Is it possible for a company like Herbalife Ltd. to pressure regulators into investigating an activist investor or hedge fund? Of course some would say yes, and others no. But one industry expert tells ValueWalk that it often seems like this is the way investigations like the one linked to activist investor Bill Ackman’s firm and third-party researchers hired by his firm begin.
Even though this seems to be common practice on Wall Street, it should be noted that it doesn’t mean this is what happened in the case of Herbalife versus Ackman. A source familiar with the investigation tells ValueWalk that Herbalife Ltd. (HLF) was the one that initiated the first meetings with officials regarding Ackman, although the nature of that first meeting is unclear.
SEC cracks down on activists
Recently it was reported that the Securities and Exchange Commission is investigating whether activists team up in targeting a particular company but without the proper disclosures. This highlights how seriously regulators are starting to take the PR shows launched by activists. There is, after all, sometimes a thin line between market manipulation and just honest efforts to warn investors that a particular company might be doing something wrong. Indeed, regulators should be keeping a close eye on activists in some types of cases.
There is chatter on Wall Street among my sources which suggests that Herbalife might have applied some (how much, if any, is unclear) pressure on regulators to encourage the ongoing investigation linked to Ackman’s firm through subpoenas and interviews with third-party researchers who worked on Pershing’s battle against Herbalife. Pershing Square has not been accused of wrongdoing. One source even suggested that some regulators act as if they are “too scared or uninterested” to rock the boat in the case of Herbalife.
This is certainly far from being a definitive answer regarding whether Herbalife did or even could pressure regulators, and the suggestion that regulators would be afraid of Herbalife seems like too much. But it does beg the question of “what if?”
It should be noted that no one is pointing the finger at Herbalife in this case. However, an expert told ValueWalk in an interview about the recently reported probe of undisclosed activist alliances that this sort of thing may be happening behind the scenes all the time.
Expert says practice may be common
Former SEC attorney Ron Geffner now heads up law firm Sadis & Goldberg‘s financial services segment. When asked whether it’s even possible for companies to exert pressure on regulators, he told ValueWalk that, in general, it seems as if companies being targeted by activist investors do indeed go directly to regulators or investigators.
“It is quite common for an issuer whose security is either being shorted or invested in by activists, in an effort to entrench themselves, many public companies will through various sources put pressure on regulators to examine the activities of the activists with the basis or suggestion that the activists are in the process of manipulating securities or otherwise may be breaking other laws,” said Geffner.
“In half a dozen situations which I’ve experienced in which the activist is the recipient of a subpoena or a letter from a regulator that appears to have been brought about—’appears’ is be the real key word because I don’t have proof—appears to have been brought about by the issuer,” he added.
One of Herbalife’s supporters, known only as The Skeptic, pointed out that if Herbalife does have information relating to possible wrongdoing in the PR campaign that has been targeting it, then it is obligated to report that information to regulators. It is also Herbalife’s fiduciary responsibility to its shareholders to do everything it can to fully protect itself against allegations raised by anyone. In general though, The Skeptic doesn’t believe Herbalife would be able to pressure officials to launch an investigation. Indeed, it does seem questionable.
The recent New York Times article that suggested Herbalife has met with regulators and the FBI over the last few years brings an important question. Who initiated those meetings? Was it Herbalife or government officials? A source familiar with the investigation told ValueWalk that Herbalife requested the first meeting, which occurred in January 2013. The same source also informed us that Herbalife has met with officials more than the five times reported in The New York Times. The nature of those meetings is unclear. The meetings may simply have been requested to present information to officials with no intent to pressure anyone, and some of the later meetings were apparently requested by officials rather than Herbalife.
A spokesperson for Pershing Square declined to comment for this story. An Herbalife spokesperson provided the following statement to ValueWalk: “We have great faith and confidence in the government’s efforts.”
Lobbying a big piece of the MLM puzzle
Usually neutral on the battle between Herbalife and Ackman, Bill Keep, dean of the College of New Jersey’s Business School, noted that lobbying of all kinds is an important part of doing business for multi-level marketing companies.
“Herbalife and other MLM companies have a long history of effectively lobbying regulators,” he told ValueWalk. “It is a cost of doing business for this industry. Getting regulators to investigate Ackman questions his motivations. Ackman cannot be surprised by this. On the one hand, an investigation of Herbalife helps reassure investors — see, it’s all him; not us. On the other hand, investigations that go nowhere simply become side shows and the focus eventually returns to questions of Herbalife’s business model in practice.”
It’s certainly been no secret that Herbalife and Ackman have been lobbying for their respective sides in the fight, and lobbying can take multiple forms. Indeed, in Herbalife’s case, if information has been passed to regulators, as sources have suggested, the company’s proponents could also argue that it was simply part of the company’s lobbying efforts.
Can Herbalife placate short-sellers?
Vijay Marolia of Regal Point Capital Management, whose short position on Herbalife has been well-documented, suggests he would be convinced of Herbalife’s innocence if management releases one specific piece of information:
“What keeps getting missed is perhaps the simplest to comprehend,” he told ValueWalk in an email. “The truth is that HLF could and should reveal a breakdown of their retail sales which would solve the entire drama once and for all… The fact that they would rather spend more money fighting a supposedly false claim that should be entirely refutable does not say much for management’s concern for shareholder value. “
Do Herbalife’s business model changes matter?
Quoth the Raven, who recently identified himself as Chris Irons known for his short position on Herbalife, thinks that the MLM company has made progress in transforming its business model. However, he also thinks that it’s too late to change because he believes the company has been “caught with its hand in the cookie jar.”
In other words, he thinks Herbalife should be held accountable for what happened in the past even if the company has remedied prior questionable policies.