When the Wolves Bite

by Scott Wapner

  Herbalife billed the establishments in its own internal documents as places “for meeting and sharing the Herbalife products in a social atmosphere as well as explaining the business opportunity.” But to Richard, the clubs appeared to be a scam—a place where visitors stopped in for a shake or tea and were then suckered into buying thousands of dollars’ worth of Herbalife products with hopes of striking it rich.

  Richard told Ackman’s team of what she’d found, but the investor still remained reticent to get involved. That is, until January 5, 2012, when Herbalife was declared “an illegal pyramid scheme” in a Brussels court.12 The case was brought by a Belgian nonprofit called Test-Aankoop, and though Herbalife fought the accusations vigorously, a judge rejected the company’s claim that its salespeople could be considered “retail customers” and not simply distributors of its products. Furthermore, the judge argued, based on the evidence presented, Herbalife’s only actual customers were Herbalife’s salespeople themselves. The company appealed, and for most people that day, the news was but a blip, getting almost zero media coverage.

  Ackman and Dinneen, though, were among the few who took notice. Richard mentioned she’d booked a trip to visit another Herbalife nutrition club in Omaha, Nebraska, in the following week, and Ackman told Dinneen to go see for himself what was really going on.

  On the morning of January 11, 2012, Richard and Dinneen walked into a nutrition club in Omaha and found several people drinking Herbalife teas and shakes. They’d met the club’s operator, a man named Jose, who claimed to spend $3,000 a month on products to serve and sell in the club. But after watching Jose’s customers come and go and calculating how much his supposed “regulars” were spending, it appeared to Richard as though the man was making about $3,450 a month in revenues, barely enough to get by after paying rent and other expenses. Jose complained about how difficult it was to recruit without signs and the other markings of a traditional business establishment.

  Richard concluded that the entity looked unviable.

  Dinneen came home from Omaha more convinced than ever of Herbalife’s misdeeds, and continued to pitch the idea and his own new findings in the Tuesday meetings.

  By mid-February, Richard and Schulman’s full investigative report on Herbalife was ready to drop. They sent it to Ackman and other big-name hedge funders on the payroll, hoping at least one would bite. The document, dated February 22, 2012, was damning. It was a hundred pages long and began with the statement, “Herbalife would be an impressive American success story, if it weren’t based on a lie.” It continued, “Far from being a shining example of corporate beneficence, Herbalife is a story of stunning deception. It is a pyramid scheme whose revenue comes not from retail sales of its products, as it contends, but from capital lost by failed investors in its business opportunity.”13

  Richard and Schulman charged that 98 percent of investors in Herbalife’s business, some 11 million people since 2004, had failed, losing a combined $11 billion. They documented what they’d found at the club in Omaha, and at others in Pennsylvania and Rhode Island, saying they were nothing more than a “stage set” for a “get rich quick and achieve the American dream” scheme.

  They took aim at Herbalife’s so-called Chairman’s Club members—the top-level distributors who’d earned millions over the years and boasted about it openly. Richard and Schulman wrote of a video presentation they’d found in which a slippery-sounding distributor named Doran Andry told a group of wide-eyed new sellers that they could earn $55 million in “passive, residual income” after ten years through the same nutrition-club operations Richard and Schulman thought were bogus. “This opportunity called nutrition clubs is an opportunity for you guys to make tens of millions of dollars or hundreds of millions of dollars over the course of a lifetime,” he told the group.

  The women had also gotten their hands on Herbalife training materials that described “magic numbers” needed to reach the higher levels of the pyramid. They argued that the system of internal milestones was rigged from the beginning. “While the vast majority of people who become Herbalife distributors fail,” they wrote, “a tiny fraction of those at the top of the pyramid are enormously successful. Their stories are held out as examples of what is possible for any Herbalife distributor.”

