Ackman Hints At Herbalife’s Enron-Like Fraud [TRANSCRIPT]

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Bill Ackman, Pershing Square CEO and Founder, spoke with Bloomberg Television’s Stephanie Ruhle and Erik Schatzker about his team’s two-year investigation of Herbalife Ltd. (NYSE:HLF) and the company’s alleged fraud. He also discussed his bid for Allergan, Inc. (NYSE:AGN).

Ackman said that he has spent “approaching $50 million” of investor money investigating Herbalife. He said: “Trust me, when you see the stuff we have tomorrow you will conclude that the money was well spent.”

He pointed to Enron as a hint to what will be revealed in tomorrow’s presentation: “The only clue I’ll give you for tomorrow is that Enron, if you remember, had a fake trading room. They were touring people around the Enron campus, I don’t remember if is an auditor or whatever, to talk about the trading operation. They actually set up work stations and had people sitting there looking like they were trading.”

Ackman said: “We have hundreds of hours of recorded conversation. This is stuff we’ve not yet turned over to the government. We will be doing that promptly after the presentation. But this is new material…The whole growth of the company in the last several years, the emphasis has been what they call daily methods of consumption in which the nutrition club is the biggest driver. And the nutrition club is a total and complete fraud.”

Highlights include:

*Frightened Allergan Will Make All-cash Acquistion Error

*Allergan ‘gave Its Best Shot Today’ On Restructure

*’Goal To Catalyze Regulatory Interest’ In Herbalife

*Tomorrow’s Herbalife Event Probes Nutrition Clubs

*Has Spent `approaching $50 Mln’ On Herbalife Probes

*Pershing Square Investors Fund Herbalife Probes

Ackman: We Spent Investors’ $50M Probing Herbalife

Herbalife’s Nutrition Club Is ‘Total Fraud’


STEPHANIE RUHLE: Bill, thanks so much for joining us. Why don’t we start with Allergan-Valeant? We have to ask, if your collective bid is so attractive, why haven’t the majority of the shareholders with 40 percent of the stock outstanding put pressure on the board to capitulate and accept you offer?

BILL ACKMAN: I think the answer is the board has turned a deaf ear to the shareholders and the board is not willing to engage with shareholders. The board is not even willing to engage with their largest shareholder. Unfortunately the board – the only authorized agent to speak with shareholders is the chairman and CEO David Pyott, and that’s from the – the lead independent – supposedly independent director who told me this.

RUHLE: But is it fair to call yourself simply the largest shareholder while you’re also part of a very hostile bid?

ACKMAN: Put me aside. If you talk to – what we’ve heard from other shareholders of the board is not willing to listen to them or speak to them. The only authorized person who’s handling this bid on behalf of Allergan is the chairman and CEO David Pyott, who would like to continue to run this company. And as a result, he’s got what we call a disabling conflict of interest. And the notion that David Pyott is leading this process is absurd. If you look at the Shire-AbbVie situation, the Shire chairman, who is a non-executive chairman, led the process. And that was entirely appropriate. Here you have a chairman and CEO who’s horribly conflicted leading a process.

And so we’ve said, look, we tried initially to do kind of a shareholder referendum. The company fought that and it would cause delay. And shareholders said, look, just go to this special meeting. We’ve launched a special meeting process. We’re in the process of collecting the shares we need to call the meeting. The company could tomorrow hold a meeting of its shareholders to ask them what they think.

Instead what the company is doing is delaying as long as possible and trying to what they call – what some people call defending the company. And on the conference call they talked about running out and doing an all-cash deal that wouldn’t require shareholder support as a way to defend the company. And I’m frightened of that, as – as should every shareholder.

ERIK SCHATZKER: Bill, if you’re right and Allergan is ignoring its largest shareholders, those others than you, don’t you think we would have heard from some of these people before? These are some of the largest institutional money managers in the world. Capital Group, Blackrock, Vanguard, State Street, State Farm, T. Rowe, even John Paulson. Wouldn’t these people be speaking up?

ACKMAN: They are.

SCHATZKER: No, no, no, but – but in a public way.

ACKMAN: In a public they are, okay? And here’s how they’re speaking up a public way. CapRe sold all of its stock I read this morning in The Wall Street Journal and they sold their stock after meeting with David Pyott. And I believe the reason why they sold their stock is they did not believe the company could justify the value of a Valeant transaction as an independent company and I think David Pyott probably told them that he, as he’s told everyone, he has no interest in doing a deal over his dead body with Valeant. And that was a frightening thing to CapRe.

