- - Monday, November 2, 2015

Should this variation stock manipulation be legal?

A billionaire hedge fund manager spies an opportunity for further enrichment. 

He identifies a publicly traded company that he suspects may soon plunge in value because of fraud or other illegal practices.

Trading on his suspicion, the billionaire takes a massive short position in the stock of the target company.

But there are no complaining consumers, employees, or independent contractors to support the billionaire’s suspicions.

He makes public presentations elaborating the reasons for his conviction that the target company is a fraud doomed to collapse. But the company does not.

The billionaire fears losing staggering sums from his short sales.

To send the target company’s stock price plunging, he employs his vast wealth to lobby Congress and federal law enforcement agencies to investigate his suspicions of fraud. Defending against the investigations is expensive, and an investigation, simpliciter, creates a risk factor that deters investors or creditors. The billionaire, however, conceals from the public the material investment fact of his plan to enlist the instruments of government to destroy the target company thereby profiting handsomely from his short sales.

This hypothetical largely tracks the Captain Ahab-like quest of Pershing Square’s hedge fund manager Bill Ackman to destroy Herbalife and make huge profits for him. Herbalife is a multilevel nutritional marketing company.

Mr. Ackman is no philanthropist. He is in the hedge fund business to make money. According to an article in Fortune Magazine, Mr. Ackman took a
stupendous $1 billion short position in Herbalife in December 2012. Mr. Ackman then delivered a public presentation in which he assailed the company as a pyramid scheme whose stock price would fall to zero.

So far, so good. Private parties, especially victims, can usefully complement government watchdogs in detecting fraud or other wrongdoing. Government resources are limited. Sunshine is said to be the best of disinfectants. Moreover, Herbalife could sue Mr. Ackman for commercial defamation for publishing any false statements of fact without encountering First Amendment barriers under the Supreme Court’s ruling in Dun & Bradstreet v. Greenmoss Builders (1985). On the other hand, defamation suits are often self-defeating by giving the damaging defamatory statements — at least temporarily—neon signs. At present, Herbalife has refrained from any defamation suit.

Mr. Ackman endeavored to unearth evidence of Herbalife’s suspected fraud. He hired lobbyists to alert community groups to discover “victims” and direct them to regulators. He created websites, placed advertisements, posted notices, set up 1-800 numbers, and contacted former Herbalife employees and distributors. Even though Mr. Ackman acted with ulterior motives, these methods are unobjectionable — so long as bribes or other things of value were not offered to fabricate evidence

But Mr. Ackman’s next steps crossed the line. He sought to enlist members of Congress to intercede with the Federal Trade Commission or other federal agencies to launch an investigation of Herbalife. 

Sen. Edward Markey, Massachusetts Democrat, wrote letters to the FTC and Securities and Exchange Commission.

Members of Congress control the budgets of executive branch enforcement agencies. Their suggestions predictably receive premium treatment. When I served as general counsel of the Federal Communications Commission, Chairman of the House Energy and Commerce Committee, John Dingell
Michigan Democrat, was treated as royalty.

Further, Mr. Ackman is uberwealthy. Under the Citizens United decision of the U.S. Supreme Court, Mr. Ackman could independently spend unlimited personal or corporate funds in support of a member’s re-election. Members are not stupid. They know that accommodating a billionaire’s request could earn them his independent expenditure support without an express quid pro quo. That is how Washington, D.C., works.

The FTC unsurprisingly issued a Civil Investigative Demand to Herbalife on March 12, 2015, and its investigation is still ongoing. Herbalife remains under a cloud.

What Mr. Ackman has done is reminiscent of what Charles Keating did in the so-called “Keating Five” scandal. Keating of Lincoln Savings & Loan enlisted five senators to whom he had made substantial campaign contributions to intercede with the Federal Home Bank Board to prevent a declaration of Lincoln’s insolvency. Keating was a crook who was soon imprisoned. Three of the five senators were sanctioned by the Senate Ethics Committee, and the remainder harshly criticized.

The enforcement machinery of government should not be conscripted by the rich in cahoots with members of Congress to compromise the evenhanded administration of justice for private advantage.

That is an earmark of plutocracy, not democracy.

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