Bill Ackman: DOJ's Inside Spoon

Calendars being calendars, they reliably determine for us year after year that January, February and March are in fact all after the preceding November (or Movember for interns). 

In their  1st quarter 10-Q (covering January-March, again for the interns) Herbalife disclosed that "The Department of Justice recently sought information from the Company, certain of its Members and others regarding allegations being made about the business practices of the Company and its Members." That sentence got everybody in a hot frothy lather. Even yesterday when it was first announced that the DOJ and FTC were having a presser about dietary supplements, Herbalife, Vitamin Shoppe and GNC all crapped the bed to varying degrees (GNC being the Joey Chestnut of the three and down as much as -25%). After the full DOJ announcement and the market realization that neither Herbalife, GNC nor Vitamin Shoppe were the target of the enforcement actions all three recovered, although GNC still closed down -6.4%.

So if yesterday wasn't about Herbalife et al, what was it about?

It was about enforcement actions against a bevy of dietary supplement manufacturers and marketers. Sadly for Bill Ackman Herbalife was not one of those manufacturers. The people that were on that list sound like they did some pretty bad stuff; a lot worse than sweetening caffeinated soft drinks. The complaints released yesterday allege all sorts of unsavory things, like importing synthetic ingredients from China under fake CofA's for geranium flower powder and then labeling your products as containing natural plant extracts. Even worse, some of these firms didn't bother to determine if some of their new synthetic ingredients were even safe in humans. USP Labs seems to be the most egregious of the bunch, and the only entity being charged criminally. In fact the FDA sent USP Labs a warning letter in April of 2012 warning that 1,3- dimethylamylamine HCl , which is one of the ingredients in its Oxy Elite Pro and Jack3D products, was a new dietary supplement which they were selling illegally. The FDA also sent USP Labs a similar warning letter in October of 2013 for another ingredient, aegeline(which you can buy on Alibaba although you probably don't want to). Terribly, 14 of 20 case reports submitted to the FDA by the Hawaii Department of Health indicated that USP Labs' products were the sole commonality across 14 cases of severe hepatotoxicity. People were really sick, and not in the Jeremy Piven/spicy tuna sort of way.

As part of yesterday's joint task force announcement the FTC also put a helpful, but LONG, infographic to help consumers steer clear of dubious products.

Learn more about dietary #supplements, in our new consumer infographic: https://t.co/oEF7L4S3cW pic.twitter.com/izdbZ4QAUL

— FTC (@FTC) November 17, 2015

That infographic had four key warnings against which USP Labs perfectly illustrates:

• Dietary supplements are not evaluated by the FDA for safety and effectiveness
• Supplements are not meant to prevent, treat or cure diseases
• "Natural" doesn't doesn't always mean safe
• Supplements could have hidden ingredients.

The problem with synthetic active ingredients being hidden in "natural" products is so bad that the FDA has actually set up a laboratory dedicated to detecting synthetic additives in "natural" products. Bought "herbal viagra" recently? Chances are, it actually has Chinese bootleg viagra (like actual sildenafil citrate) sprinkled in, so when you take your "all natural" Horny Goat Weed, and suddenly get the urge to be the outside spoon, it's probably due to a modern Chinese manufacturer and not ancient Chinese folklore.

All told, yesterday's enforcement actions brought one criminal case and eight civil complaints from both the DOJ and the FTC. The DOJ's press release pointed out that the action was the product of a "nationwide sweep" that "pursued civil and criminal cases against more than 100 makers and marketers of dietary supplements." The DOJ also specifically noted that:

"During the period of the sweep, 117 individuals and entities were pursued through criminal and civil enforcement actions.  Of these, 89 were the subject of cases filed since November 2014."

The release continues:

"The actions discussed today resulted from a year-long effort, beginning in November 2014, to focus enforcement resources in an area of the dietary supplement market that is causing increasing concern among health officials nationwide.  In each case, the department or one of its federal partners allege the sale of supplements that contain ingredients other than those listed on the product label or the sale of products that make health or disease treatment claims that are unsupported by adequate scientific evidence." [emphasis added]

So all in, we know:

1. that Herbalife was contacted by the DOJ sometime after November 2014 
2. Calendars instruct us that Q1 2015 is after November 2014(again for your interns)
3. the DOJ investigation spooled up in November of 2014
4. today's DOJ/FTC actions are the culmination of over a year of effort investigating over 100 entities
5. Herbalife was not on yesterday's list.

