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Hedge Fund Turns To Lobbying To Back Up Its Billion-Dollar Bet

ROBERT SIEGEL, HOST:

Short selling a stock - betting that it will go down instead of up - is common on Wall Street. But what about placing a bet against a company and then trying to get the government to do things that would drive down the company's share price?

Well, that's what a New York Times investigation found to be happening with hedge fund executive Bill Ackman's big short sale, his billion-dollar bet against Herbalife. Herbalife sells weight loss shakes, vitamins and other products. Ackman claims that it really sells franchises to sell those products, and it sells false hopes of easy profits. He says it's a pyramid scheme. The company denies that.

Well, what the Times reports on today is Ackman's campaign to get politicians and regulators to go after Herbalife. And joining us now is Eric Lipton, investigative reporter for The New York Times who covers corporate lobbying. Welcome to the program.

ERIC LIPTON: Thank you.

SIEGEL: And one feature of this campaign against Herbalife is the claim that it somehow victimizes members of minority groups. What's the argument there?

LIPTON: Well, the assertion is that Herbalife targets Latino Americans and African-Americans as distributors and that it brings them into the company's family and - with the suggestion that potentially they can make a great deal of money. And they buy the Herbalife product and try to sell it but then learn that they can't really sell it that well, and they end up losing money. That's the assertion and that there's a constant turnover, and therefore, it's a pyramid scheme.

SIEGEL: And the campaign that the Times reports on today is all about drawing upon that sentiment to get regulators or whoever to act against Herbalife.

LIPTON: Right. The belief is is if you can get regulators to essentially conclude that Herbalife is a pyramid scheme, its stock will decline almost to zero because they will undermine public confidence and maybe even result in the shutdown of the company, and then Ackman walks away a much richer man.

SIEGEL: Let's talk about some of the letters that were sent out here that the Times reports on. Ackman, I guess, retains various people, employs people to drum up support for his campaign.

LIPTON: That's right. He hires mostly Latino American and African-American lobbyists and political consultants to go out and find people they know and get them to write letters.

SIEGEL: Among those who wrote letters supporting Ackman's position, in effect, were some members of Congress.

LIPTON: That's right. And one letter in particular is sort of unusual because Representative Linda Sanchez from California sent a letter to the Federal Trade Commission in June. And the day after she sent the letter, even before the Federal Trade Commission marked that letter as received, Bill Ackman sat at dinner in New York City where he was reading that letter to other potential investors, suggesting that he had a copy of it before the FTC had officially received it. And we have since learned that Linda Sanchez's office gave his lobbyist a copy of the letter before the letter, in fact, was public.

So theoretically, he could have been trading on the information in that letter thinking that perhaps that letter was going to drive the stock down. He, though, asserts that he, in fact, did not trade on that information. But it creates, you know, he had information that was not public provided to him by Linda Sanchez's office.

SIEGEL: If you are betting against a company's stock, to be in possession of a letter from an influential member of Congress urging the Federal Trade Commission to do something, that letter has value at that moment.

LIPTON: Potentially. I mean, ultimately, in this case, the stock did not decline when her letter became public, but another letter written by a senator from Massachusetts did result in a major decline. So him having that letter ahead of time was potentially very valuable.

SIEGEL: What's the difference between people who short a stock, who bet against it, lobbying to get the government to do bad things to that company, and somebody who invests in a stock, goes long, then lobbying to get the government to contract with that company or have a mandate that supports that company's industry?

LIPTON: That's a good point. And, in fact, some of the lobbyists that I was speaking with as I was working on this story say that, you know, that you should be looking at both directions and that there are also all kinds of campaigns on when someone, you know, invests in a company and wanting it to go up and, you know, anticipating such a move. So both things happen. Again, what really distinguishes this campaign is its reach. It's not only a Washington campaign with the way that it's reached into individual states across the country.

SIEGEL: You say it doesn't appear that he's actually - that it's working out that well from (unintelligible)

LIPTON: It's not. He has acknowledged that so far he has lost probably $500 million. Now, he has had another short in his career, which he said took him seven years to actually execute, and he ended up making something like $1 billion. So this is only at 14 months into this bet, so it still could turn out for him.

SIEGEL: Eric Lipton of The New York Times, thanks for talking with us today.

LIPTON: Thank you. Transcript provided by NPR, Copyright NPR.

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