by Scott Wapner
Ackman had a plan for that too.
On December 19, the day before the Sohn special event, Ackman called CNBC’s hedge-fund reporter, Kate Kelly, to break the news about the big short. Kelly had a slew of big contacts in the industry and from Ackman’s point of view was the perfect person to drop the bomb.
Just before 2 p.m., Kelly busted into CNBC’s regularly scheduled programming with the “breaking news.”
“I’ve just learned that Pershing Square hedge-fund manager Bill Ackman has a major new short position in Herbalife,”13 Kelly said, while producers in the control room threw up a stock chart to watch the reaction on Wall Street. “Ackman considers Herbalife to be one of the single best investment short thesis he’s ever seen from what we’re hearing,” said Kelly. “He has been short Herbalife for about seven or eight months and will unveil more details why at the Sohn Conference tomorrow morning.”14
Boom.
The Kelly scoop immediately sent Herbalife plunging, falling 15 percent within seconds. Three thousand miles away, inside Herbalife’s Los Angeles headquarters, CEO Michael Johnson saw the slide and went apoplectic.
“Who the fuck does this guy think he is,” Johnson screamed to no one in particular, while a spokesperson with the company quickly drafted a statement blasting Ackman. Johnson continued his tirade. He was out for blood and didn’t care who knew it. He also felt powerless to stop the stock’s slide considering he was in Los Angeles and Ackman was in New York, where the story was just starting to spiral. Johnson wiped his schedule and called the Los Angeles offices of Moelis & Company, an investment bank that Johnson had done business with in the past. The firm’s copresident, Navid Mahmoodzadegan, took the call. He knew Johnson well and urged the now frantic CEO to remain calm while the two figured out exactly what they were up against.
Johnson would have none of it, arguing that he wasn’t about to let some asshole back in New York ruin his company in a matter of minutes. So Johnson did the unthinkable. He picked up the phone and called into CNBC’s Street Signs program and unloaded on Ackman in a tirade reflecting his outrage.
“First of all, this is not about Herbalife’s business model; this is about Bill Ackman’s business model,” Johnson railed into the phone, as Kelly and the program’s host, Brian Sullivan, listened and watched the stock react in real-time. “This is wrong,” Johnson said. “This is totally wrong what is taking place. This is blatant market manipulation. We’re not a pyramid scheme—that’s a bogus accusation. We have millions of customers around the world. We don’t pay for recruiting. We’ve been in business thirty-two years. We just announced a hundred-million-dollar facility in North Carolina employing over five hundred people with the governor of North Carolina this morning. This is a legitimate company. Mr. Ackman’s proposition that the United States would be better off when Herbalife is gone… The United States would be better off when Bill Ackman is gone.”15
Just like that, one of the biggest battles Wall Street had ever seen was on. Ackman watched Johnson’s explosion live and was taken aback at how angry he appeared, even feeling threatened by the outburst. Johnson was pissed, so much so, as the rage was spilling from his body, that he’d jumbled Herbalife’s sales figures in an exchange with the CNBC on-air talent. Kelly had asked Johnson questions similar to those that Einhorn had asked about Herbalife’s long-controversial sales figures.
Here’s the transcript:16
KELLY: “Mr. Johnson, questions have been raised by other major investors, including David Einhorn. Are the sales that go on about your products confined to your own distribution network? Is that the case, or is it broader than that?”
JOHNSON: “We have millions of customers. Our customers are sometimes called distributors; that’s the only confusion that we have, and they are distributors because they get a discount on our products.”
KELLY: “Can you give us a percentage figure though Mr. Johnson as to what percentage of your sales are outside that distribution network?”
JOHNSON: “90%.”
KELLY: “So the vast majority?”
JOHNSON: “Absolutely.”
The number was not accurate. Johnson had fucked up, and he knew it—not that there was anything he could about it now.
Ackman pounced, claiming Johnson had lied.
“He really sounded like a thug,” Ackman remembers. “It was clear to me that it was not the reaction of a normal CEO. He flat-out lied.”