If you go to all the trouble to set up a multi-agency task force between the DOJ, FTC & FDA(and also folded in USPIS, IRS, DoD and USADA) and you spent more than a year investigating "makers and marketers of dietary supplements" and host a presser highlighting the accomplishments of your enforcement investigations you'd probably want your actions to capture as many of your investigative targets as possible right?

Simply put, you don't culminate a multi-agency year long investigation of 117 different entities with a "sweep" action that doesn't capture every single viable target you're pursuing. "Sweeps" usually don't work like that or they'd probably call them something else.

And if the DOJ/FTC broom has passed you over, perhaps its an indication that any investigations or potential enforcement proceedings against you have been abandoned. Perhaps yesterday's DOJ action is the vindication that Herbalife has been waiting for and the federal investigative records of Herbalife have now been closed.

I wonder if Bill Ackman likes to be the inside spoon.

Valeant Needs More Cowbell

As the Blue Oyster Cult of financial journalists, short sellers, and investigators (including  Andrew Left, Roddy Boyd, John Hempton, Jonathan Rockoff, Charles Ornstein, Caroline Chen...) fervently ascend through their literary scales of Don't Fear the Reaper, despite Wall Street's fatigue, the Bruce Dickinson in me can't help but want more cowbell. 

After reading through more transcripts, analysis, powerpoints, investor calls and letters than I could ever want, I found that I still had a fever....and the only prescription was more cowbell.

Turns out, that additional analysis of accounts receivable data generated by Philidor has uncovered an odd subset of prescriptions which apparently were never meant to be filled.

As is to be expected of Valeant, it's not straightforward so let's keep it as simple and rhythmic as possible.

On June 23rd, Philidor claims that prescription 40031052 was dispensed and shipped. Philidor's records also show that they are due $973.21 from the the PBM/Processor Caremark.

What is quite odd about this particular receivable is the shipping history associated with this prescription. Instead of originating at R&O on June 23rd, it actually originates in Hammond, Indiana on June 29th, before making its way to R&O in Camarillo, California, where it was received on July 2nd and signed for by "Al." This is troubling for many reasons. At first I  thought perhaps it was a return, but that can't be the case, because it's a credit on the receivables. It would also stand to reason that if it were a return, the same exact script number would be referenced with a reimbursement due to Caremark, but this is the only reference to prescription 40031052.

In an even stranger twist there are prescriptions which appear to be billed to payors, but were never shipped into or out of R&O. It's like the Wonka factory for price gouged drugs. As seen here, prescription 40045409 claims to have been filled on July 6th, and shipped on July 7th, with the payor on the hook for $1017.30.

When you refer to the shipping history for that particular prescription though, you can see it wasn't even scheduled to be picked up until July 9th at 7:46pm, and the scheduled pickup was from Oak Park, IL, destined for Camarillo, California. It never got there though. You can see from its shipping history that it wasn't even scanned in by UPS.

More troubling still for Philidor and Valeant is that these two simple examples are not the only examples uncovered in their accounts receivables. These are just two little plunks of the stick on the cowbell.

Using other pharmacy's provider numbers seems bad enough, but billing for prescriptions which were never filled seems like outright insurance fraud, which would be in addition to whatever insurance fruad they were already perpetrating.

Plunk, plunk, plunk, plunk, plunk, plunk, plunk...

All our times have come.....

For those curious, the origins of these phantom shipments I've uncovered thus far are:

CHICAGO MARYSVILLE MOKENA MT PROSPECT DENVER HINSDALE OAK PARK SIMI VALLEY SANTA MONICA EDWARDSVILLE ENCINITAS ADDISON BREMERTON HENDERSON SAN FRANCISCO LAKE MARY SANTA ANA NORTH RIVERSIDE LA PORTE WEST DUNDEE PALM BAY EVANSTON LOS ANGELES TUSCOLA SAN RAMON MOUNTAIN VIEW SAN RAFAEL PHILADELPHIA CALABASAS SAN DIEGO WASHINGTON NEW ALBANY

Valeant's Quantum Entanglement Issue

Recently we learned that quantum entanglement is real. Despite their protestations, it is apparent that Valeant's actions at a distance still maintained a spooky financial and operation control over Philidor, and thus R&O.

Aside from the profound philosophical ramifications of considering whether financial control constitutes control, and whether a zero dollar option constitutes a fully consummated transaction there are some peculiarities in Valeant's statements on their call today. An embarrassment of riches. Before I cover the accounting issues in upcoming posts (particularly with respect to shareholder's equity) let's just focus on the easy stuff for now.

