Bill Ackman: Herbalife is a pyramid scheme 🚨❗

Taking a short position and going public with it is a pretty serious business. We debated long and hard as to whether I wanted to do that again. I took a lot of heat for taking a big short position in MBIA and sharing my thinking publicly about why I thought that 150-to-1 levered AAA-rated institution guaranteeing subprime CDOs was not good for America and not good for your pocketbook, and could cause a financial crisis.

And we did. It took us a couple years to get the regulators interested in taking a look at the accounting issues, reserving issues, and so on for the company. But I learned a lot about dealing with the regulatory community and also now a lot of headaches associated with it.

In the case of Herbalife, I couldn't really believe—I came to the conclusion that how can this company really exist? How is it possible that a four billion revenue business with a seven billion dollar market cap is a pyramid scheme? But you know, how could Bernie Madoff have 50 billion dollars under management in a pyramid scheme? And I debated, do I want to go public with this? And the first part of that analysis is, one, we've got to get to a level of certainty here that is higher than any other investment we've ever had. Because again, to come out and say a company's effectively violating the law is a pretty serious accusation. We didn't want to do it on our own. We hired one of the top law firms in the country who did six months worth of work and came to the same conclusion and agreed to meet with regulators with us, which I think was an important part of the work we did. But still, do I want to go public and take the heat?

And the problem with short selling is it's still not accepted as a particularly well-accepted American way of investing. There seems like something inherently shadowy or evil about short sellers. You look at some of the—David Einhorn's call on Lehman. He's still talking about it. If Lehman had done a recapitalization in response to David Einhorn saying they had inadequate capital, Lehman would still exist. And I don't know exactly what the course of the financial crisis—we've sort of had a financial crisis, but probably not as severe. Had MBIA, in effect, recapitalized when we pointed out the inadequacy of their capital, municipal bondholders would have a better insurer. In the case of Herbalife, we concluded the risk-reward was very attractive. We thought by virtue of sharing our thinking publicly—and pyramid schemes rely on deception—they've got to recruit almost two million people a year to keep the scheme going and a growing number to keep this game growing. It's harder to do that when there's tremendous visibility about the business model. The company's been forced to update its disclosures that it's now sending to its distributors. And in fact, 88% of the distributors make nothing; they get no royalties from Herbalife. That's not a fact that they were willing to disclose publicly before. They've been forced to shut down some of this lead generation recruitment that happens on the internet, which is a completely—the way it's done by their distributors is, we believe, totally in violation of law. So just by virtue of going public, we mitigate the risk of being short because it affects their ability to deceive people. It affects the fundamentals of the company, and that reduces the downside of being short the stock price rising. And then we have the benefit of a potential regulator, but you would never guess that. So all that's the kind of thesis. Now, did I think that a group of hedge fund managers would take the other side of the trade and try to orchestrate a short squeeze? No, I didn't think that. In fact, what I think is disappointing about that—again, it doesn't bother me at all if someone takes the other side. Every investment we have, there's probably someone short things that we're long or obviously long things that we're short. That's how the markets work. What's sort of nice about the hedge fund industry is it was an industry where it was more a cooperative industry. I didn't view people in the industry as competitors because we would find value together. You know, ultimately you see partnerships and various investments. This was the first case where a lot of sniping going on between managers, which I think is just a negative for the industry.

Look, it's not an easy thing to be a regulator. It's a job where you don't get a lot of awards for being a regulator. Unfortunately, you get in trouble for missing things. You have limited resources, even though it's the government; they have limited budgets. Companies have lobbying organizations, they have influence, and they push on the margin to minimize regulation oversight of their business. So their force is fighting against regulators.

It took us 18 months to do the work. We could spend an unlimited amount of money hiring the best lawyers in the country. We can put an unlimited amount of resources to figure things out. We could focus just on this one company, and we have no obligation to regulate the rest of the direct, so-called multi-level marketing industry. We found one outlier. We spent all of our time and energy on it. We studied it, and it took us a very long time to get to a level of conviction and certainty that we feel comfortable going public. A regulator can't do that. They just don't have the resources to do that. And that's the same thing on—in fact, if I were chairman of the SEC, I would have a regular meeting with Jim Chanos, David Einhorn, and all the best short sellers and say, 'What are your favorite shorts?'

I've been told that I'm not allowed to answer that question. But you should assume that we're fairly proactive at Pershing Square and that we will meet and have met with a wide array of regulators that have jurisdiction.