Former Securities and Exchange Commission chairman Harvey Pitt is taking a dim view of Bill Ackman’s current campaign to influence regulators to take action against Herbalife Ltd. (NYSE:HLF), a company Ackman’s hedge fund has shorted.
Effort to move stock price rather than spread truth, says former SEC chair
“It looks like an effort to move the stock price rather than spread the truth,” said Pitt, now CEO of Kalorama Partners, a regulatory and legal consulting firm he founded. In a CNBC interview Pitt said that Ackman’s tactic of influencing regulators to act against a stock he has shorted is questionable. “If you’re trying to spread the truth, that’s OK,” he was quoted as saying. “If your trying to move the price of a stock to vindicate your investment philosophy. It looks like he crossed that line.”
Ackman’s $1 billion bet against Herbalife
Ackman, head of hedge fund Pershing Square Capital which has a $1 billion bet against Herbalife Ltd. (NYSE:HLF), has engaged in a rather public battle to talk the price of the stock down. He has compared Herbalife to a pyramid scheme because distributors recruit distributors who recruit distributors, creating an ever-lasting commission trail. Ackman has engaged in a rather public war of words with activist investor Carl Ichan, who is long the stock. Then on Monday came news of Ackman’s latest maneuver, an attempt to influence regulators.
Ackman organized lobbying campaign to influence regulators
This past Monday the New York Times revealed a June meeting that took place between Ackman and fellow hedge fund managers, in which Ackman talked about what he saw as the inevitable collapse of Herbalife, but this time he had a new wrinkle. At a steakhouse in Midtown Manhattan, Ackman revealed a lobbying plan to influence government regulators to take action to bring about the downfall of Herbalife. His team of lobbyists paid civil rights organizations $130,000 to help him collect names of people who were “victimized” by Herbalife Ltd. (NYSE:HLF) so he could then use these letters to lobby Congressman and regulators.
In the dinner meeting, Ackman revealed some of the fruits of his campaign. Congressman Linda Sánchez (D-CA), he announced to his assembled audience, had sent a letter to the Federal Trade Commission seeking an investigation into Herbalife Ltd. (NYSE:HLF), a copy of which Ackman obtained before it was public.
Ultimately Ackman’s lobbying effort persuaded a small group of political leaders to engage in a war against Herbalife. 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 joined the cause, according to the New York Times report. This was followed by prominent consumer advocates in Washington and well-respected Hispanic and African-American community groups lobbying against Herbalife.
Claims of impending regulator investigation crosses line
All this lobbying has produced letters to regulators calling for an investigation, which is a normal course of action. Where Ackman crosses the line, according to Pitt, is in saying regulators are on the verge of action.
“He has had no information for a considerable period of time and yet he is now trying to capitalize on very traditional and almost meaningless letters to regulators and members of Congress in a drive to get the stock price a bit lower than it is currently trading,” Pitt said. When Ackman says “we are now seconds away from a thorough investigation and the truth of my allegations will be proved,” Pitt disputes this claim. “None of that is accurate in terms of what is going on so far,” he said.
“If I were still chairman (of the SEC) the enforcement division would make a judgment and if they decided to look into this I would have absolutely no problems with that,” Pitt said. “But there is a problem with the enforcement division trying to weigh in on one side or another of a contested situation. I believe the experience and judgment they bring to bear will determine what if anything they look at.”