Is Bill Ackman the Next Barry Minkow?

A “short seller” is someone who makes money by the price of a company’s stock going down, rather than up. The two methods to accomplish this are “shorting” the stock or buying “put options”, but the mechanics are not relevant to the issue here. Bottom line: If you can convince enough other shareholders to sell their shares, and the stock’s value drops, you make money.

For the record, I’m not anti-short selling. I’ve shorted stocks in the past. Most of them right before their stocks increased in value. I’m not saying I’m good at it, just saying I’m not against it. Also, I do not own Herbalife stock, nor that of any MLM company.

There are basically two classes of short sellers: One who analyzes a company, genuinely believes its share price is overvalued—and bets on other investors eventually realizing this, and that eventually the price of its stock will go down. These more honorable short sellers investigate all aspects of a company (the positive and the negative), and if they have questions or concerns they at least attempt to contact the company and/or others with an objective expertise in the area of concern. They would go into an analysis of a public MLM company by asking the questions: Is this a legitimate MLM company, or an illegal pyramid scheme disguised as one? Do their products have intrinsic value? Are they reporting their financials accurately?

Then there’s the dishonorable, deceptive short seller who doesn’t care about things like facts, fairness, objectivity, or balance. If they find what they believe might be a flaw with some aspect of a company they have shorted, or intend to short, they will never contact the company and allow them to address it. They will never contact any other experts or authorities who may explain away the concern. They never include as part of their due-diligence things like touring the company’s headquarters or manufacturing plant, meeting with the senior management, or interviewing happy customers or successful distributors. Instead they deliberately seek out only those “experts” who will fully support their “short thesis”, and interview exclusively disgruntled customers and reps. They go into an investigation not with the goal of discovering the truth about a company, but rather with a deliberate agenda to destroy its credibility: and thus its value and its share price. They would go into an analysis of a public MLM company by asking the questions, “How can I make this company look like an illegal pyramid scheme? How do I devalue their products? How can I make it appear as if there are improprieties in their financial reporting?”

David Einhorn is an example of an honorable short seller. He was looking into Herbalife, had some concerns, and brought them up to senior management on a public investor call. He merely asked a couple of what should have been innocuous questions about Herbalife’s tracking of retail sales to outside customers, and rank reporting, but even the suspicion among investors that Mr. Einhorn was working on a short thesis regarding Herbalife caused its stock to plummet 20% that day. The anticipation of him presenting his short case at an upcoming Ira Sohn investors conference caused it to drop even more. Mr. Einhorn never mentioned Herbalife at the conference, has not said another word about Herbalife since, nor has he even confirmed he had a short position – and the stock recovered less than a third of its losses. That’s an example of how powerful and influential these high profile stock gurus can be in affecting the share price of companies they are even suspected of investigating.

Barry Minkow is an example (albeit an extreme example) of a dishonorable short seller. He not only entirely met the above definition, he also extorted the companies he attacked. Back in 2007 and 2008 he produced prolific amounts of propaganda against USANA, Nu Skin, Medifast, PrePaid Legal (now Legal Shield) and Herbalife, then got at least two of these companies to pay him a low six-digit sum to drop his attacks. In the case of Herbalife he went a step further by removing all of his online Herbalife attacks and retracted all of his negative assertions regarding their allegedly “deadly” products, and allegedly fraudulent business model. He went on to actually praise Herbalife’s products and business model.

Then he tried the same scheme on Lennar, a large, deep pocked home builder. Unlike an MLM company that requires its integrity, good will, and credibility to remain constantly high to survive (because, as a group, MLM reps can be a fickle, flighty bunch who spook easily), Lennar could afford a prolonged bombardment and fought back. The end result was that Barry Minkow, who had already spent over seven years in prison for, among other things, stock fraud, was convicted of extortion and, once again, stock fraud and sent back to prison, where he now resides. You can read the full Minkow story here.

And then there’s Bill Ackman. In my opinion, based on how his activities appear to me, he is absolutely a dishonorable short seller. By his own admission he has made no attempt to contact Herbalife management, or any of their successful distributors or customers, or anyone from among the numerous objective legal authorities and industry experts available to him (instead citing only the findings of a couple devoutly anti-MLM critics). In other words, it appears he didn’t want any of his criticisms to be addressed before he had an opportunity to wreck Herbalife’s stock value, and cash in on the crash.