Valeant received a question(apparently from an investor) asking:

Did Philidor commit wrongdoing by shipping products to California residents without a California license? 

Valeant's answer:

We understand that: 

• Philidor did not dispense products to patients in California 

• Philidor only dispenses products to patients in states where Philidor has a non-resident license, and that does not include California 

• Philidor has agreements with affiliated pharmacies that have California licenses and those pharmacies have dispensed products to patients in California

Aside from the fact they didn't actually answer the question I suppose it depends upon what the meaning of the word 'is' is.

I teased everybody last week that the Valeant/Philidor was much bigger than just access to California. 

R&O / Philodor is NOT just about access to California. It's much bigger and I'm about to prove it to you.... $VRX

— The Skeptic (@TheSkeptic21) October 24, 2015

Despite Valeants assurances otherwise, R&O really is about access to California...just as much as it isn't.

Valeant told us on their conference call that they have a no cost option for the next ten years to acquire Philidor, which owns R&O. To any normal person that isn't from Laval or Hatsboro that would mean they own Philidor, which owns R&O. Ergo any prescription sent by R&O would mean that it was actually sent by Philidor, which would actually mean it was sent by Valeant. 

Valeant's statement is particularly peculiar when you consider previously unreported data that shows California is the number one recipient of prescriptions fulfilled by R&O under the Philidor regime. Ah-hah! So it is about access to California.

Worse yet for Valeant, out of the 21,000+ prescriptions I've been able to analyze so far, R&O shipped to at least 33 states under the Philidor/Valeant regime. Oh, so...it's a lot about California, but not entirely? 

Valeant carefully minced their words to avoid the pitfall of Philidor's false statements made in connection with their rejected California Pharmacy license, but if you look at the data you'll immediately see that it was about access to California, and 32 other states.

As far as I can currently tell, out of the 33 states that R&O shipped to, about 2/3's had active Pharmacy licenses for both R&O and Philidor; the remaining 33% were split between R&O's license, Philidor's license or neither being licensed. 
(I have been unable to verify WA & MN)

Sidestepping the channel stuffing allegations, that presents a very simple conundrum for Valeant management, and thus Philidor managment and thus R&O management, which is how could you make the claim that a pharmacy you own(really, but not really) legally ship prescriptions to states which your pharmacy is not licensed? It also calls into question management's statements regarding Philidor's ability to ship in California.

Perhaps in some wormhole of FASB accounting standards or ancient bibliographic tomes on American corporate structures one could make an argument that you own a controlling financial interest, but don't actually own the underlying company, however in the real world if you and 6 of your closest friends on The Board say Philidor doesn't ship to states it doesn't have a license, Philidor better not ship to those states, and neither should any of it's consolidated subs. The only thing worse would be if neither had a license, which of course there are few instances of that too.

After analyzing over 21,000 individual prescription records (at an average cost of over $800/prescription) for less than three months of Valeant products moved through R&O, it is apparent that Mike Pearson's statement was correct that Valeant does not have operational control over R&O, so cut him some slack guys! I mean, obvs, if he had known about all these illegal shipments of drugs out of R&O while under the control of Phildor/Valeant, he wouldn't have made all those certified statements to the contrary, right???



If you're curious, the states analyzed are listed below and all 21000 prescriptions available at the following link.

Ship To State	NUMBER OF R&O SHIPMENTS	Percent of R&O	R&O LICENSED?	PHILIDOR LICENSED?	JOINT APPROVAL
CA	7678	35.32%	YES	NO	NO
IL	6091	28.02%	YES	YES	Dual Approval
CO	1303	5.99%	YES	YES	Dual Approval
UT	908	4.18%	YES	YES	Dual Approval
NV	876	4.03%	YES	YES	Dual Approval
WA	856	3.94%	UK	UK	UK
FL	711	3.27%	YES	YES	Dual Approval
MS	522	2.40%	YES	YES	Dual Approval
ID	518	2.38%	YES	YES	Dual Approval
PA	506	2.33%	NO	YES	NO
OH	338	1.55%	YES	YES	Dual Approval
NY	187	0.86%	YES	YES	Dual Approval
OK	155	0.71%	YES	YES	Dual Approval
SD	141	0.65%	YES	NO	NO
IA	135	0.62%	YES	YES	Dual Approval
RI	117	0.54%	YES	YES	Dual Approval
TX	114	0.52%	YES	YES	Dual Approval
IN	111	0.51%	YES	YES	Dual Approval
MI	97	0.45%	YES	YES	Dual Approval
MO	68	0.31%	YES	YES	Dual Approval
WI	60	0.28%	YES	YES	Dual Approval
MN	57	0.26%	UK	UK	UK
KS	43	0.20%	YES	YES	Dual Approval
WY	42	0.19%	YES	NO	NO
CT	28	0.13%	ACTIVE 09/01/2015* (SHIPMENTS PRIOR)	YES	SORT OF
MA	24	0.11%	NO	NO	NEITHER
NJ	16	0.07%	YES	YES	Dual Approval
VT	14	0.06%	YES	NO	NO
AZ	13	0.06%	NO	YES	NO
DE	5	0.02%	YES	YES	Dual Approval
AK	1	0.00%	YES	YES	NO
DC	1	0.00%	YES	YES	Dual Approval
NH	1	0.00%	YES	YES	Dual Approval

