated. Many of them are undocumented. You know you don’t complain when you’re an undocumented immigrant, because you’re afraid you’ll get thrown out of the country.”16

  But the skepticism wasn’t limited to one gentleman sitting in the audience.

  While Ackman spoke onstage, investors flooded into the stock—the exact opposite reaction Ackman had predicted earlier that morning. Herbalife shares surged 13 percent, then 20, and then even more, before closing the day up a stunning 25 percent.

  It was as brutal a repudiation as anyone could remember, and Ackman knew it.

  “Herbalife is going to use the fact that the stock price is up today to say that everyone is ignoring what we have to say,” he said when confronted with the reality by a reporter in the room. “My advice to you is you probably shouldn’t ignore it.”17

  “Next,” said Ackman, who was now visibly agitated by the line of questions, which were more focused on the stock’s rise than his marathon.

  A friendlier inquirer then grabbed the microphone—perhaps in an attempt to break the ice. It was Ackman’s own father.

  “The definition of a pyramid scheme is what, Bill, and how close are you getting to be able to prove it’s a pyramid scheme?” he asked.