STEPHANIE RUHLE: Bill Ackman (Trades, Portfolio) of Pershing Square is on the phone with us. Bill, I want to start with you, on the record, let’s just make it clear, have you, your firm, or anyone you currently or HAVE previously employed been contacted or subpoenaed by the justice department or the FBI?
ACKMAN: No, not to my knowledge.
RUHLE: Not to your knowledge. So for example….
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RUHLE: Well what about — what about consultants who you have worked with like Global Strategies Group, Evelyn Mantilla?
Bill Ackman (Trades, Portfolio): My understanding is Global Strategy Group has been contacted by either the DOJ or the FBI, I’m not sure which one. And some of their subcontractors have received subpoenas.
RUHLE: And you have paid Global Strategies Group to do what?
RUHLE: And you pay them to help you with the Herbalife campaign?
ERIK SCHATZKER: Bill, beyond Global Strategies, what other consultants or other parties, to your knowledge, have been contacted by, interviewed by or subpoenaed by the federal law enforcement or prosecutorial authorities?
SCHATZKER: So Global Strategies is the only one that you are familiar with.
Bill Ackman (Trades, Portfolio): I think it’s Global Strategies and maybe some people that they have subcontracted. I think they are an organization based in Europe, and then they have sort of groups they work with who do similar things in different states. And so if we are working with a regulator in a certain state or a government official or whatever, we might hire a local lobbying organization. And my understanding — my thing is that I don’t think it is a massive number, but I think it is a handful of people have received –or the government has asked to talk to.
RUHLE: Then are you concerned that you are the big fish? So while you have not been subpoenaed yet, and you have not been told you are a target, the fact that the FBI or the DOJ has contacted consultants or people who have worked with you, are you concerned that you are the ultimate target who they want to go after?
RUHLE: Why? Why do you think they would go after them, just independently?
Bill Ackman (Trades, Portfolio): I don’t think they are actually going after anyone, as my guess is, look, Herbalife is now under investigation. It is the one-year and one or two-day anniversary of the Federal Trade Commission. And it’s two years and a couple months for the FTC. And it is over a year since the DOJ launched an investigation, and it’s according to press reports of Herbalife. And I have been — I have been here before.
Interestingly, Herbalife worked with the Joel Frank firm, and they fired them sometime in December and they hired Sarver Benin (ph), another firm. And Sarv (ph) represented MBIA Inc. (NYSE:MBI), and they had very similar kind of approach. And their approach was let’s see if we can attack the attacker. And they’ve been, I’m sure, I’m sure lobbying the government very aggressively, questioning everything we are doing. And the government (inaudible) if assuming this is the press reports and everything is true is looking in to make sure that Pershing Square did not do anything illegal.
And if you read the story in the paper, the story says that this is in connection with market manipulation. I mean Herbalife has been accusing us of market manipulation since the day before we made our presentation, like Michael Johnson went on TV and said that there has been a market manipulator in the stock, and now we know who it is. They’re giving a presentation tomorrow.
Market manipulation is when someone intentionally makes false or misleading statements about a company for the purpose of driving down the stock or driving up the stock. I have made only truthful statements backed up by enormous research. All of our materials are on two websites, facts about Herbalife.com and or a pyramidscheme.com. We have — we have every presentation we have made we put up there. We have video recordings. We have audio recordings. We have transcripts. We have all the documents that we used with respect to our research. There — no one has ever provided more transparency about the work they have done. I can tell you….
RUHLE: The video, Bill, the video that you have shown, I remember you showed a video with us just maybe a month or two ago, maybe in January or December before your puts expires. That video that you showed, was any of it edited, because maybe could one could make the argument if you look at a four-hour video, what Bill actually pieces together and puts in his presentation is sliced and diced to tell his story.
Bill Ackman (Trades, Portfolio): And by the way, I really strongly encourage you to watch the entire video, which we put on our website and we also put on kind of a greatest hits collection of excerpts. And the excerpts accurately characterize the whole video, but the whole video is there for people to look at. And we have given that to the government. That is a three-hour video that was done by Herbalife of a private meeting of top Herbalife distributors talking to other distributors in the presence of senior management of the company, basically explaining how they deceive people. And it is a remarkable — it’s a remarkable document.
SCHATZKER: I’m going to interrupt you for just a moment because I’ll acknowledge I have not watched the whole video. I have watched some of the excerpts that you have made available, but some of our colleagues have watched the whole video, and they come away, quite honestly, with a different impression then you. They say, and I am paraphrasing here, that the video goes into some of the kinds of practices that Herbalife may have once upon a time engaged in, but ultimately amounts to an exhortation not to engage in such practices. In other words, people employed by directly or indirectly by Herbalife are saying there are some bad practices. We may have done them at one point in time, but we should not be doing them.