***Correction: a previous version of this table incorrectly reported some of the states R&O did not have a license

Carnackman

Whitney Tilson: I hold in my hand the envelopes. As a child of four can plainly see, these envelopes have been hermetically sealed. They've been kept in a #2 mayonnaise jar on Funk and Wagnalls' back porch since noon today. No one knows the contents of these envelopes, but you Carnackman, in your borderline divine and mystical way, will ascertain the answers having never before seen the questions.

Carnackman: "Wells notice."
[Carnackman's face goes grey. He lays the unopened envelope on the desk.]
Carnackman: "Did I mention I had really good stuff on Herbalife I can't talk about?"

Ben Walsh published a story last Friday about some suspiciously timed trades that just so happened to occur on the eve of the NY Post (I know right?) publishing a negative article about Herbalife CEO Michael Johnson. The article was titled Video reveals Herbalife boss saw ‘pyramiding’ signs early on. and attempted to paint the CEO in a criminal light.

About a month ago, Roger Parloff published a well-researched article in Fortune titled The Siege of Herbalife.  In his article Parloff discusses that video.  Parloff's take seems to indicate that 2005 video was a record of Johnson actively reshaping the way Herbalife would recruit distributors and members. He chastised certain lead generation systems and embraced changes that were designed to reduce the turnover in distributors actively pursuing their involvement as a "business opportunity." Johnson wanted new distributors to be permitted to achieve level five more slowly and organically. “In the old days, distributors would say, ‘Go build that downline as soon as possible’ … That works for very few people … That’s a lottery ticket. So the best way to build this business … is to build it through retail and retention, and recruiting will come Johnson explained at the retreat.

Parloff also discusses a report by the former director of the FTC's Bureau of Economics, Dr. Joseph Farrell. For you kids keeping score at home, that would the Director of the Bureau of Economics, to whom Dr. Peter Vander Nat would have reported to until May of 2012. In his 67 page report the former director found that there was "genuine consumer demand" and "no evident dependence on unsustainable growth." He summarized that purchasing patterns were consistent with the purchasing you'd see when distributors were fulfilling consumer orders and not gunning for bonus qualifications.


In Walsh's report on Friday, it's also revealed that yet another journalist has seen that 2005 videothe NY Post made out as a criminal recording and Walsh characterizes that video in the same light that Parloff did. 

"In the 2005 video, after Johnson acknowledges the potential for pyramiding, he outlines changes that the company has since enacted to reduce the turnover and financial burden borne by its lowest-level distributors."

One of these stories is not like the other.

No matter, the people whose opinion really matters have seen both the video as well as the Farrell report. Although it is unclear how long they have been in receipt of the video and Farrell report, the SEC does have these key pieces of data.

The options trade itself could be a complete coincidence, but there is a disturbing fact pattern regarding Pershing Square and what it knows before it should.

In the same month as the reported options trade, as well as the Post's skewed report on the Herbalife retreat video, there was a separately fascinating and somewhat bizarre sideshow. A Pennsylvania Senate candidate named Everett Stern claimed he met with Pershing Square. Not only did he claim he met with Pershing, he claimed that Bill Ackman himself stated on a preliminary phone call to Mr. Stern

“I am interested in us giving you the research we have on Herbalife and then you repackaging it and then filing a Whistleblower Claim with the SEC to trigger a Federal Investigation into Herbalife.”

Two days after that alleged call, Mr. Stern met with David Klafter and others at Pershing Square's offices. Mr. Stern claims that Mr. Klafter offered to pay Mr. Stern by allowing him to mimic Pershing's short position in Herbalife. Being that I was not in the meeting, I have no idea whether or not Mr. Stern's claims are true. Classic he said he said.