For example: when Ackman questioned why Herbalife cites “Retail Sales” (the suggested retail price of the products), as a measure of revenue in their financial disclosures, and went on to assume the most nefarious explanation (deception on the part of Herbalife), why didn’t he simply call Herbalife’s Investor Relations department, or get on an investor call like David Einhorn did, or call Herbalife CEO Michael Johnson directly ? He could have asked why they did sales that way. But then Ackman would run the risk of getting a valid explanation. Like, the fact that two lines lower on Herbalife’s 10-Q (quarterly) and 10-K (annual) statements they openly and clearly disclose what the actual revenue was, based on the actual selling price of the products, which is the basis for practically all other ratios and financial calculations, including net profit. 4

Regarding Herbalife, Ackman claims, “This company’s goal is to keep things hidden, as opposed to make things transparent.” I always shake my head when I hear this accusation made against a company that chose to be publicly traded. That is, they made the voluntary decision to open their books, management, products, and business model to detailed public scrutiny, and allowed their financials to be fully audited by an independent third party – and people like Bill Ackman.

If there’s any doubt as to what Ackman’s agenda was going in, none should remain after his declaration, “Everything that I have seen about this company has simply been an affirmation of what we believed at the very beginning. We had a supposition in the beginning that we’ve been able to prove over a long period of time.”

I spent over two months researching and producing a 30 page rebuttal to Minkow’s initial 86 page smear report against USANA (which, of course, he had shorted, and whose stock dropped 15% the day his report was made public). Ackman’s “short thesis” against Herbalife is a 334 page PowerPoint presentation, plus a well stocked anti-Herbalife website. I’m only 150 pages into his presentation and already have amassed what would easily be over 30 pages of rebuttal points. The logical, mathematical, and legal inaccuracies in Ackman’s report are overwhelming. Writing novella-length rebuttal reports doesn’t pay anything (if I could figure out a way to monetize such activity I’d be richer than Bill Ackman!), and we don’t seem to have any trade associations that are willing to support, or are even capable of supporting such industry-defending activity. So, I’m going to focus on just three main points. At least for now. These aren’t even the three most damning rebuttal points, but rather the three that most go to Mr. Ackman’s true agenda, based on what I’ve discovered after having reviewed less than half of his case against Herbalife.

Point 1: Ackman’s Profit Motive

Much like Minkow, when Ackman is asked about his profit motive for shorting, and then attacking Herbalife, he dismisses it as a red herring. Minkow claimed his “puts” on USANA would probably not even cover his investigative costs. We eventually learned he made $61,000 on those puts – and was paid a quarter of a million dollars by three other short sellers to fund his USANA hit piece. Minkow’s anti-USANA campaign was primarily funded by fellow stock fraud felon Sam Antar, along with $10,000 from hedge fund manager Whitney Tilson (the same Whitney Tilson that just announced his short position in Herbalife, right before it regained 30% of its value). Ackman, on the other hand, dismisses any profit motive by proclaiming that any profit he makes from his “personal” short position, which he refers to as “blood money”, will go entirely to charity. He claims, “I don’t want to make money off of this”, and that, “by taking the economic part out of my investment by giving the money away…”, this should counter any speculation that he has a profit motive. As can be seen in recent CNBC 5 and Bloomberg 6 interviews, this claim is always accepted unchallenged, hook, line and sinker.

Fine. I’ll challenge it.

One of the only two charities that Ackman has identified as being the recipient of his “personal” profits is his own charity, the Pershing Square Foundation, which he formed in 2006 (the other being the Ira Sohn Research Conference Foundation). In the five years that the Pershing Square Foundation has filed a form 990-PF, Mr. Ackman has personally contributed sums of $5.9 million (2006), $36,645,650 (2007), $6,975,000 (2008), $15,520,000 (2009), and $55 million (2010). Ackman’s investment company, Pershing Square Capital, has donated over $7.2 million during that time. The rest of the $127,388,713 contributed to the Pershing Square Foundation amounts to a total of $75,000 by three other private contributors. In other words, Ackman was already going to donate tens-of-millions of dollars to his own charity, and he’s simply funding this donation, at least in part, by his personal Herbalife short position.

What is most telling is the comment that begins Ackman’s Bloomberg interview where the interviewer states, “You will be donating your personal profits from this trade to charity including a minimum of $25 million regardless of whether you make money…” (emphasis mine). So, again, it’s $25 million Ackman is going to donate either way, it’s just a matter of where it comes from – his own pocket, or from his Herbalife short position, thus this $25 million can remain in his pocket.

