When the Wolves Bite

by Scott Wapner

  By the time the winter of 2012 rolled around, Third Point, with $10 billion under management and annual returns of more than 20 percent, had major positions in Yahoo, Delphi, American International Group, Ally Financial, and Murphy Oil.21

  Now Herbalife had joined the list.

  For CEO Michael Johnson, Loeb’s landing, and his filing on January 9, couldn’t have come at a better time. The following day, Johnson was scheduled to be in New York for an Herbalife investor day, the first public opportunity for the company to offer up its defense against Ackman and his takedown.

  But Johnson and his executive team would soon learn they’d have more than just Ackman to contend with.

  At 4:33 p.m. on the 9th, “S.E.C Opens Investigation into Herbalife,” read the headline on the New York Times’s website.22 Times reporters Ben Protess and Michael J. De La Merced said the agency’s enforcement division had opened an investigation into the company, according to a source, and that the inquiry “was likely to examine the company’s sales practices.”

  The Wall Street Journal had first reported the news, which initially caused Herbalife shares to fall before they recovered. At the end of the day, the stock finished higher by 3.7 percent, at $39.77 a share. Investors apparently believed the inquiry by the SEC’s New York office was routine and was trumped by Loeb and his new position.

  Ackman was elated. While the SEC had taken years to investigate his other big short, MBIA, here were regulators knocking on Herbalife’s door after only two weeks.

  “We were on a roll,” Ackman said. “I was like, ‘OK, this thing could be over fast.’”

  The next morning, on January 10, with a cadre of television news live-trucks lining West 57th Street, Johnson and the other senior Herbalife executives—President Des Walsh, Chief Financial Officer John DeSimone, and Chief Operating Officer Richard Goudis—along with Moelis’s Navid Mahmoodzadegan, lawyers from the firm Boies Schiller Flexner, and PR consultants from the crisis firm Joele Frank walked into the Four Seasons Hotel set to officially debunk Ackman’s claims.23

  Some considered the event a make-or-break moment for Herbalife.

  At 8:46 a.m., Walsh gave investors a flavor of what to expect. He appeared via satellite on CNBC’s Squawk Box program, telling host Andrew Ross Sorkin that Ackman’s claims were a “gross distortion of reality,” that “product results drive sales,” and that Herbalife provided “a tremendous business opportunity.” Walsh also claimed that Herbalife had “a huge customer base” outside of its distributor network, a reference to the accusations that had been made during Ackman’s presentation.

  In premarket trading that morning, Herbalife shares rose 3.1 percent, to $41.18, about $15 higher than they’d been after Ackman’s initial speech.

  At 9:02 a.m., Johnson, looking calm, walked onstage for what he called “a unique event.” “There’s a tremendous amount of misinformation about Herbalife,” Johnson said. “This misinformation has found its way into the marketplace, and we’re looking to correct that today.”24

  COO Goudas walked through some of Herbalife’s products and how they were made, citing “misrepresentations” made by Ackman.

  Then, it was Walsh’s turn.

  “If we’re not a legitimate company,” he asked, “why on Earth would we invest hundreds of millions of dollars in products and facilities?”25 He continued, “Our business model is business-to-business. We sell to distributors. It’s simply the nature of our business model.”26

  To counter Ackman’s claims that the overwhelming majority of Herbalife’s products were sold almost exclusively in-network, the company had commissioned a survey to prove otherwise. Kim Rory, a vice president with Lieberman Research, which had done the work, said 5 percent of the adults polled in the United States had bought Herbalife products. That equaled 5.5 million households and “clearly a large consumer base of Herbalife products,”27 she claimed.

  Walsh said it was a “myth” that Herbalife didn’t have real outside retail customers.

  “This is the picture Pershing Square would have you believe,” he said. “The reality, of course, is very, very different.”28

  The pushback was working.

  By just after 10 a.m., Herbalife shares had risen 7 percent to session highs.29

  Then it was Johnson’s turn again.

  “This is a fabulous company with an incredible future,” he said. “We’ve been here for thirty-two years, and we’ll be here for another thirty-two years.”

  At 11:34 a.m., the presentation ended.30

  Before leaving, each attendee got a goodie bag in the company’s green corporate colors filled with Herbalife products, some of the same products Ackman had thrown under the bus a few weeks earlier.

