Battle over Herbalife Should Raise Concerns about the Influence of Short Sellers


William Ackman is so sure that Herbalife is a fraudulent company that he is literally willing to bet a billion dollars on it, and in December 2012, that is just what he did.

Herbalife, a 30 year old food retailer of weight management shakes and supplements, is estimated to be worth billions and is openly traded on the NYSE.  Fans of soccer may recognize the brand as the sponsor of both LA Galaxy and FC Barcelona, as well as the Brand’s spokesman Lionel Messi.

The company uses a multilevel management business structure. They sign people up as sellers for a fee, and these people make money by signing up more sellers.  This structure is perfectly legitimate so long as products are being sold to actual consumers at the end of the chain.

Ackman, who is manager of the hedge fund Pershing Square Capital, has his own business structure of shorting companies he believes to be lying about their health.  Ackman is not green to the game of short selling. Roughly ten years earlier his hugely successful short against the guarantor MBIA put him on the map.

Ackman made his short position on Herbalife public at an investment conference in New York City late last year.  His investment thesis is that Herbalife’s profits are inflated because they result from recruiting new distributors and not selling product.  Ackman has made it clear that he and Pershing Square Capital are betting that Herbalife will be exposed and ultimately fail “with a target price of zero” ensuring the fund and its investors make billions on the gamble.

Not surprisingly, Herbalife and its CEO did not stand idly by and retorted that Ackman was a “blatant market manipulator.”   In January the financial world took notice when Carl Icahn, another billionaire hedge fund manager and an old foe of Ackman’s, joined the fray by calling out Ackerman for unfairly targeting Herbalife so that he could profit from a plummet in stock price.  Ackman and Icahn took their battle to television screens, duking it out with harsh words and more than a few expletives on CNBC (video available here).

However entertaining the feud between Ackman and Icahn, the fight over the future of Herbalife has raised some important questions on the influence of short sellers and whether they are whistleblowers protecting investors or corporate defamers who deserve to be sued.

On the one hand, short sellers can be seen as necessary watchdogs, using private resources and money to do a job the SEC and the federal government cannot do.  In fact, it is often that the SEC and other regulators will move against a company only after shorts have spotlighted them.

The other perspective is echoed in Icahn’s criticism of Ackman stated to a fellow fund manager: “[Ackman can’t] say [he’s] honestly doing this for the good of humanity… [he’s] doing it because [he’s] selling something short and [he]want[s]it to go down.”

These comments may make it seem like Icahn is exposing Ackman. But Ackman stated that he would give profits from the winning bet to charity as he did after the MBIA fallout.  Further, although Icahn has not publicly revealed his position, he is rumored to be long on Herbalife and his comments caused an immediate rise in the stock.  As a sophisticated businessman Icahn is aware of his own influence and considering the barbs he traded with Ackman it seems plausible that Icahn is trying to squeeze out an old enemy.  This pushes the actual truth about Herbalife even further into the background.

Even if the criticism leveled at Ackman is fair, short seller influence may be beneficial. It is no secret that short sellers have an economic interest in seeing the targeted company fail and therefore have an interest in calling out the company’s weaknesses.  While short sellers may be a thorn in the side of unwitting companies, they also do a lot of heavy lifting in investigating company health and possibly even protecting unwitting investors.  It is a common misconception that a company will claim it was destroyed because of a short seller, and not because it was actually mismanaged, or even worse, fraudulent.

In the case of Herbalife however, it may be that Ackman has taken things too far.  After unveiling his extremely aggressive position publicly, Ackman has followed up his stance with a detailed website and has made his position known in google ads for “herbalife.”  Herbalife has taken a reported eight-figure retainer with famed litigator David Boies to consider legal action against Ackman for tortious interference.

Ultimately, the role of a short seller has an important role in global capital markets, but the role needs to be balanced.  Perhaps the Herbalife saga will help illuminate how to strike the right one.


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Fordham Journal of Corporate & Financial Law