  They sneered at the longevity of many top distributors, claiming, “as in all pyramid schemes, the opportunity is greatest for those who get in early,” making the point that it was the suckers who joined later who were often left holding the bag, or, in this case, thousands of dollars’ worth of Herbalife products. The nutritional supplements, they showed, were often dumped on eBay and other internet sites when they couldn’t be sold as expected.

  The report documented other similar companies either fined or shuttered by regulators over the years and concluded by calling Herbalife “a predatory money trap.” “The fraud is both obvious and complex,” they wrote. “We have uncovered strong evidence that Herbalife operates as a pyramid scheme.”

  The women were hopeful that Team Ackman would read the document and be so compelled by it that they’d be willing to start shorting Herbalife shares on the spot. There was only one issue—Ackman’s lawyers initially wouldn’t let him read it, as they were worried about some obscure legal language that protected Herbalife’s distributors. Pershing’s attorney initially redacted nearly every line in the report, giving Ackman a black-marked copy to see. Ackman wasn’t happy, but the move was a sign of just how sensitive Pershing’s management was to potential lawsuits that might pop up.

  Even so, Dinneen, who’d seen the Omaha club for himself and then continued to do his own research, sometimes sleeping under his desk between long days at the office, was more convinced than ever that Herbalife was the perfect Pershing target.

  Ackman, however, who was ultimately the only voice that really mattered, still wondered about a catalyst, knowing that no matter how good a story was, there had to be a mechanism to make it work. The MBIA struggle had underscored it, and winning with Herbalife, he thought, would be no different.

  Pershing’s investment committee continued to meet, and though some, including Dinneen, argued vociferously in favor of betting against Herbalife, Ackman refused, perhaps swayed by the misgivings of others and by his own desire to not be the front man in another public feud, no matter how compelling the story.

  Not that Ackman didn’t want to be the center of attention again. Quite the opposite. He lived for it.

  3

  THE ACTIVIST

  Bill Ackman smashed a return into the net, served up an expletive, and returned hastily to the baseline for the next point. It was just a friendly tennis match on Ackman’s spectacular Bridgehampton property over the summer of 2016, but the investor was as dialed-in as ever. There were grunts and grimaces, the atmosphere nearly as tense as Wimbledon. Ackman liked pushing himself against players with pedigrees—former pros or aspiring ones who could run him around his Har-tru clay court. He may have been in all-whites instead of a business suit, but Ackman was no less determined to win. Ackman was always on.

  “Bill plays tennis the same way he invests,” said a friend and sometimes on-court opponent of Ackman’s. “He’s looking for home runs and outright winners. He needs to win every point, game, and match he plays.”

  Those who know him best say that he has always been this way—fiercely competitive no matter the sport or challenge at hand.

  “He likes to win and is always optimistic that he will win,” said Mike Grossman, a childhood friend and one-time doubles partner who met Ackman at a local tennis club when he was thirteen years old. “We did win most of the time, and when we didn’t he always thought it was an aberration,” Grossman said.

  Ackman was raised about thirty miles from Manhattan, in leafy Chappaqua, New York, known for being home to Bill and Hillary Clinton and the kind of Westchester town dotted with old-monied mansions and a place where children of privilege were expected to do well in life.

  Ackman was no exce
ption.

  The youngest child of Lawrence and Ronnie Ackman, young “Billy,” as he was known back then, grew up in a well-to-do and loving family with all the accoutrements one might expect from such a statused upbringing. There were sleepaway camps in the summer, where Ackman enjoyed camping, canoeing, and kayaking along with baseball and other sports.

  Taller than most boys his age, Ackman ran cross-country and captained the tennis team at the nearby prestigious Horace Greeley High School, where he excelled. Even then, Ackman showed the traits that have made him the most talked about investor on Wall Street.

  “He was always larger than life. Very opinionated, self-confident, brash, blunt, honest, and polarizing,” said Grossman. “Some people loved him, some people didn’t, but he made his presence felt and always had an unshakeable faith in himself.”

