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After Big Bet, Hedge Fund Pulls the Levers of Power
Staking $1 Billion That Herbalife Will Fail, Then Lobbying to Bring It Down
By MICHAEL S. SCHMIDT, ERIC LIPTON and ALEXANDRA STEVENSON
WASHINGTON — At a Midtown Manhattan steakhouse last June, William A. Ackman, the activist hedge fund manager who had bet a billion dollars on the collapse of the nutritional supplement company Herbalife, offered his latest evidence to a handful of other hedge fund managers about why the company’s stock could soon plummet.
Mr. Ackman told his dinner companions that Representative Linda T. Sánchez, Democrat of California, had sent a letter to the Federal Trade Commission the previous day calling for an investigation of the company.
The commission had not yet stamped the letter as received, nor had it been made public. But Mr. Ackman, who had personally lobbied Ms. Sánchez and stood to profit if the company’s stock dropped as a result of the call for an inquiry, already knew what it said, and read from a copy of it that he had on his cellphone.
When Ms. Sánchez’s office ultimately issued a news release a month later, it was backdated as though it had been made public the day before Mr. Ackman’s dinner talk.
The letter was a small hint of Mr. Ackman’s extraordinary attempt to leverage the corridors of power — in Washington, state capitols and city halls — for his hedge fund’s profit after taking a $1 billion financial position called a short, a bet that will pay off only if Herbalife’s stock drops.
Corporate money is forever finding new ways to influence government. But Mr. Ackman’s campaign to take this fight “to the end of the earth,” using every weapon in the arsenal that Washington offers in an attempt to bring ruin to one company, is a novel one, fusing the financial markets with the political system.
Others have criticized the business practices of Herbalife, a company that sells vitamins and other health supplements through independent distributors, many of whom are lower-income Latinos or African-Americans. But Mr. Ackman’s attack is unprecedented in its scale, and Herbalife officials strongly deny his accusations that the company is a pyramid scheme that stays afloat by constantly recruiting new distributors.
To pressure state and federal regulators to investigate Herbalife, an act that alone could cause its stock to dive, his team has helped organize protests, news conferences and letter-writing campaigns in California, Nevada, Connecticut, New York and Illinois, although several of the people who signed the letters to state and federal officials say they do not remember sending them, an investigation by The New York Times has found.
His team has also paid civil rights organizations at least $130,000 to join his effort by helping him collect the names of people who claimed they were victimized by Herbalife in order to send the leads to regulators, the investigation found. Mr. Ackman’s team also provided the money used by some of these individuals to travel to Washington to participate in a rally against Herbalife last month.
Herbalife has mobilized its own army of lobbyists to defend itself against Mr. Ackman’s charges. “These accusations are provably false,” said Herbalife’s chief financial officer, John G. DeSimone. “And they can all be traced back to the same source: hedge fund billionaire Bill Ackman, who is motivated by one thing — getting even richer by winning a billion-dollar bet he made against our company, by any means possible, no matter how unscrupulous.”
The feud has touched off a bidding war of sorts, emails obtained by The Times show, as the advocacy groups have in some cases pressed Mr. Ackman’s team and Herbalife to contribute more money in exchange for their allegiance.
Mr. Ackman is not new to playing chess on a billionaire’s scale. The brash 47-year-old, a graduate of Harvard Business School, built his $12 billion, New York City-based hedge fund, Pershing Square Capital Management, on enormous, risky bets on companies like Jim Beam and Canadian Pacific Rail that earned billions for him and his clients. He has had some big losses too, including an estimated $473 million last August on an investment in J. C. Penney, the struggling retailer.
Regulators frequently get entreaties from financiers urging action for their own financial gain, like the hedge fund executives who in 2010 tried to secretly push Obama administration officials to investigate for-profit colleges, again citing fraudulent industry practices, after betting that their stocks would decline.
But Mr. Ackman’s efforts illustrate how Washington is increasingly becoming a battleground of Wall Street’s financial titans, whose interest in influencing public policy is driven primarily by a desire for profit — part of an expanding practice in the nation’s capital, with corporations, law firms and lobbying practices establishing political intelligence units to gather news they can trade on.
So far, Mr. Ackman has persuaded four members of Congress, a New York State senator, a City Council member in Boston, the majority leader of the Nevada Senate and other elected officials in California to join the cause. Prominent consumer advocates in Washington, as well as leaders of well-respected Hispanic and African-American community groups who have been lobbied by Mr. Ackman’s team, have also written regulators demanding action.