But the other shareholders you mentioned other than John Paulson don’t go on CNBC and don’t speak up. They are passive, very smart, successful, terrific institutions, but their MO is not to speak up. And so it’s really the – the shareholder activists who are the more vocal shareholders. And John Paulson, one of the largest shareholders of Allergan, has spoken up and has said that he supports the transaction.

RUHLE: Earlier today when Erik and I spoke to Valeant CEO Mike Pearson, we said what would happen if you walked away. He said Bill Ackman would be a very unhappy shareholder. Is that the case?


RUHLE: And what would that —

ACKMAN: Unless – unless – unless Mike Pearson walked away because there was some better transaction for Allergan shareholders. At the end of the day, we want what is the best for Allergan shareholders. We own only Allergan stock. The higher the price, the better. And if there is an alternative party that will offer more value than the strategy value created by this combination, we’ll have to listen to that. And if that’s competitive enough so that the shareholders don’t want Valeant’s bid, then we’ll – then we’ll go in that direction.

SCHATZKER: Or is it possible, Bill, that Mike finds something better to do? To the point that you made earlier, Allergan appears to be dragging this on as long as possible. Now it doesn’t really cost Mike anything to say. It also doesn’t cost him anything to walk away. Valeant’s whole business is built on acquiring companies that have some near-term prospects in cutting the costs in the R&D pipeline. Maybe he’ll find something that appeals to him better and walk away.

ACKMAN: Erik, that’s not accurate characterization of their business. That sounds like a characterization of the business that Allergan gave you. Allergan’s having a tougher time characterizing Valeant as a company that just cuts and cuts and cuts because I woke up this morning and Allergan cutting a third of their R&D workforce, right? Allergan was supposed to be all about –

SCHATZKER: I’m – Bill, you know that I’m not here to parrot anything that Allergan or Jim Chanos might have to say about Valeant. And so if I’ve mischaracterized Valeant’s business model, I’m willing to accept that. But Valeant has built itself on acquisitions. It’s an acquisition machine. If Mike feels that sticking around for another six months waiting for a shareholder vote to be held on Allergan isn’t worth his time and he’s got something better to do, he could do that.

ACKMAN: Okay. Let me be clear. And if you’d just let me speak a little bit, I could help you. The – the shareholder – Mike Pearson has made – is very clear that he’s prepared to stick around for the shareholder meeting and this is a very important transaction and that he’s patient. And the reason for that is because of the strategic overlap of the two companies, right? The core pinnacles of – of Valeant’s operation, dermatology (inaudible) ophthalmology, are present in Allergan and these companies fit like hand and glove. So this is a very, very important deal to Valeant. It’s also a very important deal to Valeant because it’s a hostile transaction. It’s a very high-profile transaction. And if Valeant is successful in acquiring this company, it will make it much easier to acquire the next company and it may not have to be hostile. I think another company looks at Pearson’s resolve in getting this transaction done and maybe actually behaves appropriately and enters into discussions to see if there’s something in the best interests of – of the owners of the next business. I think Mike is very committed to this, although he did say – I did listen to what he had to say on Bloomberg. If the shareholders vote no, right – so the way for shareholders to vote against the Valeant transaction is to not – if they were not in favor of calling special meetings, that would be one way it would be a no vote, or if we called a special meeting and they didn’t support the proposal for the board – the new board to engage with Valeant. And if the – if the shareholders came back and said they don’t want this deal, Mike will kind of fold the tent and move on to something else. But as long as the shareholders are still on board, which they are and I think the stock market is best evidence of that, the deal spread now at the lowest I think it’s been since the beginning of this if you call it battle, at 2.8 percent down 56 basis points or actually now 60 basis points from yesterday, and the stock price up 3.2 percent. Why? Because Allergan gave it its best shot today and they did a – announced a Valeant light model. They cut a third of their R&D, mostly the early-stage development, early-stage research. They cut 13 percent of their overall workforce. They’re finding other cost savings in their business. They’re taking out layers in their organization, but it’s really too little, too late.

RUHLE: Possibly, but if there is the chance that Mike Pearson does walk away, you’ve already had a great ride with Allergan stock, do you need some downside protection? You’ve got your LPs to think about here.

ACKMAN: I always appreciate, Stephanie, you care about my investors.

RUHLE: Of course I do.

ACKMAN: (Inaudible) no, we – we do not hedge our position in Allergan. We are – we believe in the combination. I think it’s very likely this transaction gets done. I think the probability of the deal getting done has gone up a lot just today. The – the kind of analyst estimates – reasonably credible analyst estimate for the value of this standalone Allergan is $180 to $200 a share. I’ve seen numbers like that. And the Valeant transaction is worth materially more and is more certain. The – the Allergan standalone transaction requires Allergan to completely change the culture and the business model of the company. And what I can tell you is that is a very, very difficult thing to do if the same CEO is running the business.

