There are puzzling reports that Bill Ackman has been complaining to the SEC about George Soros’s investment in Herbalife, claiming that “Soros’ firm broke insider-trading rules by tipping hedge funds about its purchases” at “idea meetings.” You might remember Bill Ackman as the man who called a big press conference to tell everyone that he was short Herbalife and they should join him. There was PowerPoint! It was like eight hours long. I suppose some people traded on it though I also suppose they regret it.
So what’s his problem? I do not understand this at all. The allegation of insider trading is particularly weird; as far as I know no one has any obligation to keep their share ownership – or plans to buy more shares – secret. A cynic might say that the business of fundamental equity fund management consists mostly of telling people about your positions, which is why CNBC exists. It’s also why Ackman’s Herbalife drama exists; one irony is that if he had not called that press conference he probably would never have baited Carl Icahn into becoming Herbalife’s biggest proponent. Should have kept it to an idea meeting!
Now, sure, telling people about your position on television, or at a press conference, is different from doing it at an “idea meeting,” insofar as one is public and the other isn’t, but neither is illegal insider trading. For that, you need to have an obligation to someone to keep your trades secret, which since they’re your trades you don’t have.1 The general principle that investors own their knowledge of their own investments and future investing intent, and can use it to their advantage, seems like a good one for the world in general and for activist hedge fund managers in particular.
Is it market manipulation? Does telling people that you bought Herbalife, and you’re rich and smart, so they should buy Herbalife too, constitute illegal manipulation that the SEC should do something about? The best evidence that it constitutes manipulation is that everyone who goes around talking their book like this is accused of manipulation by someone, somewhere. Including of course Ackman, who has been accused of market manipulation for his short-Herbalife antics by no less an authority than Carl Icahn.2 Also including Carl Icahn, who has been accused of market manipulation for his long-Herbalife antics by some guy. The best evidence that it does not constitute manipulation is that the SEC always seems pretty bored by these accusations, which at least in Herbalife have gone nowhere. Work it out yourselves, guys.
The perhaps more interesting claim is that the long Herbalife investors are working as a “group” for securities-law purposes, which if true would be unpleasant for them. In particular if Soros is grouped with Carl Icahn, who owns some 16.5% of Herbalife, or with other large holders, then the group could own over 10% of Herbalife and be subject to filing requirements and disgorgement of any short-term profits. If buying Herbalife out of these idea meetings makes you a part of an Icahn/Soros/whatever group, then that might deter more managers from buying Herbalife.
Does it? Maybe? The “group” rules are pretty squicky, requiring only that “two or more persons agree to act together for the purposes of acquiring, holding, voting or disposing of equity securities of an issuer.” It seems unlikely that an idea meeting would itself make a group,3 but I suppose if the idea is “hey let’s all buy stock at the same time to gang up on Ackman” then, sure, why not. Given the squickiness, though, the issue is less “is this group of long Herbalife investors a ‘group’ in the bad sense?” and more “can I get anyone to care if they are?”
Of course the entire Herbalife drama is like this.4 Ackman’s path to victory here runs through convincing a regulator to shut down Herbalife, which requires both (1) that he be right that Herbalife is an illegal pyramid scheme and (2) that he get a regulator to care. As time goes by, Herbalife keeps operating, and its stock keeps going up, it seems increasingly unlikely that Ackman will score a knockout blow in that fight, and so it appears he’s planning to try to win on points. I am not sure how that will work! But I guess it doesn’t hurt to try.
Health food fight ramps up as Ackman hits Soros over Herbalife [NYP]
Ackman goes to SEC in latest chapter of Herbalife saga [CNBC]
1. The claim is that Paul Sohn, a Soros portfolio manager, is the one who told other funds about the position, so it’s imaginable that he could have an obligation to Soros to keep quiet that he breached, but: no.
2. And by Herbalife for that matter.
3. Since if it did then … wouldn’t every similar exchange of ideas make a group? The Ira Sohn Conference probably doesn’t, for instance.
4. I sort of imagine that there’s a clique of regulators in DC, at the SEC and the FTC and wherever, who whenever they get an email with “Herbalife” in the subject line, they have an auto-reply that’s like “Thank you for your concern about Herbalife, we take your allegations seriously and will investigate them in due course,” and then they just call each other up and are like “THESE GUYS again, long liquid lunch today?”
Though it would be funny if the SEC person in charge of Herbalife announced an omnibus complaint against Herbalife, Ackman, Icahn, Soros, etc., etc., like “ALL OF YOU are manipulating Herbalife and you’re all going to pay!” Reinvigorated SEC and all that.