Shares of Herbalife (NYSE:HLF) are surging this year, but company executives are taking no chances against their old nemesis, hedge fund manager Bill Ackman, as they press legislation in Congress to make life much more difficult for investors who try to make money betting on a stock’s collapse, FOX Business Network has learned.
Herbalife is part of a behind-the-scenes lobbying effort in Congress to pass legislation that would force short-sellers – or investors who bet that stocks will fall – to face similar disclosure requirements as those investors who are “long,” or simply buy a stock and hold it.
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The nutritional-products company, which makes money through what’s known as “multi-level marketing,” or finding increasing number of distributors to hawk its protein shakes and supplements, is being joined in pushing the legislation by two powerful players in the investing world, the New York Stock Exchange and the Nasdaq stock market, according to people with direct knowledge of the matter.
In 2012, Ackman announced that he was taking a $1 billion short on the company, which he claimed was a pyramid scheme that would eventually be shut down by regulators. Despite a massive settlement with the Federal Trade Commission following Ackman’s public attacks, Herbalife was not declared a fraud in 2016 and its share price has soared.
A short sale occurs when an investor borrows shares of a stock and immediately sells them with the intention of repaying the borrower at a lower price and pocketing the difference. The practice has long been championed by regulators as a way to identify fraudulent companies, but the target companies complain they are often victims of false charges by short-sellers trying to drive down their share prices.
A Nasdaq spokesman confirmed that the exchange operator is working on the legislation that seeks short-seller requirements similar to those facing long investors, such as the public filings in which investors who accumulate more than 5% of a stock must disclose their stake. There are also disclosure requirements for so-called company insiders – senior executives or board members who own 10% of voting stock – when they buy and sell their shares.
Market regulators such as the Securities and Exchange Commission don’t have similar disclosure rules for short-sellers other than the general announcements of the level of short interest on a stock.
“We have no problem with short-sellers,” Nasdaq spokesman Joe Christinat told FOX Business. "We just think they should follow the same disclosure requirements as everyone else."
A spokeswoman for New York Stock Exchange, (where Herbalife lists its shares), declined to comment, and a spokesman for Herbalife confirmed the lobbying effort but declined to comment further.
Herbalife's six-year battle with Ackman was one of the most contentious and public confrontations between a short-seller and a target company in recent Wall Street history. In a series of public appearances, Ackman described his efforts as something of a crusade against a fraud that was targeting poor people with unrealistic claims that they can get rich by selling nutritional products that have very little retail appeal. He said he would give all his winnings to charity once the stock fell to zero, which he predicted would happen as regulatory scrutiny mounted.
Herbalife vehemently denied the charges and claimed it was forced to spend tens of millions of dollars to defend itself against what it called Ackman's unfair attacks against a company that employs thousands of people and sells real products. Over the course of the six-year battle, shares of the company have been volatile, but they generally weathered the attacks as Herbalife attracted a number of investors including billionaire activist Carl Icahn, its largest shareholder and now a board member.
The current lobbying is focusing on getting draft legislation through what proponents consider receptive members of the House Financial Services Committee and the Senate Banking Committee, though it’s unclear if or when such legislation will be drafted.
A written proposal of the legislation drawn up by Herbalife and its allies names the legislation the “Short Position Transparency Act” and models the disclosures for short-sellers close to the 5% threshold that long investors must adhere to. It also calls for additional disclosure for “material” changes to such a short position.
The proposal, obtained by FOX Business, says “there is recognition that legitimate short selling aids in setting prices, facilitating risk management, and reducing incidences of fraud and misconduct within companies. All of these benefits would be enhanced as a result of greater transparency and disclosure."
The proposal didn't mention Ackman by name, but Herbalife's lobbyists, in pushing the measure, often refer to it as the "Bill Ackman bill" during their discussions with members of Congress. Press officials for the House Financial Services Committee and Senate Banking Committee declined comment.
Through a spokesman, Ackman declined to comment; he recently announced that he covered his short position on the stock to limit his losses as shares of Herbalife continue to rise. He still maintains that the company is a pyramid scheme that will eventually unravel.
It’s also unclear just how much of an effect additional disclosure will have on short-selling in general – a practice that has long been protected by regulators. Indeed, it was Ackman who claimed that Herbalife was a fraud and a pyramid scheme when he famously went public with his $1 billion short-sale in 2012 without government disclosure mandates.
Pyramid schemes occur when companies don’t really sell much of the underlying products but rather make money simply by attracting enough distributors of the product; they fall apart – and their stocks implode – when investors realize that the companies’ profits aren't derived from real sales activities.
In July 2016, when Herbalife settled with the Federal Trade Commission, it agreed to pay $200 million in restitution to people who were allegedly duped into believing hyped claims that they could make money selling its products. It was also forced to make substantial changes to its business practices.
It’s unclear how much impact these changes will have on the company’s bottom line; Herbalife remains profitable and so far this year shares are up around 20%.