RUHLE: Okay. That – clearly you’ve got a busy week. That’s what you’re up to today. Tomorrow, you have said it’s going to be the day of your career, an announcement like nothing else, an epic take down. What exactly are you doing and what if it isn’t one?

ACKMAN: Look, let’s put it this way. I would not have made the statement I made unless – obviously I could be – for me to make a statement today and be proven wrong tomorrow, that would be a mistake, right? So what I can tell you is we have known about what we’re talking about tomorrow or known about elements of it six months ago, nine months ago, a year ago, but we couldn’t prove it to a certainty. And my standard for going public and accusing a company of being a pyramid scheme, accusing a company of having a completely and totally fraudulent business is a pretty high one.

RUHLE: But you’ve been making this claim against Herbal Life for a year and a half now. And with the exception of your first announcement and the FTC making their announcement, all we really saw was a pop in the stock even after you brought out the people from the company and their sort of sob stories, even after we saw China, which we thought would be a big aha moment. You really didn’t get the stock drop that you had hoped. Why do you think (inaudible)?

ACKMAN: Our goal, as I said from the beginning of time, was not to get a stock price drop. Our goal was to catalyze regulatory interest in the company. And what’s happened since our – actually the day after our – the day of our China presentation is the Federal Trade Commission launched a formal investigation into the company. The Department of Justice has launched a criminal investigation of the company. The FBI has launched a criminal investigation of the company. Various state attorneys general have launched investigations of the company.

So I think we’ve been successful in catalyzing the regulatory interest. What’s different about tomorrow is this is not something we’ve talked about before. We have – on our early presentation we made some references to nutrition (inaudible) but we didn’t really understand how they worked. So we spent the last year with undercover investigators in multiple countries and in the United States participating and trying to figure out and ultimately figuring out how nutrition clubs work. And we have hundreds of hours of recorded conversation. This is stuff we’ve not yet turned over to the government. We will be doing that promptly after the presentation. But this is new material.

And what I’ll say about nutrition clubs is if you go – just read the last few conference call transcripts. The whole growth of the company in the last several years, the emphasis has been what they call daily methods of consumption in which the nutrition club is the biggest driver. And the nutrition club is a total and complete fraud. We will be showing that tomorrow.

SCHATZKER: Bill, you just said that you’ve got hundreds of hours of video of these nutrition clubs. Is that right?

ACKMAN: Audio and video.

SCHATZKER: Okay. How many clubs were visited of the thousands I believe that Herbal Life has? How many did you – how many did you (inaudible)?

ACKMAN: Ask – feel free to ask – feel free to ask us tomorrow. I don’t want to give away any more details, but let’s put it this way. All the (inaudible).

SCHATZKER: Hang on a second. I can ask you tomorrow, but you’re the person who just offered to me the fact that you have hundreds of hours of tape. And so I’m —

ACKMAN: That’s correct.

SCHATZKER: – asking you

ACKMAN: And if I could give you an accurate answer to your question, I would do it. I just can’t – I’m not —

RUHLE: All right, is it – is it more than half? Given that there’s about 5,000 nutrition clubs in the United States, what percentage of the (inaudible).

ACKMAN: Stephanie, they all operate the same way, okay? You’re going to hear about that tomorrow, okay? And I’m happy to talk about it in more detail then. Trust me. You’ll be satisfied with the answer. I don’t want to preview the presentation any more than I already have. By the way, if you find it not credible, okay, feel free to ask me tomorrow.

RUHLE: Understood, but will there be a way to link – yes, there could be some sleazy, smarmy nutrition clubs out there. Is there a way to link the company at a corporate level to directing the way they behave in this bad (inaudible)?



ACKMAN: Yes, 100 percent certainty, definitely, we will prove that tomorrow.

RUHLE: And you have absolute proof of that?

ACKMAN: Proof, certainty.

SCHATZKER: So I guess what Stephanie was getting at at the beginning, Bill, is that for a year and a half it’s been incumbent upon you to demonstrate that Herbal Lief is a pyramid scheme, a fraud effectively. And up to today, there’s been some interesting stuff but not enough clearly to drive any regulator to declare it a fraud, any court of law to declare it a fraud, or for that matter to persuade many of your fellow institutional investors that it’s a fraud because they’ve taken the other side of your trade. What’s to say that anybody’s going to feel differently tomorrow?

ACKMAN: Stay tuned.

SCHATZKER: Stay tuned.

ACKMAN: That’s correct.

RUHLE: At this point, how much money have you spent investigating Herbal Life?

