Bill Ackman says 'Herbalife' is effectively-valueless, because it is a 'criminal enterprise.'
The bosses of the 'Herbalife' racket have been bluffing and on December 20th, 2012, hedge fund manager, Bill Ackman, called their bluff by revealing he was holding a vast short-selling position involving around $1.2 billions of 'Herbalife' shares. However, at the same time Bill Ackman laid his own winning-hand on the table (by publishing a detailed analysis of why he considers the legally-registered corporate structure known as 'Herbalife' to be the front for a vast and damaging pyramid fraud and, therefore, effectively-valueless), he also declared that all the profits he will personally make from this tainted deal will be handed over to charity.
Later in December 2012, Michael Johnson refused to lay his own losing hand on the table. Instead, he grinned and insisted that 'Herbalife has millions and millions of customers,' and that Bill Ackman's analysis was based on his not understanding that many 'Herbalife customers' are 'distributors.' Michael Johnson then insisted that 90% of all 'Herbalife's' declared sales were to persons outside of the company's own distribution network. In reality, for more than 30 years, the overwhelming majority of all 'Herbalife's' declared 'sales' have been economically-incestuous internal transactions between the company and persons under temporary take it or leave it contract to the company, and who were clearly defined as 'Distributors,' but who have lately been redefined as 'Members.' Soon afterwards, Michael Johnson claimed that he had 'mispoke.'
The laughable, but predictable, reaction of 'Herbalife' boss, Michael Johnson, was to continue his bluff, by steadfastly pretending innocence whilst accusing Bill Ackman of wilful market manipulation, i.e. lying in order to damage a valuable American enterprise and make money. Yet neither Michael Johnson, nor his previously-aggressive echelon of attorneys, have been able to refute Bill Ackman's published analysis of 'Herbalife' by providing quantifiable evidence which would prove that the so-called 'Herbalife MLM income opportunity' has generated any significant, and sustainable, revenue other than that deriving unlawfully from a never-ending chain of losing investors around the world. This is because, for decades, the bosses of the 'Herbalife' racket have been riding on the coat tails of the 'Amway' racketeers - operating a dissimulated closed-market swindle (right under the noses of regulators and financial journalists), in which they have been laundering billions of dollars of unlawful, losing investments (based on the false expectation of future reward), by falsely-declaring these payments as lawful sales (based on value and demand).
As a result of inside information which was apparently first touted (but without any takers) by a PR specialist working for the 'Herbalife' mob, to various mainstream media publications, the 'Wall St. Journal' reported last week that US law enforcement agents have launched a probe to determine whether short seller, Bill Ackman, has been engaging (via paid third parties - activists lobbyists, consultants, etc.) in unlawful market manipulation, to drive down the price of 'Herbalife' shares.
(Bear in mind that core 'Herbalife' adherents have been programmed to believe that Bill Ackman is a ruthless Wall St. Shark who has invented a pack of lies about 'Herbalife' simply to make money).
Within hours, this carefully-constructed, black propaganda story was all over the mainstream financial media, but it had become qualified as the Office of the Mahattan US Attorney, and FBI agents, checking the voracity of complaints filed by a few alleged 'Herbalife' victims who had been traced by sub-contractors working for 'Global Strategy Group' (a reputable consultancy firm working for Bill Ackman's Pershing Square Capital).
As a result of this latest reality-inverting chapter of the 'MLM income opportunity' fairy story, the market price of effectively-valueless 'Herbalife' shares, rose by more than 8%.
Typically, when this two-dimensional mixture of lies and truths had already gone around the world, the multi-dimensional truth was still getting its boots on.
U.S. authorities investigating potential manipulation of Herbalife Ltd.'s shares by consultants working for billionaire investor William Ackman will find it difficult to prove that false statements were deliberately made to drive down the company's value, securities lawyers said.
