Friday, February 26, 2016

When Words Matter: FTC Sends Proposal to Herbalife, Pershing Somehow Involved in On-going Enforcement Action

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    UPDATED: Pershing Square Capital Management denies having received a Wells notice.***

    I've said before that the SEC has defiled Ackman's short thesis. I've also said that the Bostick case was crushing Ackman's thesis; more recently I noted that the Bostick case actually eviscerated Ackman's thesis. You can easily go back and revisit the judge's opinion on Bostick. To do that though, you'll either have to query court records or look to documents I uploaded to SCRIBD because you won't find these records on Pershing's anti-Herbalife website (although it's been 10 months since the ruling). Conveniently Pershing Square Capital has failed to upload the Bostick ruling or the Awad ruling to the Herbalife case law section of the site's "resource library". Even if you search the site for the word "bostick" you'll get "no results found". That's all a bit of back story though and isn't really the matter at hand, because the FTC and the SEC may have just picked up shovels and started helping Bill Ackman scoop dirt on the casket of Pershing Square. 
    In Herbalife's 10-K filed yesterday, the company (which first disclosed a CID it received from the FTC two years ago), made a pretty significant change to the language of the "NOTES TO CONSOLIDATED FINANCIAL STATEMENT" section. After having stuck to the same disclosure for two years, the company decided to modify their disclosure language with respect to the FTC, possibly indicating that resolution of the matter is near. In the 10-K Herbalife stated: 
    "The Company is currently in discussions with the FTC regarding a potential resolution of these matters.  The possible range of outcomes include the filing by the FTC of a contested civil complaint, further discussions leading to a settlement which could include a monetary payment and other relief or the closure of these matters without action."*

    *For ease of comparison there is an embedded blackline of the section below (10-K vs. Q3) 

    This modification follows closely on the heels of a Wall Street Journal article that reported the DOJ probes of Ackman and Herbalife had both fizzled. It's only one tiny word, but it's noteworthy that Herbalife has also removed the "recently" qualifier from the DOJ's information request they previously disclosed, further supporting the Wall Street Journal's report that the DOJ matter is done.
    Make of it what you will, but I have to believe resolution is imminent.
    The trouble for Ackman however may extend far beyond his fund's performance and his Herbalife short moving against him. A series of FOIA requests over a period of several months present a troubling fact pattern. It cannot be determined at this time specifically what Pershing Square's involvement is in any on-going enforcement action, although the SEC is actively exempting from release numerous records regarding Pershing Square.
    An informative series of inquiries sought numerous records from the SEC including: (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.
    The SEC declined to provide any of those records and exempted them under 7(a)** in their response. After the matter was appealed, the SEC's Office of the General Counsel also confirmed that the requested records were appropriately exempted under 7(a) citing ongoing enforcement proceedings. What is extremely informative with respect to these exemptions and the General Counsel's appeal response is that it confirmed there was an ongoing enforcement action and also confirmed that such records existed. In the appeal response the SEC specifically noted that it had "confirmed with staff that releasing the withheld information could reasonably be expected to interfere with on-going enforcement proceedings." Further, officials at the SEC, who were aware of the specific FOIAs in question stated that a 7(a) exemption would not be applied to a record that did not exist.
    **Exemption 7(A) authorizes the withholding of "records or information compiled for law enforcement purposes, but only to the extent that production of such law enforcement records or information...could reasonably be expected to interfere with enforcement proceedings." 5 U.S.e. § 5 52(b )(7)(A), 17 C.F .R. § 200.80(b )(7)(i).
    In an effort to further delineate what PSCM's involvement in any ongoing enforcement investigation could have been in regards to, or whether Pershing had been served with a Wells notice, I also queried whether or not Herbalife or its agents/representatives had received a Wells Notice during the same period.  In an ironic twist of fate for Pershing Square, the SEC had "no information responsive to my request".
    The fact pattern is pretty simple to understand. In separate requests, I queried the SEC for any Wells Notice sent to Herbalife or Pershing Square. The SEC had no responsive records for Herbalife, but are withholding Pershing Square records under 7(a) exemptions, which authorizes the withholding of records compiled for law enforcement purposes which would interfere with enforcement activities.
    It should be carefully pointed out that Pershing Square denies receiving any Wells notices, and that any FOIA response I've received thus far, does not however specify what the SEC was investigating, nor does it indicate that Pershing Square or related parties were not able to successfully resolve the matter without additional action or further inquiry by the SEC. As note

    ***a previous version of this article was published with a different title and without an on the record comment from Pershing Square Capital Management. Pershing Square has subsequently provided an on the record statement denying that they have received a Wells Notice.


    1. Hi, thanks for a great article! And concerning SEC's reply, whether they have no information on any Wells notices sent to Herbalife. - does that mean that SEC has no ongoing enforcement actions against Herbalife? Or it's just simply means that they haven't found any data on that matter?

      Many thanks for a reply

      1. The SEC's reply to the Herbalife request should only be construed to mean that the SEC did not send a Wells notice to the company during the responsive period. Based on that letter, you can't say anything (positive or negative) about enforcement actions or other matters.

      2. This comment has been removed by the author.

    2. 1. SEC and DOJ cases are not closed, I think you would agree.

      2. There is no definitive proof that the SEC has issued a Wells Notice to Pershing Square based on the indirect and circumstantial evidence in this article.

      That said, have a nice weekend.

      1. Raven, you have been wrong for so long on so many fronts that to take you seriously would be border stupidity. You do remember how convinced you were that Netflix was a great short and you were wrong and anyone that followed your advice lost a ton of capital. Just saying

      2. Pro tip: Netflix isn't the only one I've gotten wrong over the last few years. Maybe try talking about some other calls that I beefed - you know, add some spice to the discussion. Here's some reading for you: Cheers!

      3. It's not the one's you got wrong but more importantly the degree to which your were wrong is more important. Keep spinning the truth though.


    4. What happened to QTR's claim that Ackman does an insane amount of research on the companies he invests in? Missed the mark with VRX. Ackman and QTR appear to be birds of a feather.......