It all set the stage for the main event the following morning at the AXA Center.
On the morning of December 20, Ackman made the short trip from Pershing’s offices to 787 Seventh Avenue, where the AXA was located, to give his presentation. Dinneen and a cadre of Pershing executives followed, taking a seat in the front row for moral support.
As the clock struck 9 a.m. Eastern time, the event began.
“Good morning, my name is Evan Sohn, and I’d like to welcome you to the first Sohn Foundation Conference Special Event.”17
Standing backstage, Ackman believed the presentation he was about to give was the best piece of research Pershing had ever done. There were no rehearsals—no dry runs in front of a mirror or practice speeches in front of his Pershing Square colleagues. Ackman had never felt more ready. He knew what was at stake and wasn’t about to blow it.
After the brief introduction, Ackman, dressed impeccably in a dark suit and royal blue tie, quickly walked onstage clutching a clicker to advance the slides, and began.
“OK, so we’ve got a lot to cover today, and we’re going to move pretty quickly,”18 Ackman said as he pushed the button on his projector remote to reveal the first slide.
“Who Wants to Be a Millionaire?” it read.
“Herbalife… if you can dream it, you can do it,” Ackman began, mocking a slogan from Herbalife’s own marketing materials.
Ackman began by highlighting the company’s remarkable growth, marveling how, in a little more than thirty years, Herbalife had gone from nothing to a $5 billion market cap company, becoming “one of the fastest growing companies in the history of the world.”
“Has anyone in the room purchased an Herbalife product?” Ackman asked of the few hundred in attendance.
One or two hands went up.
“This is not a particularly well-known company,” he continued.
He called out the company’s top-selling product, the Formula 1 meal replacement, comparing the shake’s impressive sales figures to more mainstream household products like Clorox, Crest, and Palmolive.
How was Formula 1 “the only $2 billion brand nobody’s ever heard of?” Ackman snickered.
“How is it possible that Herbalife sells six times more nutrition powder then Ensure, Slim Fast, and GNC’s Lean Shake?” Ackman wondered. He even used Johnson’s own words from the previous day against him, chiding the chief executive over the 90 percent figure he’d told Kate Kelly of CNBC regarding the company’s sales.
Then Ackman played a video. It was a highly produced testimonial made by Herbalife itself featuring the top-selling Herbalife distributor Doran Andry that Richard had mentioned in her original research report. Andry had left a desk job at the age of twenty-two, saying he was taken by the business opportunity Herbalife presented. He’d climbed the Herbalife sales ladder, reaching the top-level Chairman’s Club, and he had all the spoils to show for the ascent.
“This is a product that is changing people’s lives,” said Andry, showing off the Ferrari, Bentley, and expensive chopper-style motorcycle he’d gotten from working “two to three hours a week” as an Herbalife distributor.19
“In my very first calendar year, our income hit $350,000,” Andry claimed. “And our second year, I turned thirty and Miko (Andry’s wife) turned twenty-five, and our income hit $1,100,000. We had become millionaires.”
Andry gave a guided tour of the opulent mansion he’d bought.
“You know, it’s really amazing. I step out of the Ferrari, Bentley, whatever, and people go, what does that guy do for a li
ving? And I go, I’m an Herbalife independent distributor. And people are absolutely amazed what I do. It’s an incredible quality of life. All of you, if you just dream, can have all that we have, and much more.”
Ackman mocked Andry’s success, calling Herbalife “the best-managed pyramid scheme in the history of the world.”
Then, it was Dinneen’s turn at the lectern.
He attacked Herbalife’s marketing and compensation structure, which he and Ackman said was a purposely convoluted web of misinformation based almost entirely on recruiting. The pay plan, they charged, essentially worked like this: when an Herbalife distributor recruited new members, or distributors, into the business, they received a commission when that person bought products from the company and continued to get paid when those original recruits found others to join. And as their so-called “downline” bought Herbalife products, a distributor would move up the Herbalife food chain to higher and higher levels, with the biggest sellers ultimately reaching the Chairman’s Club level, where Andry and others were striking it rich.