News of the probe has thrown a temporary shadow over the more than two-year campaign by Ackman and his hedge fund Pershing Square Capital Management against Herbalife. Ackman alleges that Herbalife is a pyramid scheme and he has taken a $1 billion short bet that its stock price will slide. The nutritional supplements seller has long denied the allegations, saying the campaign is based on misinformation.
U.S. law defines market manipulation as artificially raising or depressing the price of a security for the purpose of inducing trades by others. Potential methods include orchestrating phantom trades or spreading false information.
In the most common type of market manipulation, someone buys or shorts a stock, spreads misinformation about it to drive its price up or down sharply, and then reverses their position to take a profit. The scheme, commonly known as a "pump and dump" or "buy, lie and sell high" scheme, depends on the manipulator reversing their position before those being deceived catch on to what is happening.
However, lawyers with expertise in securities law say that the Ackman campaign has not attempted to hide what it is doing and has argued its stance very publicly. Ackman has also pledged to retain his short position in the stock until Herbalife is exposed as a pyramid scheme and its stock goes to zero.
"For me, it's impossible to imagine that Ackman is involved," said Jonathan Macey, a Yale University professor who has made public comments in defense of the tactics of short sellers, including Ackman. "If he had made up some lie about the company, he hasn't profited from that, because he's still short. In manipulation, at some point you've got to transact the security. Otherwise, there's no point to it."
Herbalife stock rose 8.2 percent on Friday because of news of the probe. The Wall Street Journal was first to report the existence of the investigation after hours on Thursday.
Spokesmen for both the FBI and the Manhattan U.S. Attorney's office declined to comment.
It was not clear on Friday whether the investigation had focused on particular individuals, or whether any wrongdoing had been discovered. One of the sources said it could end without any charges being filed.
In a statement on Thursday night, Herbalife spokesman Alan Hoffman said that Ackman's bet meant he had a direct financial interest in hurting Herbalife and had orchestrated a false and fabricated attack against the company. "We are confident in the strong fundamentals of our business model," he said.
On Friday, Herbalife declined to respond to questions.
Ackman says he believes Herbalife is a company that is based on signing up more distributors and getting them to buy its products, rather than on meeting the needs of consumers, and that as markets become saturated with new distributors the business is doomed to fail.
Ackman told CNBC on Friday that some people who had done work for one consulting firm he was using, Global Strategy Group, had received subpoenas. He said that the firm had hired some subcontractors around the country.
He later told Reuters in an interview that his firm was still working with Global Strategy. "We work with the best of the best. We can afford to. My belief is they conduct themselves appropriately," he said.
A Global Strategy spokesman said in a statement: "It is our clear understanding that neither the firm nor any of our employees are a target of any investigation, and we are confident that all our work surpasses the highest legal and ethical standards."
Market manipulation prosecutions generally require proving intent to lie or deceive, which is difficult without an incriminating document, securities lawyers said.
"You're always dealing with circumstantial evidence. We don't have the ability to probe people's minds," said Eric Chaffee, a University of Toledo law professor.
Ackman said Pershing Square's very public campaign was the furthest thing from market manipulation.
"What have we done? We've shorted the stock. We've disclosed the size of our position. We've made a 330-page PowerPoint presentation," he told Reuters. "Market manipulators don't make 330-page PowerPoint presentations and broadcast them globally."
Emphasizing the public nature of his campaign, he added, "No one could say anything worse about a company that what we've said about Herbalife. It's a pyramid scheme. It's a criminal enterprise that harms poor people."
U.S. guarantees of free speech mean that short-sellers have a right to talk down a stock price, even with the assistance of public relations and lobbying firms like the ones Ackman has hired.
The U.S. Securities and Exchange Commission often brings civil charges against the manipulators of penny stocks, which are most vulnerable to misinformation. Enforcement cases are much more rare among big, listed companies.
"Prosecutions of market manipulation by the government are as scarce as hen's teeth," said James Cox, a Duke University law professor.