NEW YORK (TheStreet) -- Greed may be good when the profits are earned honorably. But Bill Ackman may have crossed a line in his fight to boost the stock price of nutrition supplements manufacturer Herbalife (HLF) .
The activist investor, founder and CEO of Pershing Square Capital Management has accused the company of mismanagement, in his effort to increase returns on his investment. But Ackman's tactics have raised fundamental questions about the his and other fund operators' potential to unfairly influence a company's stock price. At times, Ackman has seemed intent on destroying the company so he can profit on a short position. He's pursued this apparent objective by using government and other institutions to scrutinize Herbalife's performance.
This may ultimately hurt the hedge fund sector, which is already facing greater regulation. It is occurring, although the industry continues to generate money for its clients, and to do so in compliance with the law. According to Forbes in 2013, "in total, the 25 highest-earning hedge fund managers and traders made $24.3 billion in 2013. The lowest earning hedge fund managers in one recent list made $280 million last year."
To be sure, hedge fund managers pursue their goals in ways that are not always betting on a company's future success. But there is nothing wrong with shorting a stock and betting against an organization in a free market to deliver returns for fund participants. Ackman has gone steps beyond that approach and seems to be trying to drive shares lower so that his investors can profit.
Ackman says that he looks to take advantage of short-term, downward moves in prices. The website Insider Monkey notes that Ackman "is particularly successful at special situations investments."
His top holdings included Valeant Pharmaceuticals (VRX) , Air Products & Chemicals (APD) , Canadian Pacific Railway , and Zoetis (ZTS) at the end of 2Q 2015. For several years, Ackman has been crusading against Herbalife, which he contends was operating a "pyramid scheme" that targets poor people, a view he laid out in a December 2012 research report.
Could he be motivated by something other than standing up for consumers? Given the current Herbalife share price, Ackman's short bet on the stock has not paid off. "We shorted it at $47 but because of option premium, borrowing costs, dividends, investigative expenses, our break-even is around $31, $32," Ackman said not too long ago.
Last year, the New York Times seemed to catch Ackman in the act of manipulating at least one lawmaker into investigating the company. In an article, The Times told the following anecdote.
"At a Midtown Manhattan steakhouse last June, William A. Ackman, the activist hedge fund manager who had bet a billion dollars on the collapse of the nutritional supplement company Herbalife, offered his latest evidence to a handful of other hedge fund managers about why the company's stock could soon plummet. Mr. Ackman told his dinner companions that Representative Linda T. Sánchez, Democrat of California, had sent a letter to the Federal Trade Commission the previous day calling for an investigation of the company. The commission had not yet stamped the letter as received, nor had it been made public. But Mr. Ackman, who had personally lobbied Ms. Sánchez and stood to profit if the company's stock dropped as a result of the call for an inquiry, already knew what it said, and read from a copy of it that he had on his cellphone. When Ms. Sánchez's office ultimately issued a news release a month later, it was backdated as though it had been made public the day before Mr. Ackman's dinner talk."