Mr. Ackman has trumpeted the news conferences and protests to create the image that the walls were closing in on Herbalife, a company no stranger to controversy, whose sales reached a record $4.8 billion last year.
He has argued that he is trying to protect Hispanics, who he says are most frequently recruited by Herbalife as distributors, only to find out that there is little money to be made.
Yet Mr. Ackman’s staff acknowledges that this crusade is really rooted in one goal: finding a way to undermine public confidence in Herbalife so that his $1 billion bet will produce an equally enormous return. Mr. Ackman has said he will donate any profits he personally earns to charity, calling it “blood money.” The clients who invest in his hedge fund, however, would still benefit enormously.
Brent A. Wilkes, the national executive director of the Washington-based League of United Latin American Citizens, or Lulac, rejected any suggestion that he had become Mr. Ackman’s tool — even though his organizationaccepted a $10,000 contribution early last year, and since then has taken a position at the forefront of the anti-Herbalife campaign.
“It’s not the Latino groups that are helping Bill Ackman,” Mr. Wilkes said. “Bill Ackman is helping the Latino groups. He has elevated this battle.” On Sunday evening, after questions from The Times, Mr. Wilkes said he had decided to return the donation, so there was no chance anyone could suspect he had undertaken the effort “for a mere $10,000 table purchase” at one of his fund-raising events.
Harvey L. Pitt, a former chairman of the Securities and Exchange Commission, said that Mr. Ackman’s campaign was starting “to look like an effort to move the price rather than spread the truth.”
“If you are trying to spread the truth, that is O.K.,” Mr. Pitt said. “If you are trying to move the price of a stock to vindicate your investment philosophy, that’s not O.K.”
Mr. Ackman rejected the assertions that he had done anything wrong.
“Our goal here is to shine a spotlight on Herbalife and let the government know all the facts and motivate them to do something,” Mr. Ackman said in an interview on Sunday.
So far, Mr. Ackman has little to show for his efforts. Herbalife’s stock has climbed higher, in part because the billionaire investor Carl C. Icahn decided to buy a large stake in the company, and the regulators lobbied by Mr. Ackman have not taken any formal action against the company.
That has not deterred Mr. Ackman, who is not known to retreat from a risky investment without a fight, even if it takes years.
In February, 14 months after he announced he had wagered big money on the collapse of Herbalife, and with around $500 million in paper losses so far, he announced that instead of backing down, he had made his bet even bigger.
If Herbalife “were 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 a little easier,” he told an audience of Wall Street investors and media attending an investor conference last month.
Pitches to Regulators
One of Mr. Ackman’s first stops in his crusade to bring Herbalife down was a meeting at the regional field headquarters of the S.E.C. in Lower Manhattan, where more than 400 enforcement lawyers, accountants, investigators and other staff members work to police some of the nation’s biggest corporate players.
He presented investigators in New York with a year’s worth of financial research that he said showed that Herbalife was misleading investors by failing to properly disclose that most of its sales were generated by simply recruiting more distributors, rather than by selling large amounts of its product to consumers.
He made other presentations, to investigators from the F.T.C. and state authorities, because he knew regulatory action would be among the quickest ways to make good on his prediction that the company’s stock was going to crash.
“So the risk we took in making this investment was could we get the world to focus on a company, could it get enough of a spotlight so that the S.E.C., the F.T.C., the 50 attorney generals 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?” Mr. Ackman explained at the investors conference in February, 14 months after he made his bet on Herbalife public. “And I think that was the biggest risk we took in going short” on Herbalife.
Mr. Ackman once made a similar bet against the bond insurer MBIA, one that reaped him and his investors a $1.1 billion return. In a book about his MBIA wager called “Confidence Game,” the reporter-turned-financial analyst Christine S. Richard chronicled how he fought with regulators for seven years before his prediction that MBIA stock would “spiral downward” came true. In a twist, it was Ms. Richard, who left Bloomberg News to start up the Wall Street research shop Indago Group, who gave Mr. Ackman the idea to short Herbalife.
After listening to Mr. Ackman’s pitch, S.E.C. investigators moved almost immediately last January to begin an inquiry into Herbalife — which newspapers reported, creating the coverage that Mr. Ackman needed to fuel his strategy.
From there, his team worked to create outside pressure, assigning lobbying, public relations and so-called grass-roots advocacy teams to attempt to build support across the country.