  Johnson hit the door, got into a waiting car, and headed to the airport for a flight back to Los Angeles for a distributor dinner that evening.

  Ackman released a statement that day saying Herbalife “distorted, mischaracterized, and outright ignored large portions of our presentation.”

  At the end of a volatile trading session, Herbalife shares closed down 2.8 percent, at $39.24 per share.

  Even so, Johnson thought he had nailed it and that the pushback would resonate on Wall Street. He climbed aboard the plane home and exhaled, assuming his fight with Ackman would soon be over.

  8

  THE BRAWL

  Michael Johnson was in church.

  It was Christmas Eve 2012, just days after Ackman made his presentation on Herbalife. Johnson had arrived early with one of his sons, hoping for something of a miracle—to save a dozen or so seats for family and friends who would join them for the pre-holiday Mass in fifteen or twenty minutes. Standing in one of the pews, Johnson and his offspring tried their best to wave off the inquiring eyes, when his mobile phone rang.

  “No Caller ID” read the screen.

  Thinking it was his wife calling, Johnson walked outside into the California night and hit the green “Accept” button on his iPhone.

  “Hi Michael, it’s Carl Icahn,” said the voice on the other end in a friendly and engaging tone. “I don’t get this Ackman thing.”

  Johnson had no idea how Icahn had gotten his number, but couldn’t talk—his wife had just shown up and was waving for him to hang up.

  It wasn’t a request.

  “But it’s Carl Icahn…, it’s Carl.” Johnson said, unable to even finish the sentence.

  Johnson sheepishly told Icahn he’d have to call him back the next day and hung up the phone, somewhat abruptly.

  The next afternoon, on Christmas, Johnson went to a quiet spot inside his Malibu mansion and dialed Icahn’s number. Not one to beat around the bush, Icahn got right to the point.

  “‘I don’t think this guy Ackman is right,’” Johnson recalled Icahn saying. “He said he was going to take advantage of that and get in on the other side.”

  Johnson had never met Icahn but knew of his tough-as-nails reputation. He also figured that having the iconic investor in his corner was a potential game-changer in the fight with Ackman. It wasn’t that Dan Loeb was chopped liver—he wasn’t—but he also wasn’t Icahn—a billionaire many times over who answered to no one. Plus, Icahn had something that Loeb didn’t—staying power. Icahn’s cash hoard, estimated to be nearly $20 billion at the time, was almost all his own, meaning he didn’t have to worry about the interests of outside investors. Icahn’s fiduciary responsibility was to Icahn himself. Icahn was also more than happy to mix it up anywhere, at any time, which Johnson knew could be a great asset against a guy like Ackman, who was loud in his own right.

  “We had many people lined up against us that to have somebody lined up with us—it’s a huge positive,” said Johnson when we spoke about the development.

  The substance of the Icahn/Johnson call remained a secret until January 16, 2013, when a Wall Street Journal headline splashed across the paper’s website. It simply read: “Icahn Takes Herbalife Stake.”1

  The Journal’s Juliet Chung reported that I
cahn had taken what amounted to a “small” position in Herbalife and that he, or one of his associates, had recently met with the company’s management.

  Despite the news, Herbalife shares fell 3.8 percent on the day to close at $45.06. Perhaps it was because most observers figured Icahn was simply along for the ride, content to ride shotgun on Herbalife with Chapman, Hempton, and especially Loeb, whom he had a great amount of respect for as an investor. It didn’t take long for Icahn to make it clear that he had other plans.

  One week later, on the afternoon of January 24, Icahn appeared on the Bloomberg business TV network but refused to even discuss whether he’d bought any Herbalife shares.

  “I’m going to sort of duck that question,” Icahn said coyly when asked by the show’s host, Trish Regan, if he’d gone long on the stock.2 But while Icahn may have been reticent to talk about Herbalife directly, he didn’t hold back when it came to Ackman himself and his over-the-top tactics.