I will point out here that if you read Mr. Stern's report, there are some embarrassing errors I wouldn't expect to see from a "premium intelligence service" so it does bring to question the veracity of his claims. Apparently he felt strongly enough about the meeting and his accusations that he wrote a letter to Mary Jo White at the SEC. I've verified through multiple independent sources that Mr. Stern did in fact meet with Pershing Square on the day he claims, but beyond that I have no idea what was said between parties. A separate source which has worked for Pershing Square, and has also been in contact with other firms contracted by Pershing Square, stated that their firm had never been offered any soft dollar payments and had no knowledge of any soft dollar payments being offered by Pershing Square as a form of compensation.

In light of HuffPo's article, Mr. Stern's accusation is still a troubling one. Although I doubt Pershing Square put on the trade that Mr. Walsh outlined in his article, it's discomforting knowing that the very same month Pershing hosted a meeting with Mr. Stern during which Mr. Stern claims he was offered payment by a soft dollar mechanism which would be directly tied to the release of information known only to Pershing Square and Mr. Stern's team, there is a large derivatives trade suspiciously close to the release of the NY Post article. It begs the question whether Pershing Square knew about the NY Post's article and whether or not Pershing Square disseminated that information to someone else.

When asked whether Pershing Square knew about the 2005 video in advance of the Post article, and if Pershing Square knew about Celarier's story in advance of its publication, or if Pershing Square had seen the video since then Carnackman ebulliently responded: "May your favorite daughter be featured in NFL Films' Sack of the Week." Actually, I just made that up because Pershing Square still has not responded to last week's inquiry.

Find the Body, Find the Weapon, Find the Motive

John Hempton and I have blogged extensively on the Ackman/Herbalife cage match, and based on my work, John recently wrote an excellent article on the changes that Pershing Square made to their NAV reporting. Oddly they made two back to back changes to their NAV reporting disclosure and have reportedly sent representatives to speak with some very ruffled investors about the matter.

Hempton concluded:

"For the moment though Pershing Square thinks it is okay to - without prior notice - report on an eight day week. Sure they did it so they could modestly hide the fantastic performance on 30 September. But the motivation is not the issue here.
Having an eight day week opens Bill Ackman up for allegations of deception - allegations that Bill should neutralise immediately by reporting the interim data point as originally planned."

It's clear that not reporting the -$800M AUM on Tuesday (the dead body), was achieved by modifying the NAV reporting schedule and guidance (the weapon), but the motive that Pershing has offered really doesn't make all that much sense, at least not on it's surface because there was no logical motive, other than saving face.

Pershing claimed that back-to-back NAV reports could help detect changes in their portfolio and that people could front run or disadvantage them. I think Pershing's claim is REALLY a stretch. Literally, I was able to predict within 0.1% what their numbers were going to be the night before they were scheduled to release their NAV, so portraying that back-to-back NAV the following day was somehow disadvantageous really does not fit with their defense.

Ackman's Pershing Square with -12.5% YTD performance, having lost $3.75B since JUL 31 (-18.7%) $APD $CP $HHC $PAH $QSR $VRX $ZTS $MDLZ $HLF

— The Skeptic (@TheSkeptic21) September 30, 2015

Back-to-back NAV reports alone could help you determine that a change has been made, but it wouldn't allow you to detect WHICH change was made. For instance, we can also predict based on last Tuesday's weekly NAV's Pershing released that a change has occurred.

FWIW, if $PSH isn't at -10.1% YTD tomorrow, there was some major restructuring. $APD $CP $HHC $PAH $QSR $VRX $ZTS $MDLZ $HLF $PSH

— The Skeptic (@TheSkeptic21) October 6, 2015

$PSH's -11.2% YTD performance indicates they sold/bought back something. ~$165M Δ $APD $CP $HHC $PAH $QSR $VRX $ZTS $MDLZ $HLF $PSH

— The Skeptic (@TheSkeptic21) October 7, 2015

Whoopdie-doo. We know there's a change but it's not that informative. We don't know what they sold, what they bought or what they bought back. There was a sharp increase in Herbalife the days that Valeant was down, and it would be tempting to infer that Pershing partially covered their Herbalife short, but as one investor said, "Bill Ackman is not in the business of buying back Herbalife".  I agree that it doesn't appear that on a August to September basis Pershing did not reduce their exposure to Herbalife; if anything they partially increased it, but the supporting data is inconclusive. The only other data we get is what the firm's L/S exposure is with a partial breakdown by market cap. That's not super helpful even though you can detect a significant reduction in the firms long large cap exposure while simultaneously increasing their long midcap exposure. Interesting, because you know what their LC holdings and MC holdings are. Although this 6% change could be an indication that they sold something down while building another position it's a data vacuum so it's hard to make any conclusions.