The team includes lobbying firms run by two former members of Congress: Toby Moffett, a Democrat who once represented Connecticut, and Robert S. Walker, a Republican from Pennsylvania. Mr. Ackman also hired firms run by former top White House aides for President Obama and President Clinton. Jim Papa, who handled legislative affairs for the Obama White House, also joined the effort, with his firm, Global Strategy Group, a longtime consultant to Mr. Ackman.
In some cases, the hiring was even more strategic. In Massachusetts, Mr. Ackman’s firm hired the lobbyist Larry Rasky, who was an aide to Senator Edward J. Markey, Democrat of Massachusetts, when Mr. Markey was a member of the House. Another lobbyist, Malcolm Grace, is a former aide to Ms. Sánchez. Both Mr. Markey and Ms. Sánchez would ultimately play critical roles in the effort.
Mr. Ackman also retained the Dewey Square Group, a Washington-based firm that specializes in “grass-roots advocacy,” to influence officials by recruiting surrogates to speak out against Herbalife in emails, tweets, letters or rallies.
He employed Dewey Square to focus on Hispanic and black community leaders and politicians based on a belief that because many of the individuals who are recruited as distributors by Herbalife are minorities, taking on the company might in some way help the Latino community. Separately, the lobbyists and grass-roots organizers set up meetings with major consumer groups.
Enlisting Allies
A wave of additional letters started to be sent to federal regulators by groups like the Hispanic Federation and the National Consumers League. Each person contacted by The Times acknowledged in interviews that they wrote the letters after being lobbied by representatives from Pershing Square, or said they did not remember writing the letters at all. Mr. Ackman’s team also then started to make payments totaling about $130,000 to some of these groups, including the Hispanic Federation — money he said was being used to help find victims of Herbalife. The pitch by Mr. Ackman peaked in early February, when nearly 30 people affiliated with Latino advocacy and church groups, several of whom had joined the cause after being briefed by consultants hired by Mr. Ackman, flew to Washington to meet with members of Congress and the head of the F.T.C., again pressing for investigators to take action against the company.
Three of the nonprofit group leaders who participated in the event, from Massachusetts, Illinois and Washington, said they took part because they also believed that Herbalife was taking advantage of the working class and poor.
“At the end of the day, these people are becoming millionaires off the back of the people in the shadows,” said Julie Contreras, the president of the Lulac chapter in Waukegan, Ill., who traveled to Washington for the event, adding that she had not taken any money from Mr. Ackman or anyone on his team.
Mr. Ackman did not publicize his role in helping generate these letters or rallies, or the fact that his consultants in many cases wrote the language that is used in these letters, but his team still issued news releases noting that yet another group had called for an investigation.
In Washington, Mr. Ackman’s efforts bore fruit on Jan. 23, when Mr. Markey’s office, which Mr. Ackman had lobbied himself and which had been provided with detailed information about Herbalife by Mr. Ackman’s team, sent letters to the S.E.C. and F.T.C., calling for investigations of the company. A little more than a half-hour after the stock began trading that day its value fell by 14 percent.
The letter sent by Ms. Sánchez in June, which Mr. Ackman discussed at the dinner, did not move the stock. Ms. Sánchez’s office acknowledges that it sent a copy of this letter to Mr. Ackman’s team a month before it issued its news release on the matter, and says that it backdated the letter when making it public because The New York Post reported its existence a week after the dinner. The dinner itself was reported in August by The Wall Street Journal.A spokeswoman for Ms. Sánchez said backdating the news release was not inappropriate, as the office considered the document public when it was sent to the F.T.C.
Despite his efforts, Herbalife’s stock over the last 14 months has actually gone up. But Mr. Ackman, at least publicly, has tried to maintain the confidence of his investors, telling them last summer that he was confident he had made “material progress” in his attempts to persuade regulators to crack down on the company — an act that would be certain to hurt its stock price.
“We believe that the probability of timely, aggressive regulatory intervention has increased materially,” he said in the letter.
A Lack of Victims
The Nevada attorney general, Catherine Cortez Masto, was among the many officials who found herself enmeshed in the debate. But as the fight unfolded, with Latino groups holding a news conference in East Las Vegas demanding that she investigate Herbalife, she had some questions.
She says she was struck by the appeals for an investigation of Herbalife, at first directly from representatives for Mr. Ackman’s firm and then from others: All three of the letters from nonprofit groups demanding an investigation were identical — except they were signed by three different Hispanic community leaders, each on a different letterhead.
When Ms. Masto invited the Hispanic leaders to meet with her individually, none of them could identify a victim of abusive practices.
