American oligarch: How a billionaire uses the government to game the market
Bill Ackman, founder and CEO of Pershing Square Capital Management, is one of America’s most successful hedge fund managers. He has amassed a $1.2 billion personal fortune through “activist investing”–a host of savvy financial transactions and calculated risks. But one of Ackman’s recent ventures is more sinister than innovative, as he attempts to use his political influence to manipulate the stock prices of a multi-billion dollar corporation for his own benefit.
One of Ackman’s preferred tactics is short selling (or “shorting”) stock, a practice where investors bet against a publicly traded corporation and reap profits if the business fails. Most short sellers are honest businessmen who put their capital at legitimate risk, but Ackman’s shorting of Herbalife–which makes nutrition and weight-loss products–reeks of corporate cronyism. As a short seller, Ackman stands to benefit if the value of Herbalife’s stock drops, and he appears to have concocted an intricate web of lobbyists, paid-off media figures, and government regulators to ensure that Herbalife stock prices artificially fall.
In 2012, Ackman shorted over $1 billion of Herbalife stock, and immediately launched a multimedia campaign insinuating that the corporation is a “pyramid scheme,” repeatedly comparing it to Enron. Multiple media outlets, included CNBC and Business Insider, picked up Ackman’s story and ran with it, triggering a panic that caused Herbalife stock to lose over 20 percent of its value within 28 hours. Ackman also invested $20 million in the powerful left-wing consulting firm Global Strategy Group, which engineered an onslaught of lobbyist-fueled complaints and paid media storylines that kept his Herbalife narrative alive in the financial papers.
As Herbalife faced an artificial flood of unfounded legal complaints and news reports about its business model, Ackman began flexing his political muscle to sic his Washington allies upon the company he had bet against. By making undisclosed contributions and calling in favors, Ackman convinced several Congressional Democrats and a handful of state-level power brokers in New York, California, Massachusetts, and Nevada to call on government regulators to open a formal investigation into Herbalife. And after this investigation opened, Ackman paid a former Herbalife executive $3.6 million to provide choice information to federal regulators.
Ackman’s perfect storm of market-rigging succeeded–the Federal Trade Commission launched an investigation into Herbalife this spring. Regardless of the FTC’s findings, the damage has already been done, as Ackman’s initial pyramid scheme accusations and the cloud of federal investigation have forced stock prices down, to the benefit of Ackman and detriment of honest investors who have placed their money in Herbalife stock.
Ackman and his lobbyist allies have set the model for the latest iteration of crony capitalism, the dangerous marriage of government and business interests that poses the most powerful threat to our free-market economy. This model is nearly the reverse of insider trading–publicly betting against a company’s success, and then setting the full force of the federal government against that it. This blatant attempt to manipulate the market is the type of deplorable abuse that gives true free-market capitalism a bad name. For crony capitalists with access to the government regulators who set the rules, it’s an avenue to guaranteed billions with minimal risk. But for average investors–not to mention the thousands of employees who rely on the slandered company for their livelihood–it’s nothing more than white-collar highway robbery.
Telford is senior vice president at the Franklin Center for Government & Public Integrity.
This story has been corrected to reflect that Ackman paid a former Herbalife executive $3.6 million. A previous version contained incorrect information.