  “Look, it’s no secret to the world and to Wall Street—most guys on Wall Street I sort of like and get along with—it’s no secret that I don’t like Ackman. I don’t respect him and I don’t like him,” said Icahn with stunning ease.3 “But that doesn’t mean that I’m going to go in and buy stock in a company necessarily just to get him—frankly I don’t like the way he did this anyway. I think if you go short, you go short and hey if it goes down you make money—you don’t go out and get a room full of people and badmouth the company. If you want to be in that business, why don’t you just go join the SEC?”4

  It was riveting television. Icahn lit into his nemesis in a barrage of insults.

  “I will tell you—I dislike the guy, I don’t respect him—I’ve done business with him and he wasn’t forthright,” said Icahn before the segment ended.

  Icahn was alluding to the old Hallwood dispute, when he and Ackman had ended up in that ugly legal fight during the last days of Gotham. The beef ultimately cost Icahn $4.5 million dollars on what the financier felt was a technicality. The ruling had enraged him, partly because of the hefty check he’d had to write, but also because of Ackman’s attitude afterward. Ackman had gloated about the victory in the New York Times, which Icahn felt had violated a decades-old code on Wall Street—never rub it in the other guy’s face, no matter how gratifying the win.

  Icahn had never forgiven Ackman for it, and the reported Herbalife position, no matter how small it was said to be, had many wondering if his long-awaited chance at payback had finally arrived.

  While Icahn was going after Ackman on television, I was strolling through CNBC’s newsroom, when I stopped by the desk of a show producer named John Melloy, who was watching the spectacle on one of the four TV monitors atop his desk. Melloy ran the Halftime Report, which I hosted. Neither of us could get enough of what we were seeing.

  After the segment wrapped, I went back to my desk and impulsively emailed Ackman, whom I had never met before, asking if he wanted to respond to Icahn directly. I got my response later that evening, sitting at a table inside the lounge at the Surrey Hotel, on Manhattan’s Upper East Side, waiting to have dinner with an acquaintance, thumbing through my emails to pass the time.

  A message from Ackman suddenly popped up, saying he was putting the finishing touches on a statement and would send it to me first, momentarily. It was pay dirt, I thought.

  A few seconds later, it appeared in my inbox:

  On March 1, 2003, on behalf of my former fund, Gotham Partners, I entered into a contract with Carl Icahn, signed by him, to sell him a 15% stake in Hallwood Realty Partners. He paid my investors $80 per share and agreed to what he called “schmuck insurance.” The agreement provided that he would pay my investors an earnout equal to 50% of his profit on Hallwood after he received a 10% annual return if he “sold or otherwise transferred” his shares for value within three years. Fewer than 13 months later on April 14, 2004, HRPT Property Trust acquired Hallwood. As a result, Carl and the other Hallwood shareholders received $136.16 per share in cash for their shares.

  Under the terms of our agreement, Carl owed my investors about $4.5 million. He refused to pay. I was forced to sue him on behalf of my investors. On September 6, 2005, the court awarded us summary judgment and found the agreement to be “clear and unambiguous.” He again refused to pay and appealed. We won on appeal and Carl was forced to post a bond for what he owed us and appealed again. In general, Carl waited to the last few days to appeal in order to delay the inevitable. After eight years and Carl’s appeals of the judgment were denied, in 2011 the Court forced Carl to pay my investors the $4.5 million they were owed plus 9% interest per year from the date of the sale.

  After Carl paid my investors, he called me up, congratulated me on winning, and said that he wanted to be my friend. I told him that I had no interest in being his friend.

  Carl Icahn is a great investor, but, in my experience, he does not keep his word.

  Within minutes, the release went public.

  “Bill Ackman Fires Back at Carl Icahn” read the Business Insider headline that posted at 8:31 p.m. that night.

  I asked Ackman if he’d come on my show the following day at noon to personally respond to Icahn’s so personal takedown. To my surprise, Ackman readily agreed.

  “Sure, I’d be happy to,” he said.

  I emailed the show’s producers, telling them of my coup.

  The stage was set—or so I thought.

  Not even five minutes after Ackman had agreed to come on my show, my phone rang again. Again, it was Ackman.

  “You know,” he said, sounding exasperated by the evening’s events, “I’m not going to come on. This whole Icahn thing is a sideshow. I promise that I’ll come on your show when I have something substantive to talk about.”

  “OK,” I responded, as I tried to hide the obvious dejection. I headed back to dinner, where my friend was waiting, when my phone rang again. Once again, I excused myself and headed into the small hotel lobby when the voice on the other end said, “Fuck it, I’ll do it.”