“We are not going to move forward unless we have victims,” she told the community leaders.
In Nevada, the Ramirez Group, a political consulting firm run by a former aide to the Senate majority leader, Harry Reid of Nevada, helped line up Hispanic groups and then contacted local reporters to attend a news conference, emails obtained by The New York Times show.
The attorney general in Connecticut, George Jepsen, said he had a similar experience. He received five letters with almost identical text. “Herbalife is a complex and abusive pyramid scheme,” the letters each said. “Herbalife unfairly targets minority groups and falsely markets itself as an easy business opportunity.”
One came from the mayor of the city of Waterbury, another from a former state legislator that Mr. Ackman had hired as a lobbyist, and a third from Israel Alvarez, a Puerto Rican-born hairstylist in Hartford.
Five people in Connecticut sent letters with very similar language urging the Federal Trade Commission to open an investigation into Herbalife.
Evelyn C. MantillaMs. Mantilla’s government relations firm was hired by Global Strategy Group, which Mr. Ackman’s firm had retained to discredit Herbalife. Her letter does not mention her connection to Mr. Ackman.
Israel AlvarezMr. Alvarez, a hairstylist in Hartford, said he never wrote the letter signed in his name and did not know anybody who had been harmed by Herbalife.
- Mary Ann TurnerMs. Turner declined to say who asked her to send the letter. “I don't remember anything,” she said. Asked how it could have been identical to others, she said: “It is just something I wrote. I guess we are really smart.”
Neil O’Leary
Mr. O’Leary, the mayor of Waterbury, Conn., does not recall who contacted him about the letter, his chief of staff said.
Liliana MadridCould not be reached for comment.
None of the letters cited any specific victims of Herbalife’s business practices. In fact, only one person had filled out a formal complaint form with the Connecticut attorney general’s office. State investigators were ultimately unable to substantiate the person’s claim that he lost $1,500 through the company five years ago.
The effort reached the West Coast as well. In California, Mr. Ackman’s team sent Minyon Moore, a former senior Clinton White House aide, to host a meeting in October at the landmark West Angeles Church of God in Christ in the city’s predominantly black South Central neighborhood. Ms. Moore detailed what she said were Herbalife’s deceptive sales techniques, participants in the meeting said.
Within a matter of weeks, Mr. Ackman’s consultants had helped organize a demonstration outside an Herbalife conference in Los Angeles and helped persuade nearly two dozen prominent Latin American and black community leaders to send letters to state and federal officials demanding action — letters that are now posted on an anti-Herbalife website that Mr. Ackman’s consultants control.
Najee Ali, a longtime activist in Los Angeles who attended the meeting at the church and then wrote one of the letters to California’s attorney general, said he was moved by Ms. Moore’s appeal.
“Her remarks were very touching and compelling, and her credibility across black America — it is unquestioned, so I really took to heart her argument,” Mr. Ali said.
But he had no idea that Ms. Moore was working on behalf of a hedge fund manager who had made a bet on Herbalife’s stock — and that his letter had become part of a lobbying strategy.
“Have I become an instrument in some billionaire’s investment campaign?” he said, adding that he now regrets sending the letter. “I don’t want to be an unwitting pawn, and that is how I am feeling right now.”
Pershing Square and its lobbyists argue that many of Herbalife’s victims are afraid to come forward because they are undocumented. “It’s a problem that we haven’t been able to find victims to come out,” said Maria Cardona at Dewey Square, who specializes in appeals to Hispanic Americans.
But Mr. Ackman once again had a solution: Pay nonprofit groups across the United States to find the victims Mr. Ackman knew he needed to compel the regulators to act.
So Global Strategy Group, a consulting firm helping Mr. Ackman conduct the campaign, began to make such payments, including about $120,000 to the Hispanic Federation and another $10,000 to Make the Road New York.
Make the Road New York, a nonprofit advocacy group for Latinos, promoted a video showing people who said they were hurt by Herbalife. The video encourages people to report their own complaints about Herbalife to a toll-free number.
Make the Road doesn’t disclose that it received a $10,000 payment from Mr. Ackman’s firm. The toll-free number plays a recording nearly identical to hotlines inCalifornia, Illinois and Nevada.
Other leaders of prominent Hispanic nonprofit groups said that a New York-based lobbyist hired by Mr. Ackman, Luis A. Miranda Jr., had also been holding a series of meetings offering payments at the same time that he was asking for their help in the anti-Herbalife campaign. Mr. Miranda denied these allegations, but emails obtained by The Times include discussions of possible support for programs run by groups whose leaders he had just approached for help on the Herbalife campaign.
