Is activist short selling market manipulation? Ask Bill Ackman


Today it was reported by CNBC that famed activist investor, and reported billionaire, Bill Ackman has sold out of his losing short bet against Herbalife. Five year’s ago when he announced the short thesis, Ackman said he would go “to the ends of the earth” with his campaign. Ultimately, the end was based on government regulators shutting down the nutritional supplements company for being an illegal pyramid scheme. (Ackman must have had a lot of trust in government regulators!)

Unfortunately for Ackman and his investors, the government came in, fined the company, made it change some of its sales practices, but stopped short of calling it a pyramid scheme. Herbalife’s stock has nearly doubled since Ackman made the bet, costing his investors hundreds of millions of dollars.

Over the 5-years he was short Herbalife, Ackman’s Pershing Square Capital Management spent millions on lobbyists, PR firms, consultants, event space for their hours-long presentations and on and on. In the end, Ackman got shaken down by an old fashioned short squeeze from a bunch of prominent investors who said they disagreed with his thesis and a company who bought back massive amounts of their own stock.

When you’re a short seller, being right and making money aren’t always the same thing. We all remember David Einhorn’s decade-long battle against Allied Capital and numerous other short campaigns that have cost short sellers in reputation and money – think Jim Chanos and Tesla.

All this is to say that critics who think activist short sellers can simply publish reports or tweet something negative about a company and sit back and count their profits don’t understand the true risks of short selling. Forget for a second the death threats and nasty emails from stock pumpers, short sellers risk being squeezed by a giant company buyback or a big investor who enters the market with billions and publicly comes out in support of the target company. If you own a stock, the most you can lose is your invested capital. A stock can only go to zero. Short sellers can lose many times their original investment because stocks can go up indefinitely.

Ackman’s bet against Herbalife took five years and he counted up the losses every step of the way. No one is crying market manipulation over that report.

The true market manipulator faces no risk of losing money. Think about the Libor manipulations – those banks made money every day of the week on that trade, that’s why they did it and why it was illegal. Activist short selling relies on other investors believing what they say to be true and, in Ackman’s case, the government actually confirming the thesis. That’s a lot of uncertainty and it’s why Carl Icahn, who successfully squeezed Ackman on the Herbalife trade, has said he would never in a million years announce publicly that he’d taken a short position in a company’s stock. Ackman also said recently he’s unlikely to publicly short a stock again. It’s a tough business.