During his Oscar-nominated cameo in “A History of Violence,” William Hurt declares ominously to the brother he is about to have murdered, “You cost me ... you cost me a helluva lot!” In a much broader sense, and in the real world, the rise of the Regulatory State has cost us a lot; a helluva lot, if you will — in excess of $2 trillion annually, as estimated by Forbes.
What is not reflected in this eye-popping figure is the cottage industry that has developed among a small, but well-financed group of investors to make money by manipulating the regulatory mechanisms of government, and those who enforce them.
The costs to the businesses that are the targets of these manipulators can be steep. The tactic of choice is the “short sale.” In a nutshell, an investor who engages in a short sale is betting that stock in a certain company he has bought or against which he has borrowed will drop in value before the time comes for him to repay the loan with which he purchased the shares. He makes money by having to pay back less than he borrowed.
Short selling is, in fact, a legitimate technique often used by hedge-fund managers, many of whom have developed complex algorithms with which to identify companies or business sectors likely to drop in value, and which therefore are purchases worthy of taking a risk with their or their clients’ funds.
Unfortunately, certain investors employ tactics other than careful market forecasting and analysis on which to base investment risks; relying instead on public relations ploys and regulatory pressure to deliberately cause the value of stock which they have “shorted” to drop.
Just a few years ago, for example, Steve Eisman bet millions that he would reap huge profits from his short sale of shares in for-profit schools. To improve the chances his massive bet would pay off, he pressed aggressively for the Department of Education to mandate restrictive “gainful employment” rules for proprietary schools. Former Iowa Sen. Tom Harkin, chairman of the Education and the Workforce Committee at the time, became an apparently unwitting ally in Eisman’s scheme.
Bill Ackman, another well-known and successful investor, has taken up where Eisman left off. Ackman is going after Herbalife, a 35-year-old company that sells health and wellness products through independent contractors across the U.S. and globally. Ackman has been aggressively pushing state and federal regulators to investigate Herbalife and declare it an unlawful “pyramid scheme;” hoping to score a major reward based on his investments in “shorting” Herbalife stock.
Ackman, of course, does not publicly admit the reason behind his anti-Herbalife crusade is to profit from shorting the company’s stock; but he has not hidden his desire to ruin the company.
A Reuters account of a recent Ackman speech, quoted him proudly declaring that destroying Herbalife was “most important” to him, because of what he claimed is “harm” the company’s products have caused “vulnerable population[s].”
The specious nature of Ackman’s claims aside (according to Reuters, his remarks elicited “some laughter” from the audience) — and notwithstanding the fact the company has never, in its more than three-decades long existence, been found to be operating illegally — Ackman’s campaign is no laughing matter. The company is having to spend millions defending against lawsuits filed by investors who buy into Ackman’s claims, even as it fights a lengthy investigation by the Federal Trade Commission.
The good news is Ackman’s antics may be starting to backfire on him. According to some media reports, the FBI is investigating whether he and those associated with him made false statements to regulators. And at least one well-known watchdog group, Citizens for Responsibility and Ethics in Washington, is calling on Congress to investigate short-sale manipulators such as Ackman.
This appears to be one of those rare instances in which calls for congressional oversight should be supported by Republicans and Democrats.
For the GOP, the purpose would be to rein in short-sale manipulators and overzealous regulators who are skewing the marketplace and unfairly harming particular companies or industries. At the same time, Democrats on the Hill should welcome the call for oversight as a way to burnish their anti-Wall Street credentials; or, as CREW’s interim executive director, Anne Weismann, noted in a recent letter to Congress, to fight the “rigged [Wall Street] game.”
The bottom line? A series of hearings on short-sale market and regulatory manipulation would tee-up rather nicely what likely will be one of the key political battles in the coming 2016 presidential campaign — Wall Street vs. Main Street.
Bob Barr is a former Republican congressman from Georgia.
Editor's note: After this piece was published, a Pershing Square Capital Management official challenged Barr's premise and directed questions to the website: www.factsaboutherbalife.com.