The effort to find Herbalife victims now also includes toll-free numbers set up in at least four states, with recordings in English and Spanish urging people to report wrongdoing by the company.
“If you, a loved one or a friend have fallen for Herbalife’s deceptive marketing practices, we need you to share your story,” the recording says. “Every story can make a difference.”
A Global Powerhouse
Herbalife, according to the company’s official history, was born out of the trunk of a car in 1980, when a 24-year-old California man, Mark R. Hughes, began selling a protein shake that he had concocted, he said, after his mother had died of an accidental overdose of diet pills.
The company has grown into a global powerhouse, with a worldwide team of more than three million so-called members and distributors who operate as independent contractors through a system that rewards many of them not only based on actual sales, but also on their ability to recruit more distributors.
The sales tactic, popular with many nutritional supplement companies, has frequently been the target of criticism. In 1986, California authorities issued an order prohibiting Herbalife from making false claims about the weight-loss powers of its nutritional drinks.
But never before has the company met an opponent quite like Mr. Ackman. In fact, company executives acknowledge that they underestimated just how far-reaching his effort would be.
Herbalife’s opinion changed on Jan. 23, when Mr. Ackman’s campaign scored its biggest hit yet: a United States senator, Mr. Markey, sent letters to the S.E.C. and the F.T.C., and Herbalife’s stock fell.
On Jan. 23, Senator Edward J. Markey of Massachusetts sent letters asking the F.T.C. and S.E.C. to look into Herbalife. The letters were based at least in part on research that William A. Ackman’s firm provided. Herbalife stock fell by 14 percent.
Mr. Ackman’s anti-Herbalife website originally posted copies of the letters dated Jan. 22, while Mr. Markey’s office sent them out to the public dated Jan. 23. Mr. Markey’s office attributed this to a clerical mistake and added that Mr. Ackman’s office had merely obtained early versions of their letters from Mr. Markey’s website.
Herbalife, after Mr. Ackman announced his bet, had already expanded its own lobbying team, hiring, among others, the Glover Park Group, founded by former top Clinton administration aides, and the Podesta Group, run by Tony Podesta, who is known for his close ties to the Obama White House. With help from this team, last month the company held a private briefing for more than 30 Capitol Hill aides, defending itself against Mr. Ackman’s charges — and the echo chamber they argue he has manufactured.
They also retained the law firm Dickstein Shapiro, which has a large practice that specializes in lobbying attorneys general around the United States. Herbalife was so determined to force Mr. Ackman to back down it asked an investment adviser it retains, Moelis & Company, to approach some of the investors in Mr. Ackman’s fund, suggesting that his bet was dangerous and could cost them dearly.
To counteract the appeals Mr. Ackman had made to Latino groups, it also decided to significantly boost its spending on donations to such nonprofits, such as a $25,000 payment to the National Puerto Rican Coalition. Its president, Rafael A. Fantauzzi, was among the signers of a letter sent in February from a group that called itself Friends of Herbalife, which defended the company’s business practices.
Dueling Donations
In recent weeks, the back-and-forth donations by the two sides have generated something of a bidding war.
For example, a top executive at the United States Hispanic Leadership Institute informed a member of Mr. Ackman’s consulting team in late February that he had already received a $30,000 donation from Herbalife. He then solicited payment of the same amount from Pershing Square in exchange for the group remaining “neutral.”
“Are you able to match the $30K we have received from Herbalife?” Juan Andrade Jr., the president of the Institute, wrote to the consultant. “If Herbalife says neutrality is unacceptable and wants their money back, are you able to replace it?”
One of Mr. Ackman’s consultants at Dewey Square suggested in a note to Mr. Ackman’s lawyer that “I think it would be worthwhile to keep them neutral.” But a spokesman for Mr. Ackman said that the company refused to pay Mr. Andrade’s group, arguing that he is paying groups to help find victims, not for their allegiance to his cause.
For now Mr. Ackman shows no sign of backing down. In fact, he has just agreed to increase the payments for the victim identification effort.
Mr. Ackman said that even if he decides at some point in the future to shift his investments and financially back out of the fight with Herbalife, he is not going to give up on the campaign.
“I am going to personally pursue the Herbalife matter to the end of the earth — meaning I think this company is a criminal operation, I think they are harming people,” Mr. Ackman said. “This is something that angers me. I am going to pursue that.”
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