ACKMAN: Approaching $50 million.

RUHLE: And is this your money or your investor’s money at this point?

ACKMAN: Our investor’s money.

RUHLE: And your investors are comfortable with that? About six months ago I know you had potentially representatives from Herbal Life trying to reach out to your customers, which many people thought was crazy. What was the outcome of that?

ACKMAN: Our investors are happy with us, as you might guess. Look, $50 million is a lot of money, but we manage $15 billion. So it’s about 30, 40 basis points of capital and spread over a couple of years. It’s cost us about 20 basis points of return. And trust me, when you see the stuff we have tomorrow you will conclude that the money was well spent.

RUHLE: Understood. Now many of your puts, as I –

ACKMAN: Well actually a point I will – I will make that I think is important about the government. The government cannot afford on a speculative basis to spend $50 million doing research on a potential fraud. And that’s why unfortunately the government tends to get involved after frauds collapse. Most FTC investigations take place after a stock price collapses and the fraud is exposed and the FTC goes in unfortunately to clean up the mess and investors are left holding the bag.

The benefit of short sellers, if I could make my case for short selling, is the shorts position that we’ve taken allowed us to – enabled us to afford to invest the money we’ve spent researching the company. And I think that’s a very, very healthy thing for the markets. And by the way, that work that we did was sufficient that after the FTC studied this thing I might guess for a year and a half ultimately deciding to launch a formal investigation.

Now the government – that was announced on March 12. It’s, whatever, 120 days later. So I think – I don’t – the fact that the FTC hasn’t shut the company down doesn’t prove anything other than they’re going to be thorough and careful. But I think the difference with tomorrow is I think we will give the market sufficient information to shut the company down.

SCHATZKER: And if the market doesn’t respond accordingly, what does that say?

ACKMAN: We’ll see. Why don’t we – why don’t we see how the market reacts tomorrow?

RUHLE: Okay. And if the government doesn’t respond, then what happens to this short for you?

ACKMAN: Look, every – I’m an investor. I manage capital as a fiduciary. Every day we assess the risk and reward of every position in the portfolio, and I’m obligated to do that. But I think this goes to a more interesting conversation the day after than the day before.

RUHLE: Well then how much more time are you willing to give this trade seeing that have said tomorrow is the biggest day?

ACKMAN: I already told you that from a personal perspective I’ll take it to the end of the Earth. And what that means is if for some reason it wasn’t an appropriate risk reward for our investors, I’d fold the tent on the investment. But I will personally pursue this. Now fortunately I don’t think I’m going to have to do that because I think the investment remains. Again, we – you and I have had conversations about this now over a period of time.

As recently as towards the end of the last year, the stock was approaching $80 a share. You were saying, Bill, you got – it’s time to capitulate. How much more money can your investors lose? And I think what I said to you at the time is I said we manage our risks prudently. And I continued to believe it was still a good risk-reward and I continued to believe that the government would ultimately act. And so far I think I’ve been pretty good on my predictions. The government acted 90 days after our interview in December. I think the government is working hard and we’re going to give the government a lot more help tomorrow.

SCHATZKER: Why did it take so long to get to this point, Bill?

ACKMAN: The reason why is because the best frauds are really, really good. The only clue I’ll give you for tomorrow is that Enron, if you remember, had a fake trading room. They were touring people around the Enron campus, I don’t remember if is an auditor or whatever, to talk about the trading operation. They actually set up work stations and had people sitting there looking like they were trading. Do you remember? It’s hard to remember.


ACKMAN: Okay. That’s my biggest clue for tomorrow.

RUHLE: Bill, I don’t disagree that I am sure there are so many, we can call them Herbal Life distributors who were victims. But is there a way this company could get around that if you go through the fine print in the distributor agreements that they give to many of their distributors who might not speak great English, who might not have great educations, that Herbal Life will be able to say well you didn’t read the fine print. Sorry. This is a legal document. Do we run that risk?

ACKMAN: No. No. I’ll answer – I’ll answer that part of the question in the first few minutes of the presentation tomorrow.

SCHATZKER: So Bill, can I – can I just touch on the point that you made a second ago before – before Stephanie’s question? This idea that the fake Enron trading room is a preview of what you’re going to show us tomorrow. Is that to say that there’s something about what the public sees, what the Herbal Life distributors or the ultimate consumers see that is absolutely fake, a figment that is completely and utterly made up and is something utterly different from what we perceive it to be?


RUHLE: All right, Bill. Well clearly it’s going to be a very big day tomorrow. We better all have not necessarily our Herbal Life but a nutrition shake to get ourselves ready. Bill, thank you so much for joining us.

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