A couple other curious things occurred in September compared to August that may help us determine Pershing's motive for the NAV sliming.

Pershing eliminated the "undisclosed position" entry from their report.

They also injected some new language in their footnotes. (Blackline changes below)

I'll let you parse the minor changes but there seems to be a long addition at the end there. Taken in aggregate with the disappearance of the "undisclosed position" sector, as well as the fact they've maintained 12 positions it could indicate a few potential changes

1. they've sold down positions and missed some of the rally in the ensuing weeks or
2. they've sold down a position in connection with building a new one (this would require the new position didn't perform as well as the previous or their performance would have been better) or
3. similarly to their move with Actavis (prior to Allergan closing) maybe they decided to hedge their enormous risk by buying derivatives to offset the downside risk in Valeant, and thus not enjoy some of the snapback in Valeant's shares (also by their rules this would not create a 13th position, nor would it create a new reportable short position, keeping both number of positions and sector reporting the same).

If it isn't some new hedge and they decided to build a new position, there isn't much to be said at this point. We only know the net delta on performance is ~$165M and by their own disclosure guidelines (if they honor them) it would need to be 5% of AUM or more to be disclosed, so we can determine that if it is in fact a new position that they are so sensitive about, that the acquisition can't represent more than an $825M investment as of last Tuesday because they hadn't declared it. We could also determine that if it was a new position it would have to be down at least 20% over that interim week to drag down performance by over 100bps. Unless we see a new 13-D, or other disclosure from Pershing, it's hard to say which one it is, although I'm leaning toward a Valeant hedge, just because it sounds more fun.

There is a separate but related story that also helps highlight why Pershing may have been so sensitive about reporting the NAVs the way they did. Hypothetically if they disclosed that they hedged Valeant(or any other company in their portfolio), this somewhat undercuts their projected confidence in the company and if word gets around that Valeant's biggest champion is losing confidence, it could put serious pressure on the stock and thus serious pressure on Pershing's holdings, and thus serious pressure on PSH shares, during a period of serious pressure that already exists. Pershing Management has about 3% of the PSH vehicle and is subject to a 10 year lockup, so P&L fluctuations aside, it's not like they could realize any gains by tinkering with the NAV values, right? Actually wrong. According to Pershing's own financial reporting, management actually is able to sell/redeem shares:

"Mr. Ackman and other members of the management team and officers of the Investment Manager have each agreed with the Company to a lock-up of ten years commencing from October 1, 2014, of their aggregate Management Shares, less amounts (i) attributable to any sales required to pay taxes on income generated by the Company; (ii) required to be sold due to regulatory constraints, including, without limitation, sales required due to ownership limits; or (iii) attributable to sales following separation of employment from the Investment Manager. Under the terms of the lock-up arrangement, shares subject to lock up may from time to time be transferred to affiliates, provided that the transferee agrees to be subject to the remaining lock-up period." 

Interestingly, Pershing Management was issued 199,127 additional PSH shares in August, which disappeared again in September. This is yet another anomalous synchrony that overlaps with their NAV reporting change. It's anomalous because from October 2014 through July 2015, the number of PSH shares held by management stood completely flat from month to month at 8,500,796 shares. At the end of July, Pershing was crushing it and was just shy of $20B AUM, so it makes sense why in August the number of management shares increased to 8,699,923 although at the end of September, when it modified NAV reporting, it had decreased back down to 8,500,796.  

199,127 shares doesn't seem like a lot until you look at PSH's trading over the period. During the month of September, PSH averaged 211,754 shares traded a day. The reduction by management, if they'd sold to the market, equates to 4.5% of all volume for the entire month of September. It's not like Management reduced their count by selling on the open market, but open market perspective is nice when you consider that the shares management redeemed, directly derive their value from the NAV's of the public vehicle. I think it is a reasonable conclusion to surmise anyone planning to redeem at the end of the month could be motivated to do what they could to protect the net value of that redemption, even though the total value of that redemption was only $4.9M. Talk about managing to the share price.