  While sports may have been Ackman’s early passion, business was never far behind. Ever the aspiring entrepreneur, as a young teen Ackman had his own car-waxing operation, along with a few other side ventures, to make some extra cash.

  “He was a big-time capitalist and always interested in how money could be made,” said Grossman.

  He also could look across the dinner table each night for inspiration.

  Ackman’s father had become CEO of the family’s real-estate brokerage firm, named Ackman-Ziff, which traced its roots to the early 1920s. Ackman’s grandfather had started the business with a brother, somehow surviving the Great Depression and World War II while building the firm up to focus on the lucrative business of property finance.

  While Ackman took a modest liking to real estate, it was hardly a given that he’d follow in his father’s footsteps. A straight-A student, Ackman graduated fourth in his class of 280 at Horace Greeley, as he was quick to tell anyone who asked.

  Grossman said Ackman seemed destined for success and wasn’t afraid to bet on it or talk about it. “I gave him a T-shirt for his sixteenth birthday, and the expression I had put on the shirt read, a closed mouth gathers no foot,” he said. “He got a kick out of it. He’s genuine. He’s real. There’s no BS with Bill. He’s a genuinely honest, high-integrity person. He’ll tell you exactly what he thinks—there’s no playing games or politics. What gets underestimated is his high level of integrity.”

  Ackman demonstrated his self-belief by wagering his father $2,000 that he’d score a perfect 800 on the verbal portion of the SAT. Ackman had been acing practice tests in the weeks leading up to the exam and figured he’d nail the real thing too. But the night before the test, Ackman’s dad, perhaps figuring the pressure of the test was enough weight on his son’s shoulders, along with having no real desire to lose a cool two grand, abruptly canceled the bet. Ackman got a 780, missing one question. He missed three on the math part, scoring a 750, and still seems pissed about it.1

  Since Ackman’s older sister, Jeanne, had begun studying at Harvard College a year earlier, it seemed only natural that Bill would follow suit. Sure enough, in the fall of 1984, Ackman enrolled in Cambridge, and it didn’t take long for the outspoken freshman to make an impression on the more seasoned student body. Friends say Ackman was outgoing and opinionated—unafraid to start a debate or express his passions and points of view.

  “Bill was polished at a super young age,” said Whitney Tilson, a star investor and public commentator who first met Ackman in 1986 on Harvard’s campus. “Just off-the-wall smart, ferociously competitive, off-the-charts confidence, which some might call arrogance, always an incredible talker.”

  Those attributes would come in handy during a college job Ackman took selling ads, alongside Tilson, for the “Let’s Go” series of travel guides that were popular with backpackers.

  “Whoever could sell the ads the quickest was going to make the most money,” Tilson said. “We were in a little room, no windows. I could listen to Bill’s calls and he could listen to mine. We were supposed to make $5,000 each—that’s what they made the previous year—but we ended up making twelve to thirteen thousand dollars each. We sold a half million dollars’ worth of ads in the course of a summer. That’s real money for college kids.”

  Ackman excelled in the classroom too, and on the adjacent Charles, where he rowed crew. He said he became one of the best “strokes” on the Harvard team—the member of the squad who guides the boat and sets its pace. And though he’d never make it to the top boat, where all the glory was, Ackman claimed he was happy just to be recognized at all.

  But while driven to succeed at Harvard, Ackman had no clear direction of what he wanted to be in life, other than to make a lot of money. After graduating, he went to work in the family business. His job was to find financing for developers to build new projects or to help developers who wanted to borrow money. Ackman was convinced by his father that the experience he’d get at the firm was better than that at most other jobs, and being the son of the CEO couldn’t hurt either.

  Ackman did the job for two years, but found the work uninspiring. He figured it would be more fun to be on the other side of the phone—the “players” actually looking to do the deals, rather than the guy trying to service ones. And though real estate may have been an interest, it wasn’t a passion.