  He didn’t stop there. “Carl’s an asshole… he fucked me… he’s a fucking asshole!”

  It was on.

  The next morning, on January 25, 2013, as New York City was waking up to its first snow day of the season, I headed to the New York Stock Exchange to do Halftime Report from Post 9, CNBC’s new set on the floor just under where companies ran the opening bell each day.

  Shortly before noon, Ackman called in to the control room back in New Jersey, where the production staff checked his audio levels and made sure he was good for air.

  At high noon, we went live.

  “The war of words between two hedge fund heavyweights is heating up…” I began as I welcomed Ackman to the show. “Bill, it’s good to talk to you,” I said.5

  “Sure, thanks for having me,” he said, clearly ready to commence the rebuttal.

  “Let’s try to move the argument forward here,” I said. “The fundamental one that Mr. Icahn seems to be making against you is that you were too aggressive—too public in the way that you attacked Herbalife in announcing your short position to the world. What would you say to that?”

  “Do you know what’s fascinating about it?” Ackman retorted. “In 2002 and 2003, Carl spoke at the Ira Sohn Conference… and talked about the same short idea both years. Trinity Industries, and he was short according to a Fortune story I just pulled up, 22 percent of the outstanding shares. I was there personally and remember him talking about the short and he gave a great story about why he was short. There was a room full of people, and it was the same conference, so I find it interesting our speaking at the Ira Sohn Conference in 2012 is somehow a bad thing.”

  Back in his office on the 47th floor of the General Motors Building, Icahn was watching the interview live and becoming angrier as Ackman spoke. If there was one thing that Icahn had no tolerance for, it was someone doing him wrong. “Don’t fuck me,” he liked to say when talking to me about a story or scoop.

  Bill Ackman, it
seemed, had fucked him.

  Unbeknownst to me, Icahn had his assistant dial up CNBC’s control room in Englewood Cliffs, New Jersey. Icahn said he wanted to speak to Ackman live right there on television.

  It wasn’t by accident.

  I’d later learn that an enterprising CNBC producer named Maxwell Meyers had called Icahn’s office that morning, told him of the planned Ackman interview, and floated the idea of a call-in. Meyers had known Icahn for years, even occasionally sending the investor delicacies from the smoked fish emporium Barney Greengrass on the Upper West Side as a “thank-you” for prior appearances on the network. Now, the pricey sturgeon was paying off.

  At 12:25 p.m., Icahn called in.

  Through my earpiece, John Melloy told me Icahn had been listening to the whole exchange and had called in to respond to Ackman.

  “Carl Icahn wants to call in and respond to you directly,” I said to Ackman. “I will give you two choices—you can hang on the phone and we can bring Mr. Icahn in and you guys can have that discussion with me on live television, if you’re up for that.”

  In the heat of the moment, I forgot to give Ackman the other option of calling it a day and hanging up.

  “You know, if Carl wants to come on, let’s make it fun TV,” Ackman said. “Let’s put it to bed and move on. If you promise me we can move from here and focus on whether Herbalife is a pyramid scheme or not, for the future of CNBC Television, I’m happy to talk to Carl on TV.”

  We went to a commercial, while I gathered my thoughts and prepared for the moment the best I could. We came back live, and I welcomed Icahn and Ackman back in to the Halftime Report.

  “Carl, we’ve been speaking with Bill for the last several minutes following the accusations you made yesterday, and he’s essentially saying that you’re a hypocrite, Carl, in your argument,” I said.

  “Listen,” responded Icahn, with a fury in his voice I hadn’t ever heard before. “I’ve really sort of had it with this Ackman guy. You know, why don’t we go back over a little history with him. I’m not going to get into talking about short positions as much as maybe you’d like me to, but hey, let’s start out with my history with this guy. Minding my own business and in 2003, I get a call from this Ackman guy, and I’m telling you he is like the crybaby in the school yard. I went to a tough school in Queens, and they used to beat up the little Jewish boys. He was like one of these little Jewish boys crying that the world was taking advantage of him.… He was almost sobbing, and he’s in my office talking about how I could help him. And it was like in the old song, you will rue the day I ever met the guy.”