Crony Capitalism

Left and Right Should Condemn Crony Capitalist War on Herbalife

William Ackman's self-serving activism is shameful.

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Money bags
Dreamstime

Little common ground exists between the left wing and right wing these days. One exception found in the emergence of the tea party and Occupy Wall Street movements is a healthy distrust in the motives of politicians and government regulators. These concerns are vindicated when officials are caught teaming up with the super rich to abuse political power.

Case in point: hedge fund manager William Ackman's attempt to salvage his so-far losing bet by using the power of government agencies to sink the stock of the nutritional supplement company, Herbalife. Why? Because in 2012, the activist billionaire made a $1 billion bet on the collapse of the company by shorting its stock. He then took the rare step of publicly announcing his position, while declaring the company as the "best-managed pyramid scheme in the history of the world." He even boasted that the stock would eventually fall to zero.

Risky moves can be very lucrative. They can also be costly. Three years later, it's clear that other investors aren't convinced. While Herbalife's stock has been volatile, it's nowhere close to worthless. Over the past few months it has even been valued higher than when Ackman made his risky play.

The crux of his argument is that Herbalife is a multilevel marketing firm, and therefore a pyramid scheme. MLMs use independent contractors to distribute their products and typically reward them both for selling product and recruiting other distributors. The main product of Herbalife is a meal-replacement shake powder. Prominent examples of MLMs include Avon and Tupperware.

Other investors didn't bite. For one thing, courts and regulators rejected the idea that the MLM structure alone is sufficient to identify a pyramid scheme. In pyramid schemes, recruitment provides the bulk of income and products rarely end up in the hands of consumers that aren't themselves distributors. This doesn't seem to be the case here at all. Herbalife actually sells products—its shake powder sells more than the three leading competitors combined, including the popular SlimFast—which is likely why investors have stuck with the company, despite the onslaught.

Pyramid schemes tend to collapse before they are as old as Herbalife, which was founded 35 years ago and brings in $5 billion in revenue.

Ackman's position is a tough sell, but that hasn't stopped him from trying. In a very ugly move, the investor is now betting that the government will take down the company so he can finally cash in.

Using all the political influence his corporate money can buy, he has been putting pressure on state and federal regulators to investigate Herbalife in hope that the company's stock would finally dive. To build his case, an investigation by The New York Times reports that he organized "protests, news conferences and letter-writing campaigns in California, Nevada, Connecticut, New York, and Illinois, although several of the people who signed the letters to state and federal officials say they do not remember sending them."

His lobbyists also scoured the country to find distributors who lost money and could be held up as victims, and convinced members of Congress to write to the Federal Trade Commission encouraging an investigation. Ackman also made presentations directly to the FTC, the Securities and Exchange Commission and federal prosecutors.

The costly efforts are beginning to pay off with the FTC and SEC initiating investigations, and now a New York state senator promising to introduce legislation.

What's troubling is not that a company is being scrutinized; it's how that scrutiny can be bought by another private entity with a vested interest in the outcome. Short selling is a valid investment strategy with numerous benefits, such as providing liquidity and checks against bubble-inducing hype and excessive optimism. It's another matter entirely if officials step in when that strategy goes awry.

Regardless of one's impression of Herbalife as a good or bad company, one place of common ground should be in the belief that the super rich should not get bailed out by the government. If Ackman's lobbying pays off, however, we can expect many more to follow his example.

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  1. That’s how Democrats support business…

    1. Republicans aren’t exactly chopped liver themselves.

      1. That’s true – chopped liver is pretty healthy and delicious if you know how to cook it right, which is probably more than can be said for Republicans.

        1. The key to cooking Republicans is to feed the meat in a woodchipper.

    2. That’s how government supports business. FIFY.

  2. Yet everyone in Ohio should have supported prop 3 even though its main backers were rich investors who stood to get richer off of a new law (and more importantly, cornered the market for themselves and kept small entrepreneurs out).

    1. Which is why reason authors expressed concern about the bill, and why it ultimately didn’t pass. But keep on knocking down those straw men.

  3. ” These concerns are vindicated when officials are caught teaming up with the super rich to abuse political power.”

    It’s always amazing libertarians calling out crony capitalists whilst always giving the Koch’s a pass. They, through their funded groups, are waging war against not just one company, but the entire solar industry, and in a number of states…Florida, Oklahoma, etc. andAnd they will say anything to do so. While looking for favorable legislation in Florida, they (AFP) claimed that solar caused rate hikes in Georgia. Rated “pants on fire.”

    http://www.politifact.com/flor…..cies-cost/

    And please stop with “they just don’t want subsidies to solar.” They enjoy lots of subsidies that they know will never go away as long as the GOP (their party of choice) is around.