There was only one problem, asserted Ackman and Dinneen. Almost all of Herbalife’s new recruits actually failed at the business opportunity, they claimed, losing thousands of dollars in the process, with many dropping out altogether within the first year. They also charged that the only sales the company was actually making were from distributor to distributor, one of the key hallmarks of a pyramid scheme.
“Do we even know if any retail customers exist?” Dinneen asked, almost rhetorically.
Over three and a half blistering hours, Ackman, Dinneen, and Pershing Square attorney David Klafter shuttled through 343 slides. Herbalife shares, which had fallen 12 percent the day before on the Kelly scoop, plunged nearly 10 percent more while Ackman and company made their case. In the space of twenty-four hours, billions of dollars in Herbalife market cap had evaporated. Ackman made it clear he didn’t expect the stock to stop there.
Minutes after leaving the stage, Ackman calmly sat for an interview with CNBC’s Andrew Ross Sorkin and said of the stock, “If it’s found to be a pyramid scheme, it’s a zero.”
A zero. Think about that. Ackman wasn’t just betting on Herbalife shares falling; he was banking on the company’s demise—its death—something even those who agreed with his thesis thought was risky.
“I think he did a very good job, but when he made the comments about it going to zero, I think I said to myself, why is he saying that?” remembered the CNBC reporter Herb Greenberg, who’d also done work on Herbalife for a documentary project produced by the network. “He was drawing a line that showed so much hubris, but I thought it was a really good presentation.”
Ackman accompanied the more than three hundred slides with a website that needled Herbalife even further. He called it “Facts About Herbalife,” and it went into even greater detail about the fraud he was alleging. Ackman also pledged to give all personal profits he made to charity, lest he receive any “blood money” from the trade.
Back in LA, Herbalife’s management was shell-shocked. Most in the office had expected Ackman to lay it on heavy, but not over several hours and with so many damaging accusations.
Then, there was the reaction of Herbalife’s legion of distributors—its de facto sales force. Though few if any had any idea who Ackman even was, they sure saw the reaction of the stock and were left questioning whether their livelihoods were about to go up in flames.
John Tartol had been an Herbalife distributor for thirty-six years, rising through the ranks to become a top-selling Chairman’s Club member. He earned millions of dollars a year from the business opportunity after having tried the product himself and becoming sold on its effects.
“I lost twelve pounds in a very short time,” he said. “I had great energy, and I thought I’d start sharing it with others.”
Tartol thought Ackman’s allegations were false.
“We’ve been around for over thirty years, doing billions of dollars,” he said. “You can’t kid the public about a product for thirty years if it doesn’t really work.”
But no matter how much conviction Tartol and the other distributors had in Herbalife’s products or the business itself, at that very moment, none of it mattered. It was Ackman the activist against Herbalife, and the market seemed to believe the billionaire investor. It was the reality of how the stock market had come to view activist investors in general and the power they had come to wield.
“It makes me angry because (Ackman) wanted to fill his own pockets,” said Tartol. “There are certain people who have bad motives. There should be ramifications for people spreading misinformation and harming the business.”
Tartol said the company reached out immediately to its rank and file to make sure they were well informed, even if slightly unsettled by Ackman’s presentation and the dramatic stock drop that followed.
With his company’s stock in free fall, Johnson, who’d never before been through such an exercise in his professional career, picked up the phone and called his mentor, Jerry Perenchio, the billionaire who once ran the television network Univision. Perenchio had watched part of Ackman’s presentation and had heard the damning accusations. Right there on the phone, Perenchio made Johnson walk him through the business to prove it was legitimate.
Herbalife released a statement saying, “Today’s presentation was a malicious attack on our business model based largely on outdated, distorted and inaccurate information.”20
But Herbalife’s executive team wasn’t the only party stunned by the intensity of the takedown.