Furthermore, Pershing Square Capital possesses over 20 million shares of shorted Herbalife stock, which is reportedly over 97% of all the stock available to short.7  Ackman claims he shorted the stock back in May. Considering David Einhorn and Bill Ackman are friends, and both spoke at the Ira Sohn conference in May, we can be fairly certain Ackman shorted Herbalife just before Einhorn’s questions took its stock down. So assuming Ackman shorted the stock at around $70 a share, and it is now trading at about $26, Ackman’s Pershing Square Capital has already made about $880 million. Even if he shorted Herbalife after the Einhorn induced drop to about $46 he’s still swimming in $400 million of “blood money”.

When asked by CNBC interviewer Andrew Sorkin about his “blood money” comment, Ackman explains, “I don’t want to make money off of this… It is not a happy thing.” 8 Although we don’t yet know what his “personal” stake is, we do know his investment firm has so far made four hundred to eight hundred million dollars! And I bet he’s just a little bit happy about that.

Keep in mind that for every single dollar that Herbalife’s stock rises, Mr. Ackman’s company loses $20 million, and he has less from his personal short interest to donate to his own charity, that he was already going to donate millions to anyway. But naw. He’s totally explained away his profit motive.

It deserves to be noted here that Ackman’s $25 million donation will be going to pediatric cancer research, and that both he and his wife, and his Pershing Square Foundation, have been extremely philanthropic with the focus of their generosity directed towards good causes that benefit children. For that Bill Ackman deserves recognition and praise.

If only he didn’t have to go to such effort to destroy the livelihoods of the more than 5,000 Herbalife employees and the well-being of their families and children; the 90,000-plus distributors who are earning significant, if not living income from their Herbalife business, and their families and children; and the $1.8 billion that he’s pretty much single handedly caused other innocent Herbalife shareholders to lose since he announced his short position on Dec. 19th. This is not even to mention the devastating effect this will have on all the support vendors employed by Herbalife around the world should Ackman succeed in his stated goal of taking Herbalife’s share value to “zero” – meaning completely destroying Herbalife.

Point 2: Market Saturation

Ackman claims Herbalife is about to reach a point of market saturation – that inevitable point where all pyramid schemes must collapse. Like, the “Dinner Party”, “Women Empowering Women”, all the countless “Gifting” schemes; and the granddaddy of all pyramid schemes, the “Airplane Game”. 9 Each of which rarely lasted more than one year.

I wonder, how many more years does a 32 year old company like Herbalife have to exist, and continue to grow before this notion of the MLM company’s succumbing to “inevitable market saturation” becomes folly? Ackman says his evidence that it’s about to happen now, as opposed to, say, after 10 years, or 20 years from now, is that Herbalife is “running out of countries” to move into. He then cites small, recently opened countries like Guiana and Zambia as evidence.

However, Herbalife is operating in a total of 79 countries, was launched in 1980, and has reported a net gain in United States sales alone in the last 15 consecutive quarters (quarter over quarter), and 30 of the last 31 – all occurring after they were 25 years old and had amassed over 1 million distributors! Herbalife reported 2.7 million distributors worldwide at the end of 2011 10 , and now has over 3.1 million distributors. 11 In fact, for the first three quarters of 2012 Herbalife’s average U.S. sales growth (21.2%) has exceeded their worldwide sales growth (17.7%).

To further disprove Ackman’s statement, we’ll mention another MLM that is older than Herbalife, Amway, which was launched in 1959 (just one year after I was launched), and is now in over 100 countries and territories, currently has “over 3 million distributors” 12 , and revenues of $10.9 billion in 2011 which project to over $12 billion for 2012 13 – and they just celebrated a record sales volume quarter. 14  Amway is still growing! Herbalife’s sales over the last four quarters (Q1 2011 through Q3 2012) was about $3.5 billion.

So if a company that’s almost 22 years older than Herbalife, and is in at least 21 more countries, and has over three times the sales revenue, hasn’t reached this mythical point of market saturation, why could Bill Ackman possibly believe Herbalife is on the verge of it? Are we really supposed to believe that with all of his resources—and with all of his investigative skills, and the proposed 18 months he and his “team” have had to research Herbalife—that he somehow missed all this information that I alone just uncovered with one malfunctioning Mac, in less than 45 minutes, while eating an Enchirito?

How many more MLM companies must surpass their 40th anniversary? Apparently eight isn’t enough. 15 How many more years does the MLM industry have to grow? According to the DSA the entire MLM industry has had a net gain in distributorships in 17 of the last 18 years in the United States – after it had existed for over half-a-century! The entire MLM industry hasn’t even reached market saturation in this one market, let alone any specific MLM company, worldwide.

How is Ackman’s claim of Herbalife’s imminent market saturation not absurd?