I asked Pershing Square to confirm the following:

1. that management was issued an additional 199,127 shares in PSH in August, which was redeemed by Pershing management in September
2. that Pershing sold down a holding while building a new Allergan-like stake
3. that Pershing took a large derivatives position in Valeant to hedge downside risk

Pershing Square Capital Management declined to comment for all three.

Any of these risky moves could be motivation for the reporting changes, but with one quarter to make up 11.2%, just to get back to zero, Ackman and Pershing Square Capital Management seem to be gunning for even more risk. As one investor put it to me, 'Ackman may have become the worst risk manager around. Here you are with tens of billions in assets, collecting hundreds of millions of fees annually on a highly concentrated portfolio, which is risky enough on it's own, and significantly negative for the year, with regulatory scrutiny all over you, but you still risk all of that by hiding your NAV to support a $5M management redemption...it's appalling.'

Whether Pershing was actively manipulating the PSH price with NAV report modifications to support management's own redemptions remains to be seen, but as that same investor expressed to me, 'it demonstrates extremely poor judgement, or taste or both.' 

Pershing Square Involved in On-Going Enforcement Proceedings

A series of FOIA requests have confirmed that Pershing Square is involved in "on-going enforcement proceedings". These FOIA requests specifically sought investigatory records regarding Pershing Square from 2013 through the Summer of 2015. The initial FOIA responses from the SEC cited SEC 7(a) exemptions to the information sought. I feel like ProbesReporter and I have beaten this issue to death already, but 7(a) exemptions specifically exempt from disclosure information that could interfere with either prospective or on-going proceedings. This means that in many circumstances, 7(a) could be invoked even if there is no "on-going" actions because it could interfere with a future action. Based upon the invocation of the initially cited 7(a) exemptions to the requested investigatory records, the FOIA decisions were then appealed to the SEC's Office of the General Counsel.

The SEC's OGC confirmed by letter that the FOIA official that initially exempted the responsive documents had correctly made this determination for each request. The SEC's Associate General Counsel noted in their reply:

"I have determined that the FOIA Officer correctly asserted Exemption 7(A). There is a
two-step test to determine whether information is protected under Exemption 7(A), whether: (1) a law enforcement proceeding is pending or prospective, and (2) release of information about it could reasonably be expected to cause some articulable harm.' We have confirmed with staff that releasing the withheld information could reasonably be expected to interfere with on-going enforcement proceedings." (emphasis added)

What was not included in the inital responses, but were confirmed in the OGC's letter is the addition that this relates to an on-going enforcement proceeding, not prospective. It should be noted that the requests were agnostic with respect to other related companies and did not request investigatory records that were related to Herbalife, Valeant, Allergan, Pershing Square Holdings, Target, JC Penney, etc. ad nauseam...

The requested records were described as: (1) any matter under inquiry summary regarding Pershing
Square; (2) any case closing recommendations regarding Pershing Square; (3) any investigation
recommendations regarding Pershing Square; (4) any investigation reports regarding Pershing Square; (5) any investigation opening reports regarding Pershing Square; (6) any investigation closing reports regarding Pershing Square; (7) any orders of formal investigation regarding Pershing Square; (8) any wells notices sent to Pershing Square; (9) any subpoenas sent to Pershing Square; (10) any correspondence between third parties and the commission related to the investigation of Pershing Square; and (11) any correspondence between Pershing Square and the Commission related to the investigation of Pershing Square.

What is also VERY interesting with respect to the requested records is that not a single requested item generated a "no responsive records" reply. When questioned about this, the SEC further confirmed that if in fact there were no responsive records that the 7(a) exemption would not have applied and thus could not have been invoked.

So, go down the list; this means that there are responsive records which involve Pershing Square for each one of these eleven types of records requested. It could very well be that many of these records exist without Pershing Square's knowledge, so you couldn't really count on them to disclose something that may not have been disclosed to them. I mean, it's not like there's a Weekly/Monthly investigatory disclosure report, but even if there was, I hope they'd honor it more than they're NAV reporting guidelines. In Pershing's disclosure defense, I'll pre-emptively point out that it'd be doubtful they'd be informed regarding the SEC's internal investigation recommendations, however, we could conclude that Pershing likely knows about the Wells Notices or subpoenas sent to Pershing Square, and correspondence from Pershing Square to the SEC that exist.

It should be noted that the SEC is not stating that Pershing Square has or has not done anything wrong, they are merely acknowledging the existence of such records and on-going proceedings that the release of these records could interfere with. The question that arises from the SEC's response is to what extent Pershing Square knows about the above referenced records and just how deeply Pershing Square is "involved".  We won't know until the SEC either stops exempting such records, or they or the DOJ take action. It could be nothing or it could be everything.