The research analyst Tim Ramey, who covered Herbalife for the firm D.A. Davidson, said, “I’ve never seen an investor spend three and a half hours of time at a major venue being webcast and then make TV appearances to make his point. It’s the largest orchestrated bull or bear case that I’ve ever seen.”21
“This is the highest conviction I have ever had about any investment I have ever made, full-stop,”22 Ackman told a reporter before heading back to the office to watch the stock plummet even more.
“I thought the thing would be done in less than a year,” Ackman said later. “I thought the stock would get crushed and the distributors would start to freak out, that the pyramid scheme would collapse and the distributors would move on to some other pyramid scheme.”
Ackman soon learned it wouldn’t be that simple.
On December 28 at 5:30 a.m., the Australian hedge-fund manager John Hempton published a blog post titled “Bill Ackman enters the city of Stalingrad,” a reference to the epic battle in World War II that saw Nazi Germany face a catastrophic defeat.23 Many historians consider the seven-month bloodbath to be the greatest battle of the war, and Hempton figured, at least metaphorically, that either Ackman or Herbalife would face a similar fate.
“Someone is going to lose big,” he wrote. “And the victor will be so bloodied that the word victory will sound hollow.… For a short seller who is as risk-averse as me, watching this is pure hedge fund porn.”24
Hempton then let it be known which army he was betting on. In a stunning postscript he wrote:
P.S. I am utterly convinced by everything in Bill Ackman’s presentation except the final conclusion—that Herbalife’s stock will collapse. I took a long position on Christmas Eve. I suspect that Herbalife is so profitable and so powerful they will see Mr. Ackman’s attack off—and the easiest way to do that is to buy back stock (and make the stock go up). Mr. Ackman has given them the incentive to return their huge (but tainted) profits to shareholders (and I plan to be a recipient shareholder).25
The Hempton post caused Herbalife shares, which had sunk into the $20s in the days following Ackman’s presentation, to pop nearly 7 percent. Less than a week later, on January 4, 2013, Hempton went on CNBC with Herb Greenberg to explain why he’d taken the other side.
Of Herbalife, Hempton said, “It buys back stock regularly, it pays a fairly hefty dividend. They’re scumbags, but they’re the stock market’s scumbags.”26
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“I was surprised that he took the other side, because Herbalife was typically the type of company where he’d have been the natural skeptic,” Greenberg remembers. “I knew that he had done his own research, but I never thought he would make it so personal.”
Hempton had underscored the debate some other investors were having at that very moment—that Herbalife may in fact be a sprawling fraud, but that still didn’t mean the stock would collapse to zero under its own weight or that the government was going to shut the business down.
Wall Street would soon learn Hempton wasn’t the only notable money manager skeptical of Ackman’s thesis.
Out in Los Angeles, a man named Robert Chapman, who ran money for his namesake firm, Chapman Capital, had followed Herbalife since the late 1990s, when Mark Hughes had tried to take the company private in the leveraged buyout. It had been a messy process, and when it had become clear that the deal seemed unlikely, Herbalife shares had sunk to near $8. Chapman had pounced and gone long.
He said he traded in and out of the position every now and again but hadn’t paid much attention to Herbalife in years—at least until Ackman’s slideshow in New York, when his interest was piqued once again.
Chapman, who looks more henchman than hedge funder, had no great love for Ackman either. He thought the brash billionaire was more Barnum than Buffett, a sanctimonious schmuck who had Herbalife all wrong. Like Hempton, Chapman thought Herbalife could buy back stock or raise its dividend, with either event likely to drive the stock higher. He also went a step further, calling out Ackman’s timing for the public presentation, which came just ten days before year’s end, when hedge funds are marking their books to market or placing a fair value on their assets. Chapman’s message was implicit. By sending Herbalife stock dramatically lower at the end of the year, Ackman could goose his annual performance numbers.
On December 29, 2012, Chapman put out a public letter that read, “Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid.”27