  Still, Wall Street was barely on Ackman’s radar. He’d occasionally pick up the Wall Street Journal for kicks, but he hadn’t aspired to be the next Warren Buffett—at least not yet.

  After those two years at his father’s firm, Ackman returned to Cambridge to attend Harvard Business School, where he found his true calling. It was Wall Street where Ackman decided that he would make his mark.

  Having some close-to-home connections helped. One night, Ackman’s dad made an introduction during a cocktail party to a man named Leonard Marks, a successful investor who urged the young wannabe to read Benjamin Graham’s definitive value-investing bible, The Intelligent Investor, which Ackman readily did, along with several other books on the subject. It was the same Ben Graham who’d inspired Mr. Buffett many years earlier, so Ackman was more than eager to dive in.

  It wasn’t long before he’d put the words of wisdom he’d read on paper into practice.

  At Harvard, Ackman used $40,000 he had saved from the job at Ackman-Ziff and, in October of 1990—at the bottom of the recent stock-market cycle—opened a Fidelity account in his own name and began investing for the first time. His first stock purchase was Wells Fargo for $47 a share, as he believed the bank was better than its competitors because of its more conservative loan book. It didn’t hurt that the aforementioned Buffett, whom Ackman was all but idolizing at this point, had recently bought shares too and at a higher price. Ackman would also buy stocks in real-estate firms and retailers, using the knowledge he’d soaked up over the years from his father. One of those trades was in the department store chain Alexander’s. Ackman bought shares for around $8 apiece when the company filed for bankruptcy. Months later, he nearly tripled his money, selling them for $21.2

  Always on the hunt for insight, Ackman read every word of Buffett’s annual letters to learn as much as he could about the art of investing. In a twist of fate, the Oracle and his young believer would actually have a chance meeting at Fordham University in New York City, where both were attending an event. Ackman’s seat that day in the auditorium just happened to be next to Susan Buffett, Warren’s then wife, who took an interest in the young investor and saved a place for him next to the couple at lunch. At the meal, seated right next to the man himself, Ackman peppered Buffett with questions about the markets, he later recalled. But it wasn’t a story about the markets that stood out. As Ackman tells it, after returning to his seat with a plate of food, including a brownie for dessert, Mr. Buffett salted the entire dish, including the dessert.

  Some of the actual investing conversation must have stuck as well because back at HBS, Ackman approached a classmate named David Berkowitz about starting their own investment fund.

  “David said a lot of smart things,” Ackman told the Washington Post. “And I thought this is a sharp guy. W
e became friendly.”3

  Berkowitz studied engineering at MIT, and Ackman thought he was brilliant. Berkowitz, who’d come from a family of more modest means than that of the Westchester-reared Ackman, was interested, but nearly backed out at the eleventh hour.

  Berkowitz eventually agreed to join forces on the fund with the stipulation that the two neophytes would need to raise at least $3 million to get going. Ackman had already raised money from the father of a classmate and two professors at Harvard, including $250,000 from Martin H. Peretz, who taught social studies and was then the editor-in-chief of New Republic magazine.4 Peretz, who now serves on Pershing Square’s advisory board, wasn’t shy in urging Ackman to start his own fund rather than work at a larger institution. It was then that a friend of Ackman’s then girlfriend’s mother introduced the boys to George Rausch, an heir of the Ryder truck family. Rausch agreed to give the boys $900,000, bringing their total assets to $2.9 million—still slightly below Berkowitz’s threshold. Finally, Ackman was introduced to a member of the infamous Durst family who agreed to give the boys $250,000. It was enough to push Berkowitz over the goal line.

  Ackman’s father had kicked in money too, and with a total of seven initial investors and $3.2 million in assets under management, Gotham Partners Management opened in New York City, with the fledgling firm renting space in the famed Helmsley Building, at 230 Park Avenue, where other startups had also set up shop.5 Sharing a single office, the two men had desks, a Bloomberg terminal, and no windows. In other words, they had arrived.