Can You Believe These FUCKING GUYS?????

Pershing Square put out a hasty press release this morning that hit the wire today at 10:39 am EST, 54 minutes before the AEX closed. Pershing also released a copy of that press release on it's own website at 10:58 am, 37 minutes before the AEX closed. 

The purpose of the release was to notify the public of their change in NAV reporting policies. They quickly scribbled in a sentence to their new policy, AFTER they had already released their NAV numbers under the auspices of the old policy. The new sentence says:

"In the event that month-end falls on a Wednesday, the Company will report the month-end NAV on Thursday, and not report the weeklyTuesday NAV. In the event that Wednesday or Thursday is not a business day, any such month-end NAV will be posted the next business day following that Thursday."

In fact, I have a copy of their original NAV release and you can see for yourself the above sentence is conspicuously absent from last night's report disclosure pictured below.

Pershing continues in today's press release:

"It has come to our attention that certain investors have used our periodic reporting to attempt to determine changes to the portfolio in advance of PSH’s requirement to disclose these changes publicly by comparing their NAV estimates with PSH’s periodically reported results. The ability to determine changes in the portfolio is greater during periods of increased volatility in PSH’s holdings and when PSH’s weekly and monthly performance are reported during the same week, particularly when the NAV reports occur on sequential days.

Until the change in policy, when a month end occurred during a week other than on a Tuesday, investors would receive two NAV performance reports for that week increasing the risk of detection of changes in the portfolio which could be used to front run or otherwise disadvantage PSH."

Ummmm.... NO.

Seriously, WTF are you talking about guys??? First of all, the claim that increased volatility allows one to determine portfolio changes is bullshit. Pershing's desire to maintain large highly concentrated positions is what allows someone to detect changes in their portfolio. The volatility has nothing to do with it except circumstances in which a hugely concentrated position, (i.e. Valeant) is super volatile.

Looking back to the three instances that the monthly came after the weekly report and within the same week there was very little volatility in their NAV. April saw a decrease of $.07 during a two day interval, December 2014 (another dreaded Tuesday/Wednesday combo) saw a $.10 decline, and October 2014 saw a $.31 increase over a three day period. 

What I think Pershing is really trying to say with this press release is that if the shit ever hits the fan on Tuesday again, all bets are off...and P.S. we probably got so freaked we modified our positions to satisfy margin requirments, so heads up everybody. 

Also, PSH trades 6 hours ahead of the underlying equities held in the US by Pershing Square Capital. How could anyone front run or disadvantage Pershing based on PSH's NAV's??? PSH doesn't set it's own trading price, the NAV or the price of it's underlying assets, the market does. Furthermore PSH trades based on a discount applied the underlying NAV/share, so it is reactive to Pershing Square's holdings, it is not determinant. Even if we invented an extreme scenario in which PSH traded 9 hours behind the NYSE, does Pershing truly believe that people are going to run out and buy or short more of the assets held by PSH because the blinded NAV numbers released during NYSE trading hours show a +20% increase, particularly when you can see in real time what those assets are trading at??? If you observed a +20% NAV increase from one period to the next without seeing the corresponding increase in the underlying holdings, you'd immediately know that you have absolutely NO IDEA what the new position responsible for that +20% increase is because it would have to be new. Throw a dart maybe? It's a completely nonsensical circular argument they are trying to stroke everybody with.

If anything, Pershing's policy change frontruns and disadvantages holders of PSH by not accurately reporting the value underlying the vehicle as promised because they made this change retrospectively. Had they reported as they should have with the notification that NEXT week/month the policy was going to change it wouldn't be an issue. I think it's more likely that the Pershing Square press release and NAV reporting changes is reactive to a huge drop in NAV on Tuesday that Pershing Square would have embarrassingly reported on Thursday, which would have caused a precipitous decline in PSH's price today, had they not attempted to sweep it under the rug.  Sure, PSH would have recovered on Monday because they would have issued the monthly numbers tonight, with the slighly improved results.

Adding to this obfuscation, is the manner in which Pershing handled the change. They put out numbers with improper disclosure, and allowed buyers/sellers/borrowers in their market for 7 hours 41 minutes before retrospectively correcting their sleight with a nonsensical explanation less than an hour before the AEX market closed. 

Well done you fucking guys! Well done.