Analysis - Probe of Ackman team over Herbalife campaign may go nowhere: legal experts

NEW YORK (Reuters) - U.S. authorities investigating potential manipulation of Herbalife Ltd’s (HLF.N) shares by consultants working for billionaire investor William Ackman will find it difficult to prove that false statements were deliberately made to drive down the company’s value, securities lawyers said.

In a probe that began last year, the FBI and the office of Manhattan U.S. Attorney Preet Bharara have been examining whether the consultants solicited people to file baseless complaints with regulators regarding Herbalife, two people familiar with the matter said. There is no indication that Ackman himself is a target of the investigation.

News of the probe has thrown a temporary shadow over the more than two-year campaign by Ackman and his hedge fund Pershing Square Capital Management against Herbalife. Ackman alleges that Herbalife is a pyramid scheme and he has taken a $1 billion short bet that its stock price will slide. The nutritional supplements seller has long denied the allegations, saying the campaign is based on misinformation.

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U.S. law defines market manipulation as artificially raising or depressing the price of a security for the purpose of inducing trades by others. Potential methods include orchestrating phantom trades or spreading false information.

In the most common type of market manipulation, someone buys or shorts a stock, spreads misinformation about it to drive its price up or down sharply, and then reverses their position to take a profit. The scheme, commonly known as a “pump and dump” or “buy, lie and sell high” scheme, depends on the manipulator reversing their position before those being deceived catch on to what is happening.

However, lawyers with expertise in securities law say that the Ackman campaign has not attempted to hide what it is doing and has argued its stance very publicly. Ackman has also pledged to retain his short position in the stock until Herbalife is exposed as a pyramid scheme and its stock goes to zero.

“For me, it’s impossible to imagine that Ackman is involved,” said Jonathan Macey, a Yale University professor who has made public comments in defence of the tactics of short sellers, including Ackman. “If he had made up some lie about the company, he hasn’t profited from that, because he’s still short. In manipulation, at some point you’ve got to transact the security. Otherwise, there’s no point to it.”

Herbalife stock rose 8.2 percent on Friday because of news of the probe. The Wall Street Journal was first to report the existence of the investigation after hours on Thursday.

Spokesmen for both the FBI and the Manhattan U.S. Attorney’s office declined to comment.

It was not clear on Friday whether the investigation had focussed on particular individuals, or whether any wrongdoing had been discovered. One of the sources said it could end without any charges being filed.

RECEIVED SUBPOENAS

In a statement on Thursday night, Herbalife spokesman Alan Hoffman said that Ackman’s bet meant he had a direct financial interest in hurting Herbalife and had orchestrated a false and fabricated attack against the company. “We are confident in the strong fundamentals of our business model,” he said.

On Friday, Herbalife declined to respond to questions.

Ackman says he believes Herbalife is a company that is based on signing up more distributors and getting them to buy its products, rather than on meeting the needs of consumers, and that as markets become saturated with new distributors the business is doomed to fail.

Ackman told CNBC on Friday that some people who had done work for one consulting firm he was using, Global Strategy Group, had received subpoenas. He said that the firm had hired some subcontractors around the country.

He later told Reuters in an interview that his firm was still working with Global Strategy. “We work with the best of the best. We can afford to. My belief is they conduct themselves appropriately,” he said.

A Global Strategy spokesman said in a statement: “It is our clear understanding that neither the firm nor any of our employees are a target of any investigation, and we are confident that all our work surpasses the highest legal and ethical standards.”

Market manipulation prosecutions generally require proving intent to lie or deceive, which is difficult without an incriminating document, securities lawyers said.

“You’re always dealing with circumstantial evidence. We don’t have the ability to probe people’s minds,” said Eric Chaffee, a University of Toledo law professor.

Ackman said Pershing Square’s very public campaign was the furthest thing from market manipulation.

“What have we done? We’ve shorted the stock. We’ve disclosed the size of our position. We’ve made a 330-page PowerPoint presentation,” he told Reuters. “Market manipulators don’t make 330-page PowerPoint presentations and broadcast them globally.”

Emphasizing the public nature of his campaign, he added, “No one could say anything worse about a company that what we’ve said about Herbalife. It’s a pyramid scheme. It’s a criminal enterprise that harms poor people.”

U.S. guarantees of free speech mean that short-sellers have a right to talk down a stock price, even with the assistance of public relations and lobbying firms like the ones Ackman has hired.

The U.S. Securities and Exchange Commission often brings civil charges against the manipulators of penny stocks, which are most vulnerable to misinformation. Enforcement cases are much more rare among big, listed companies.

“Prosecutions of market manipulation by the government are as scarce as hen’s teeth,” said James Cox, a Duke University law professor.

(Reporting by David Ingram; Additional reporting by Noeleen Walder; Editing by Martin Howell)

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