The film Betting on Zero, a documentary to be released in select theaters Friday, speaks on several levels. The primary plot line tells the story of an economically and informationally disadvantaged segment of society, eager to get their piece of the “American dream,” who buy into a pyramid scheme that robs them of their life savings. But there is also the hedge fund angle. To those familiar with how things really work, Pershing Square Capital, the hedge fund that bet on Herbalife to go to zero, spent more than $50 million in investigative, promote and otherwise support the active downfall of a major US corporation, was a new benchmark. Never before in the history of activist hedge funds had such a bold and public plan to destroy a corporation been executed to this level. Both these stories are told in the slickly produced documentary that appears designed to produce outrage – hitting and missing the mark at the same time.

CREW Herbalife Ltd. HLF Bill Ackman speaking
(C) ValueWalk

Betting on Zero: When he established his short, would Ackman consider the US government fining Herbalife $200 million and demanding they reform their business practices a success?

What was Bill Ackman, the founder of Pershing Square Capital Management and star of the movie, thinking after former Bloomberg reporter Christine Richard gave him the idea to short Herbalife Ltd. (NYSE:HLF)?

Richard had written a book, “Confidence Game,” about Ackman’s previous short in MBIA, which took seven years to pay off. She then moved into the research game, looking for other short ideas when she might have thought she hit the jackpot with Herbalife.

Richard had discovered a corporation that is portrayed in the movie as selling a lie: its products are too expensive to sell, so they rely on a multi-level market scheme to recruit distributors who are required to buy thousands of dollars in products they, likewise, cannot generally re-sell. The company convinces new recruits they will “get rich” beyond their wildest dreams, but it is only once they move up to the middle-level that they discover that in order to do so they must sell a dream, not a product, to succeed.

She presented the Herbalife idea to Ackman, and he bit. Hard.

Betting on Zero The Movie
Betting On Zero – Picture via Screenshot
Betting on Zero The Movie
Via Screenshot
Betting on Zero The Movie
Via Screenshot
Betting on Zero The Movie
Via Screenshot
Betting on Zero The Movie
Via Screenshot

At that moment in time would Ackman have considered his fight successful if, as turned out to be the case, the US Federal Trade Commission would end up fining the company $200 million and ordering them to change their business practices? Or did he expect the government to take the unprecedented and simply shut the doors on a publicly traded US Corporation with nearly a $5 billion market cap and 7,800 employees?

 

Via Screenshot

Betting on Zero mainstream story line: Disadvantaged people are sold a dream that is practically unattainable

Betting on Zero follows the story of Ackman as he engages on what appears more than an investment, but a moral quest to shut down Herbalife – at one point in the film he calls Herbalife CEO Michael Johnson a “predator” who is “running a criminal enterprise,” his voice shaking.

The film at times drones on, repeating the same basic story told numerous times: low-income people possessing questionable sophistication who don’t conduct proper research into a business idea are bilked out of their life savings as they peruse the lifestyles of the rich and famous. There is the Latino angle, where groups of jilted Herbalife distributors band together in a prayer circle to urge to victory their righteous lawyer in a fight with Herbalife.

Via Screenshot

But perhaps best telling the story is an Oklahoma man from a rural background who, upon graduating college with debt up to his eyeballs, leverages his only prized possession – a revamped American muscle car – to peruse his Herbalife dream. After six months of working the system and rising to a mid-level, he finally makes the realization that you can’t succeed selling the actual Herbalife product, but you must recruit other distributors to join the system, and they must recruit other distributors. “You can’t make money selling the product. It’s too expensive and people don’t want it,” he says. He finally throws in the towel and transforms the nutrition clubs that sold the product into “Vaporizing” cafes, capitalizing on the latest smoking craze.

The question that seems obvious but was never asked in the movie: What kind of research did the new recruits conduct before they invested?

Hedge fund plot line: Never before in history has an activist spent so much money to orchestrate the downfall of a major US corporation

The somewhat simplistic plot line repeated time and time again – the disadvantaged are duped – can get tedious. For those in the financial industry, there are moments of interest that elicit knowing chuckles as well as point to Ackman’s bold and unprecedented plan.

Perhaps most pronounced is the orchestrated manner in which both sides work to manufacture an environment for news consumption. This is most clear at an event in a Church in Chicago’s west Pilsen neighborhood that ValueWalk attended.

Busloads of protesters – accused of being paid in the movie – marched and chanted on demand as inside a well-staged event, all with members of the press looking on, listened to the stories of Herbalife deception and woe.

Never before in the history of activist investing has a hedge fund manager spent $50 million to promote the destruction of a public company – and done so with such a deft and sophisticated public relations touch.

Did Ackman achieve his goals? The government ended up extracting $200 million and issuing a public rebut of the company’s business model. But Ackman, who sold the stock in the mid- and upper- $40 range, now watches as the movie is about to launch and so many of his bullets have been fired but the stock is nonetheless trading near $55 per share.

The problem with investing is that the scoreboard is transparent and success and failure can be judged by a clear metric: positive or negative returns. By that measure, Ackman has not succeeded… yet. But will his investors continue to tolerate their money being used for what the movie seems to portray as a personal battle?

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Pershing Square declined to comment for this article. Herbalife told ValueWalk in a statement the film lacked credibility “because it was funded and developed by individuals who have more than a billion dollar interest in seeing both the direct selling industry as well as Herbalife Nutrition fail.  It is nothing more than an ‘infomercial’ for billionaire hedge funds.”