Herbalife Turns Table on Ackman Meeting Pershing Clients

Herbalife Ltd. is taking a page from Bill Ackman’s playbook.

Ackman has spent the past year urging Herbalife shareholders to sell their stock, saying the marketer of vitamins and weight-loss shakes is a pyramid scheme. Now Herbalife is approaching investors in Ackman’s hedge fund, suggesting they pull their money from the $12 billion firm, according to three people with knowledge of Herbalife’s strategy. Herbalife’s argument: Ackman’s bet, which has lost as much as $500 million, is risky and irresponsible, said the people, asking not to be named because the campaign is private.

Moelis & Co., an investment bank working for Herbalife, arranged a meeting with Cliffwater LLC, which advises clients on hedge-fund investments, and Herbalife executives, according to two people with knowledge of the gathering. Moelis also reached out to New Jersey’s $76.7 billion pension fund, which has $207 million invested with Ackman, said the people. Executives of the New Jersey fund haven’t met with the Herbalife camp.

“Herbalife and Ackman have been fighting in one theater, and now the warfare has moved into an additional theater,” said John Coffee, professor of securities law at Columbia University in New York. “All’s fair in love and activism,” he said, adding that the tactic of putting pressure on activist investors through their clients is a new one.

Enter Icahn

Officials for Ackman’s New York-based Pershing Square Capital Management LP, Moelis, the New Jersey pension fund, Cliffwater and Herbalife declined to comment.

The behind-the-scenes campaigning is the latest twist in a contentious wager that prompted activist Carl Icahn to publicly criticize Ackman and take an opposing position. Herbalife has more than doubled this year as top investors Stan Druckenmiller, George Soros’s family office, Bill Stiritz, Richard Perry and Kyle Bass followed Icahn in buying shares of the company.

Ackman, who sold short the stock last year in a $1 billion wager that Herbalife’s value would tumble, has since replaced some of the shorts with less risky put options to avoid potentially unlimited losses in a short squeeze.

In a short sale, an investor borrows a stock, then sells it in expectation that it can be repurchased at a lower price later, pocketing the difference. A short squeeze can occur if other investors buy the stock to drive up the price, forcing the short seller to return the shares at a higher cost. The losses are theoretically unlimited because there’s no cap how high the stock could rise.

Ackman’s Presentations

A put option gives the buyer the right to sell the underlying stock at a given price. It gains in value when the shares fall below that price, and losses are limited to the premium paid for the options.

Ackman, using chart-filled presentations with more than 300 pages, has waged a public campaign accusing Herbalife of generating most of its revenue from recruiting new distributors, rather than through sales to consumers. He’s urging U.S. regulators, elected officials and community activists to help shut it down. Even after the shares surged, the hedge-fund manager said in a November interview on Bloomberg Television that he “will take this to the end of the earth.”

In August, Ackman sent a 52-page letter to Herbalife’s auditor, PricewaterhouseCoopers LLP, urging it to pay attention to “serious accounting and disclosure issues.”

Robin Hood

Last month he made a presentation at an investor conference hosted by the Robin Hood Foundation that included testimonials from people who accuse Herbalife of deceiving immigrants into believing the company’s products can provide them with an income.

Herbalife, which has consistently denied Ackman’s claims, last year hired Moelis & Co. to help it “strategically position the company.” The decision to contact Ackman’s investors, such as pension funds, came in the past two months, said a person familiar with Herbalife’s thinking.

At first the Cayman Islands-based company focused on trying to improve operations and produce better financial results, this person said. It decided to get more aggressive in late September after the shares topped $70 while Ackman continued to campaign against the company and complained about a delayed audit.

Herbalife and Moelis are trying to persuade Pershing Square investors and advisers such as Cliffwater that Ackman is acting irresponsibly and made the wager a personal issue, said this person. They argue that, by putting almost 10 percent of client assets into a short position against Herbalife, he was taking too much risk, the person said.

Ackman Complains

Cliffwater, based in Marina del Rey, California, advises institutions overseeing $55 billion of investments in hedge funds and alternative assets. Clients that invest with Pershing Square include the pension fund of New Jersey.

Jason Goeller, portfolio manager for hedge-fund investments at the Public Employees Retirement Association of New Mexico, said Herbalife hasn’t reached out to the pension fund, and even if it did, a meeting would be unlikely.

“Our investment is with Pershing Square,” Goeller said in a telephone interview, adding that it’s the first time he’s seen the tactic used. “It’s not for us to get involved.”

When Ackman learned that Herbalife was planning to approach his clients, he called Ken Moelis, founder of Moelis & Co., and complained, according to people familiar with the conversation between the two. The men have known each other for more than a decade. Moelis worked with Pershing Square on activist campaigns targeting Procter & Gamble Co. last year, where Ackman successfully pushed for the replacement of Chief Executive Officer Bob McDonald, and Fortune Brands Inc. in 2010.

Hiring Moelis

Moelis spent three decades on Wall Street doing deals at Drexel Burnham Lambert Inc., Donaldson Lufkin & Jenrette Inc. and UBS AG, before founding his own boutique firm in 2007.

“Moelis is a known name in the financial world and Herbalife probably hopes he will lend legitimacy to its campaign,” said Brad Balter, head of Boston-based Balter Capital Management, which invests client money in hedge funds.

It doesn’t surprise him that Moelis would approach Pershing clients on behalf of Herbalife, even though he previously has done work for Ackman.

“It’s a calculation of who will pay the most fees,” Balter said.

Ackman founded Pershing Square in 2004. His career has been dotted with both high-profile wins and losses. He raised a $2 billion fund to invest in retailer Target Corp. in 2007 and lost 90 percent over the next two years. He helped rescue General Growth Properties Inc., the second-largest U.S. mall operator, from near collapse, turning a $60 million investment into $1.6 billion. This year, his largest fund has gained 9.4 percent.

Star Lineup

Herbalife isn’t his first activist short. In 2002 he put a short wager on bond insurer MBIA Inc. saying it didn’t deserve its AAA rating. Along the way he persuaded then New York Attorney General Eliot Spitzer to investigate the company. Seven years later he covered his bet, making more than $1 billion for his clients.

In Herbalife, he isn’t just up against the company and the Wall Street veteran it hired, but a star lineup of investors. Icahn, the 25th-richest person with a net worth of $26 billion, according to the Bloomberg Billionaires Index, has said a going-private of Herbalife was an option. Stiritz, the fourth-largest shareholder, said he would be willing to take part in a leveraged buyout of the company that would reward shareholders and help it fend off pyramid-scheme allegations.

Druckenmiller, who boasts one of the hedge-fund industry’s best long-term track records of the past three decades, said he invested in Herbalife in part because of Stiritz. He also was impressed by a custodian in his building who claimed to have lost 200 pounds on Herbalife products.

‘New Strategies’

“Bill Stiritz is one of my heroes in investments,” Druckenmiller said in an interview last month. “One of the best fundamental investors in the world has bet the ranch on this and that’s good enough for me.”

Bass, founder of Hayman Capital Management LP, said a share buyback by the company is another option that could drive the stock higher. Herbalife will be able to borrow as much as $2 billion and buy back “a lot of stock” after an audit of its business is complete, which may happen in the next 60 days, he said in an interview last week. The company will then be able to access capital markets and borrow 2.5 times earnings before interest, taxes, depreciation and amortization, he said in the interview with Stephanie Ruhle.

Herbalife was little changed at $72.83 at 3:25 p.m. in New York trading, after falling to $26.06 in December 2012.

“Activism on the short side is a relatively new phenomenon so there are also new strategies for companies under attack to fight back,” said Balter Capital’s Balter.