Bill Ackman (Trades, Portfolio): Well, Herbalife, and by the way, the reason why Herbalife business is declining is because they are starting to tighten up their compliance regime. The problem they have is that they cannot operate legally and do business. And their distributors are still out in the world misleading people about the so-called Herbalife business opportunity. And it’s not just their distributors. In the last few months there was a….
SCHATZKER: That may be. But that does not address the question about whether the video, your characterization of the video is either, A, accurate or, billion, what other people, how other people would characterize it.
no one has ever accused us of mischaracterizing it, and if you — I appreciate your drawing attention to that video, and I hope people watch it. But what I can tell you is Herbalife Ltd. (NYSE:HLF) is a pyramid scheme. And they are harming people by inducing them to sign up for a business proposition where they’re going to lose their investment.
RUHLE: Bill, like clearly we know you feel this way. At this point this has been an epic battle. Clearly you did not want to see this in the paper last night, today. You don’t want to have to defend yourself on TV. Why not shut this trade down? Your investors have to be sick of it at this point. You had an amazing year last year. You don’t need this garbage.
Bill Ackman: I’m sure — I’m sure our investors are sick of it. And you look at Whitney Tilson on this Lumber Liquidators investment. This is a company that apparently is causing harm by using illegal wood that’s cheaper and exposing people to formaldehyde. I think it’s a very, very healthy thing for a short seller to identify a company that is defrauding consumers or harming consumers.
RUHLE: But, Bill, Whitney Tilson (Trades, Portfolio) has spent pennies compared to the tens of millions of dollars. You have got a formal — former whistleblower who is going to be involved in an ABC piece documentary that you have to pay now. You have to backstop that guy. That is a lot different from Whitney Tilson (Trades, Portfolio)’s situation.
Bill Ackman (Trades, Portfolio): The answer is, look, we manage a lot more capital than Whitney. And this — and when we are — when we spend money on a particular investment, whether it is a hostile takeover or in this case a public short, we size the spending in the context of the size of the investment. We spend a few percentage points of capital here, and we think it is going to be a good risk reward.
But by the way, I have said very publicly, and our investors know this as well, if we think it is not a good risk reward to be short Herbalife, we will cover. The reason why we think it is a good risk reward to be short Herbalife is we don’t need the government to act to make a lot of money here. Pyramid schemes grow very quickly, but they so-called pop, but they also drop very quickly. Herbalife has missed earnings now for the third time. They took guidance.
They raised guidance in July of last year to $5.75 I think for 2015. They took that guidance back in Q4. And then they redid that guidance just recently down to $4.20. I think they have no idea how their business is going to do over the course of this year. I expect they are going to miss earnings yet again over the course of this year. So I think it is a very good short, just on the business fundamentals. And I do think, however, that the government at some point here is going to act and shut the business down. And I think it will ultimately be a terminal short.
We do — we are short the stock for economic reasons. It is helpful, however, when you are short a company that it is actually harming people because the government here is motivated not to help short-sellers, and they are motivated to help victims. And the — in the case of, again, I make the analogy to Lumber Liquidators where by exposing fraud, you can help protect consumers. We are doing the same thing here. Again, we have an economic motivation because we’re investing capital on behalf of our — can I finish speaking before you interrupt me, of economic motivation we are working on behalf of our investors. And fortunately, there is also a good for society benefit for shutting the company down.
SCHATZKER: Pardon me, then, Bill. I was going to ask you what then about the possibility that consultants you have retained, Global Strategies, for example, may have made false statements to regulators while employed by Pershing Square? What if that’s the case?
Bill Ackman (Trades, Portfolio): Then I have no idea. Again, we have not encouraged anyone to make false statements. And, believe me, you don’t need to make a false statement about Herbalife to be negative about the company. We think the truth is really what’s powerful here and the truth is that the company is harming people. We don’t need to encourage people to exaggerate. I mean, what more negative can you say about Herbalife than it is a criminal enterprise that is harming people?
SCHATZKER: What if prosecutors want to know what kinds of questions have — to your knowledge, what kinds of questions have they asked at Global Strategies and other consultants in their employ under subpoena?
Bill Ackman (Trades, Portfolio): I have no idea what questions they have asked; I have no idea what answers were given. I really have no idea and I’m not sure it is my business to know. If you want to call up the government and ask them, I would encourage you to do that.
But, look, I think it’s appropriate — I have a lot of confidence, frankly, in the Department of Justice. We hired someone recently from there. I’ve had friends who’ve worked there. They are extremely capable lawyers. They know good from bad, right from wrong. Look, I think it’s very important that the accuser, us, it is not making up stuff that — when we’re explaining that a company is harming people. But I can tell – well, I can’t at you the nature of the discussions, but we have very proactively worked with the government agencies here in assisting them in understanding the company. And we have had many private meetings with the government and conversations and shared documents.
