After two of the most punishing years of his hedge fund life, Pershing Square founder and CEO William Ackman has learned from his trying experiences. “Success is found in how you deal with failure,” he said after attending a Chicago showing of Ted Braun’s film “Betting on Zero.” Along with a packed audience at Chicago’s Facets Cinematheque theater, Ackman said he was done with public short selling, as was the case with his widely watched short on Herbalife, the subject of the film.

Bill Ackman
From left to right: Director Ted Braun, Chicago Activist Julie Contreras and Bill Ackman in Chicago after watching “Betting on Zero.”

May could be a significant month for Herbalife

With estimated marked-to-the-market paper losses on the Herbalife short near $400 million* – Pershing Square now holds long-term put options on after re-adjusting the portfolio — Ackman said if the exposure were no longer attractive to their investors he would exit the position but pursue the company personally. That point has not yet arrived. He said Herbalife is “getting closer to the end,” as the company is not growing and faces major challenges ahead. “And Carl Icahn is close to 81 years old,” he quipped to the laughter of the audience, noting that many headwinds on the trade are getting long in the tooth.

Ackman thinks the month of May could be critical, a point at which Herbalife CEO Michael Johnson is stepping down as CEO and the terms of the Federal Trade Commission’s $200 penalty take effect. The component Ackman will watch closely is the clause in the settlement that mandates Herbalife only pay distributors for products sold at the retail level. A major criticism Ackman leveled against the multi-level marketing firm is that the vast majority of its revenue came not from selling product, but from recruiting distributors who sold the American dream of success but in reality was dependent on deception to recruit new distributors. If payment for recruiting distributors is halted, it could force Herbalife to alter its business model.

Ackman also anticipates other regulators in the US and abroad might take action against Herbalife, expressing disappointment that the US Securities and Exchange Commission has not been more aggressive. “How the SEC doesn’t punish corporate executives who make false and misleading statements is beyond me,” he said.

Ackman learns from his losses

Ackman has learned much from what has been the hedge fund industry’s most organized and short selling expensive campaigns to bring down a major US corporation.

He said it was odd that short sellers are questioned for their motivations when speaking out against potentially fraudulent corporate actions, but people more automatically believe a fund manager long a stock touting its virtue. He noted the power of the media, and complained that a press report seeming to partially vindicate Herbalife came out in advance of the FTC announced punishment, it pushed the stock price higher.

Ackman’s team is noted for its media savvy, which shows in the film. Director Braun brought to life the conflict between the working class victims of Herbalife’s multi-level market scheme who claim to have lost thousands of dollars after being sold a business opportunity that didn’t exist. Braun, who also wrote and directed the acclaimed “Darfur Now” documentary, initially spoke with Herbalife executives, but they decided not to talk publicly for the film. “I just wanted to present the truth, both sides of the conflict,” he said.

Speaking with ValueWalk after the event, Braun said he was initially fascinated by the texture of the story. “How could a major US corporation be involved in such questionable activity without being publicly questioned?” The nuance in Ackman’s altruistic and profit motives behind the short investment was also a tension he teased through the production.

Ackman, in retrospect, thinks his timing on the investment could have been better. “I should have started off by speaking out about the company without a profit motive, I might have gotten more traction. I would like to short the company now,” he said, lamenting about a bruising media battle with little to show investors for his efforts. He said there may come a point where he exits the investment if the profit probability is significantly diminished, but he will never relinquish the fight against a corporation engaged in what he calls fraud. Someone has to stand up to giant corporations when they engage in wrongdoing. Ackman’s approach is that if short sellers can help keep corporations honest and make many at the same time, that’s helping society and his investors. That the definition of win-win. With Herbalife, however, this vision has yet to fully play out.

* ValueWalk rough considerations for Pershing Square paper loss to date: $1 billion initial exposure and assumed entry point in the low to mid $40 range with the current stock price $59. Assumed put options were initially at the money or near the money. Factor in options position re-adjustment, assume time decay for the outright purchase of a put (not a time horizon spread) and calculate underlying stock moving close to a standard deviation away from the initial price.  Added $50 million in costs of investigation / media / legal surrounding the campaign and considered for reference that PSH was reported to have lost $70 million in one day after the stock moved a relatively small amount.