    1. Yeah, shitstain, real in-depth reporting right there. Nor finding somehting is easy when you don’t look for it:

      “Electric utility company Entergy did not specifically mention solar as being an issue when announcing the base rate change.
      […]
      So while Louisiana did see a rate increase, we don’t see evidence that it was specifically related to a solar initiative.”

    2. Could you name the subsidies? Four or five of the largest ones will do.

      1. It’s joe, he can’t even slap his own ass using both hands.

      2. Sure, MS. Not 5, how about 190, totaling $200M. Good Jobs First is an unaffiliated site that tracks subsidies, and not just to the Koch’s.

        http://subsidytracker.goodjobs…..industries

        1. The vast majority of the 200M are tax breaks and they are state and local.
          Loan guarantees are 6M. Pretty sure anyone on this board would agree that is 6M too much.

          The article above describes crony capitalism of a much greater magnitude: an investor trying to bring down a 5B business by releasing the hounds/feds.

      3. By the way, libertarians attempt to defend crony capitalism that they like is quite touching.

        1. Jackand Ace|11.5.15 @ 4:38PM|#
          “By the way, libertarians attempt to defend crony capitalism that they like is quite touching.”

          BTW, shitstain, show where anyone did that.

    3. While the PolitiFact claims may be true, it should be noted that their rebuttal sources come from the major power companies themselves, not the retail consumers of electricity. These companies may be reticent to publicly admit to any power cost increases due to potential backlash from solar energy advocates.

      This, of course, does not prove the claims to be false, but does demand a deeper look to come to any reasonable conclusion.

    4. Looks like you had some spelling issues –

      “It’s always amazing Democrats calling out crony capitalists whilst always giving the Hillary, Soros, Obama, Jerry Brown, De Blasio a pass.”

      Fixed it for you

      1. “Hillary, Soros, Obama, Jerry Brown, De Blasio”

        “B-b-but they engage in money-grubbing, taxpayer-raping cronyism out of good intentions! It’s completely different!”

    5. It’s always amazing libertarians calling out crony capitalists whilst always giving the Koch’s a pass.

      I don’t exactly understand what you’re trying to get at. Currently, success as large corporation requires lobbying, support from politicians, and government contracts. There is no contradiction between the Koch brothers engaging in these practices while at the same time lobbying against them.

      The fault with crony capitalism lies entirely with politicians engaging in it, not with corporations asking for government favors.

      1. ^^this, I benefit from tax credits, deductions, etc. but would advocate against them for a simpler, flat tax system without them.

    6. Your logical fallacy is Argumentum ad Kochtopussius

      Both Charles and David attended Robert LeFevre’s Freedom School, and David sits on the Board of the Reason Foundation.

  4. Start working at home with Google! It’s by-far the best job I’ve had. Last Wednesday I got a brand new BMW since getting a check for $6474 this – 4 weeks past. I began this 8-months ago and immediately was bringing home at least $77 per hour. I work through this link, go? to tech tab for work detail,,,,,,,

    ———- http://www.4cyberworks.com

  5. Short sales are contracts with a period of expiration. Shorts do not last in perpetuity, and even three years is an enormous period of time for a short.

    Is the author claiming the 2012 short stock purchase by Ackerman has not expired? Or that Ackerman has made another short after that, or even plans to?

    I think Ackerman has many motives here – including revenge – but his financial stake in Herbalife as reported here is long gone.

    1. I have never shorted a stock (or anything else), but my understanding is that they don’t have an expiration date (like options do). Sometimes you may be forced out of as position if the price goes up if you can’t put up sufficient margin, but if you have sufficient margin to cover price increases, you usually can keep the position as long as you want.

      I checked and Herbalife’s current short interest (shorted shares divided by total shares) is 28%, which is insanely high. I wonder what fraction of the shorts belong to Ackerman?

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    http://www.OnlineJobs100.com

  7. Google pay 97$ per hour my last pay check was $8500 working 1o hours a week online. My younger brother friend has been averaging 12k for months now and he works about 22 hours a week. I cant believe how easy it was once I tried it out.
    This is wha- I do…… ?????? http://www.buzznews99.com

  8. Ackman needs to eat it on this one, but like Trump he is used to getting his way and winning. This story needs to be picked up and go viral. Crony capitalism is something that donkeys and elephants can all win points by being against.

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