They don’t tell us when and whether they are going to do anything with respect to Herbalife, but they seem appreciative to read the information. And if they have any questions for us, they obviously know where to find us and we’d be delighted to answer any questions they have.
We are registered investment advisors. We are audited on a regular basis by the FCC. They do look at our trading and our e-mails and all those kinds of things. And if the government had any problem with our activities, I’m sure they would let us know.
RUHLE: Bill, you did hire former federal prosecutor Jenna Dabbs. And she’s a former narcotics chief; she’s never done anything in securities law. Why does her skill set, why does her background, suit you if it’s not that you are worried about an investigation?
Bill Ackman (Trades, Portfolio): Well, Jenna is terrific. I have known Jenna since the MBIA Inc. (NYSE:MBI) days. My philosophy with respect to hiring people is I hire very talented people. While she spent her time on drugs and narcotics, she also spent time in her white collar days working on securities law and compliance issues and things like that. And those are the principal areas she is focused on with us. We are not concerned about drug use at Pershing Square.
SCHATZKER: Bill, is there any connection between this investigation into possible stock manipulation and the departure a couple months ago of your former chief legal counsel Roy Kasowitz (ph)?
Bill Ackman (Trades, Portfolio): absolutely not. Roy is terrific. He is an outstanding guy. He is enjoying life after working extremely hard over eight or nine years here, and I expect he will be assisting one or more presidential candidates getting elected and that is his passion and he has done very well economically at Pershing and that has allowed him to take a break. But absolutely no.
RUHLE: If you believe Herbalife is behind this campaign — they went out, they hired a high-priced fancy PR firm to pump this story out why do you think Herbalife themselves wouldn’t have just sued you two years ago for manipulation or slander?
Bill Ackman (Trades, Portfolio): By the way, to be very clear, George Sard personally cleared Reuters in January and pitched this story. Reuters spent a couple months looking into it, ultimately decided not to run the story. Then Sard pitched “The The New York Times Company (NYSE:NYT).” “The New York Times” said that this was old news and chose not to run the story. And about 48 hours ago, we heard from “The Wall Street Journal.” And we said happy to answer any questions, whatever you need, and they ultimately chose to run the story.
So a win for PR firm. If Herbalife wants to sue us. I’ve said before, they’re welcome to do that. The reason why they don’t is that we’ve gotten a lot of information about Herbalife from former employees who’ve shared information with us and with the government. But we would not get the motherlode we would if we had access to — if you accuse someone of being a pyramid scheme, they sue you saying we’re not a pyramid scheme, well then we have the right
to actually have access to their records to prove that they’re a pyramid scheme. And that would put us in a position as strong as the Federal Trade Commission in terms of getting access to documents and materials. And that is why they don’t do that.
SCHATZKER: I just want to understand what you are just saying. The — George Sard, whom Stephanie and I know, very well-respected PR executive, pitched what exactly?
SCHATZKER: The allegation that stock manipulation took place or something factual — based in fact that the U.S. Attorney’s Office for the Southern District here in Manhattan is investigating potential stock manipulation? Because there’s a big difference between the two.
Bill Ackman: My understanding that this story was pitched by Sard multiple times. I have heard this from the press directly. And look, he is entitled to do that. Clearly, again, as far as I understand, the government has contacted some employees or subcontractors of Global Strategy Group. And because they are a firm that we hired that becomes major news. And the reason why I am on your show is I am happy to answer any questions you have about any thing that we’ve done.
And when someone comes out with a story like that and makes it sound like I’m personally under investigation, I certainly want to respond to that.
SCHATZKER: Well, we are not alleging that at all, one iota. But what we do want to understand is what potentially this investigation may mean for your position in Herbalife Ltd. (NYSE:HLF), the interests of your investors, to whom you have a fiduciary responsibility.
Bill Ackman (Trades, Portfolio): The answer is very little. If the government were to ask us for information, we would provide it. But the good news is that market manipulation is a — it’s very clear what market manipulation is and that’s when someone tries to artificially move a stock price by sharing false or misleading information. And that is clearly something that we have not done here. You can argue —
RUHLE: Well —
Bill Ackman (Trades, Portfolio): Can I finish this sentence, guys? I’m really — first of all, very few people in the world would come on to Bloomberg TV after an article like that in the paper. So I’m doing this to be transparent and to be helpful and I’m doing this for reputational reasons. But if I can’t finish a sentence, it is hard for me to be on your show.
So go ahead and ask your question and I will do my best.
