The Most Dangerous Trade
Discover what motivates investors who wager against the stock market and how they often profit from the misery of others. RICHARD TEITELBAUM is a contributing editor to Institutional Investor magazine. He worked as a senior writer for Bloomberg News , where he shared an award from the Society of Professional Journalists for investigative reporting; as an investing editor for the New York Times ; as a writer for Fortune magazine; and as a traffic reporter in San Francisco.
The Most Dangerous Trade
Ackman: The Activist Grandstander
It had taken William Ackman more than 18 months to get this far-with zero to show for it. Over that time, the founder of Pershing Square Capital Management, with more than $15 billion in assets under management, had been hammering away at Herbalife, what can only be called a marketing machine that used so-called independent distributors to peddle nutrition and weight-loss products through a vast pyramid scheme. There was an enormous amount of money at stake-Ackman, who goes by Bill, had at one point borrowed some 20 percent of Herbalife's stock, worth more than $1 billion, through his brokers and then sold it. His goal: Expose the company as a fraud and repay those borrowed shares for pennies on the dollar-or nothing at all.
That's how short-selling works-and Pershing Square had by now spent more than $50 million in research and fees alone on the effort.
Now, in July 2014, the six-foot-three-inch-tall Ackman was wrapping up an impassioned, polished presentation for the media and investors that laid out the details of how Herbalife entrapped its distributors through a system of so-called "nutrition clubs" that were meant to lure people into the base of the pyramid scheme and goose sales by foisting products on them. In the U.S., the lion's share of distributors were low-income people, typically Hispanic-Americans, but Herbalife was pushing its weight-loss products in countries from India to Zambia.
Ackman singled out the Herbalife CEO. "Michael Johnson will go down in history as the best CEO of a pyramid scheme in the world," he said, pointing out that the former Walt Disney and Univision Communications executive had extensive experience in marketing to Hispanic-Americans. He alluded to another famed notorious pyramid scheme, that of financier Bernard Madoff, who duped investors of some $20 billion. He compared Herbalife's marketing to that of the Nazis.
Then things got personal. His voice trembling with emotion, Ackman detailed his immigrant forbears' history in the United States, his great-grandfather apprenticing as an assistant tailor, the family's coat business, and his father's own formidable achievements as a mortgage broker. "I am a huge beneficiary of this country, okay?" he said, choking up with emotion. "Michael Johnson is a predator. Okay? This is a criminal enterprise. Okay? I hope you're listening, Michael. It's time to shut the company down!"
"This is an ingenious fraud," Ackman said and, wrapping himself in the Stars and Stripes, added that Pershing Square preferred to invest in companies that help America. "I said I'm going to take this to the end of the earth. We're going to do whatever makes sense."
Before taking a break, he fired off: "This company is a tragedy and it's also a travesty."
Whew! Pass the water.
Beyond the Ackman histrionics, his argument had merit.
The accusation was that Herbalife virtually forced its distributors to commit to buying more product than they could sell to earn a living wage, and Ackman, with the help of a contract research firm, had just furnished the evidence for his claim that Herbalife was a sophisticated pyramid scheme, illegal under U.S. Securities & Exchange Commission (SEC) and Federal Trade Commission rules.
The son of a successful commercial real estate broker, Ackman was born with a proverbial silver spoon in his mouth-and a highly polished one at that. He grew up in lush Chappaqua, New York-these days home to former President Bill Clinton and his wife, former Secretary of State Hillary-graduating from one of the nation's foremost public secondary educational institutions, Horace Greeley High School. Ackman picked up both a B.A., magna cum laude, and an M.B.A. from Harvard. Immediately after graduation in 1992, with no formal training, Ackman launched his own hedge fund, Gotham Partners, which he even