RUHLE: Sorry, Bill. I just wanted to get a better understanding. These letter-writing campaigns, these groups who you have helped, who have gone out, former employees, and complained. I guess one of the issues people are asking, because you’ve organized them all, you have also paid them. So couldn’t one make the argument that you’re sort of fueling this?
There have been over 1,000 Herbalife victims who have filed complaints with regulators. Over 300 in California, many in New York, many in Illinois, all over the country. We have paid them nothing. OK? And these are people who have been harmed by the company and it’s really the government’s job to decide whether they want to act.
Look, the FTC had an informal inquiry of Herbalife that actually began we believe sometime around the time thatDavid Einhorn asked his questions in May of 2012. And it wasn’t until March of 2014 that the FTC launched a formal investigation, which requires a vote of a majority of the commissioners at the FTC. The FTC did probably 18 months’ worth of work. They understood how controversial this was. This was a time when Carl Icahn and all kind of people were on the other side very publicly promoting this thing.
And despite all the noise, the FTC looked at the facts, looked at the complaints, looked at the victims, and launched a formal investigation. That investigation has been underway for a year and two days. And we know it is a very intensive investigation because if look at Herbalife’s financial statements, they add back each quarter the expenses they’re spending on the FTC investigations. And just from March to the end of last year, they spent $15, $4.5 million in the fourth quarter alone, $400,000 a week, on dealing with the Federal Trade Commission. So we know there is a very intensive investigation by the Federal Trade Commission.
On our end, we spend nothing responding to subpoenas from regulators with respect to our activities on Herbalife. If regulators have any question about anything that we have done, we would be delighted to share information. But I think — market manipulation is not something that we have done. And I encourage you to talk to lawyers and ask them about it or go to the FTC website. It’s based on someone who makes intentionally false and misleading statements. Clearly, I have not done that here.
SCHATZKER: Bill, at this point, with your trade structure the way it is, what is your breakeven on Herbalife?
SCHATZKER: sorry, would you mind repeating that?
Bill Ackman (Trades, Portfolio): We shorted the stock around 47 or 48, but if you add back the various expenses, my guess is our breakeven is something in the neighborhood of the current market price.
SCHATZKER: About $36, in other words.
RUHLE: Do you believe, then, that you have investors who want to say to you, Bill, enough is enough? Let’s just close this position down?
RUHLE: I do remember.
Bill Ackman (Trades, Portfolio): And you remember the stock was at $73 and you told me, Bill, shouldn’t you be closing this down? You have lost a lot of money – isn’t it time to move on? We don’t make investment judgments frankly based on what our investors think. We don’t make investment judgments based on what we think our investors want to do. We make investment judgments based on an entirely purely rational assessment of risk and reward and the opportunity for profit and the potential for loss.
In the case of Herbalife, if you have been following what has been going on with the business – watch — just look at what is going on with currencies, right. Herbalife is going to be destroyed just on currencies. They produce the vast majority of product, in fact, even more today, because they just opened a factory in the U.S. Their costs is in U.S. dollars and they sell the product in the following countries: Venezuela, Brazil, Mexico, Russia, and the European Union.
Look at where the euro is. Look at what it has done since January. So when you have U.S. dollar costs and you’ve got foreign revenues and the U.S. dollar has appreciated 25 percent against the euro, what do you think is going to happen to the company? And that is before you consider the fact that they are having difficulty recruiting new distributors. So the business –
RUHLE: So you think – sorry.
Bill Ackman (Trades, Portfolio): So what I am saying is that the business itself is collapsing. So as the business declines, when you’re short the stock, you make money, and also the risk of being short gets reduced. In the meantime, the government has been at it for a long time. The FTC has had over a year a very intensive investigation into the company. Again, that’s judged by how much money Herbalife is spending to respond to the Federal Trade Commission.
Wouldn’t surprise me if, in the relative short term, i.e., this calendar year, the FTC does something. And we do not believe that Herbalife can survive a — if they have to change their practices in a way to make the business legal.
SCHATZKER: Bill, very quickly before we go, how much does a cost Pershing Square to keep this position open?
Bill Ackman (Trades, Portfolio): Much less than it did in the past, interestingly enough. Our short position, the company no longer pays dividends. And the cost to borrow has stayed very modest, so that’s not particularly expensive.
Options do have a clock associated with them and we have paid to roll our options and that does cost money. But it’s not a particularly large position for us today. It’s in the mid I think 5 percent of capital. Part of that is that Herbalife stock price has declined very significantly and part of that is, as you mentioned, Pershing has had a wonderful 2014 and a very strong 2015.
And so this is not a particularly large position for us. Every once in a while, I have to do it little bit of public relations, so I look forward to days like this, opportunities to talk to Stephanie more so than Erik. But you know, I like Stephanie.
RUHLE: I’m so glad you got that in.