An Exclusive Interview With Pershing Square's Bill Ackman

| About: Herbalife Ltd. (HLF)
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Pershing Square's investment performance has been exceptional year to date.

Bill Ackman continues to seek opportunities for his firm and his investors.

As a fellow Herbalife short, Mr. Ackman agreed to join me for a conversation.

This month marks the two-year anniversary of Pershing Square's presentation Who Wants to Be A Millionaire? made at the Ira Sohn Conference regarding Herbalife (NYSE:HLF). As a private investor, I am short HLF common stock. Recently, I took the initiative to reach out to William (Bill) Ackman, Founder of Pershing Square in pursuit of an interview. Bill was gracious enough to share his time and his thoughts on his firm, shareholder activism, investing, and Herbalife. Here is a transcript of our conversation.

Part One - On Investing

Matt: Good evening Bill. Thank you for agreeing to this interview. It's been a watershed year for Pershing Square. This year your returns to investors are outstanding, a white knight appeared to acquire Allergan (NYSE:AGN), you took PSH public. Can you offer some thoughts on the year in review? What are you most proud of as you look back upon recent events?

Bill: It's been a very good year. We spent most of our year on Allergan. I think we worked very well with Valeant (NYSE:VRX) and achieved a very good outcome for Allergan shareholders. It wasn't the outcome that we originally hoped to achieve but this was the best outcome that could be achieved. Hopefully, from here, there's a business that can become even more valuable for investors who continue to own the combined Actavis/Allergan business.

I think it's been a good year largely because very broadly across the portfolio pretty much every one of our portfolio companies made progress. Canadian Pacific (NYSE:CP) had a very strong year with continued improvement in operations. Howard Hughes (NYSE:HHC) continued to build value and opened a couple of significant developments while continuing along the process of getting approvals, selling land, increasing their cash flows and net operating income. At Air Products (NYSE:APD) Seifi Ghasemi was announced as the CEO of the business. He started in July and has only announced one quarter of results but has already begun to make meaningful progress with that company. Burger King (BKW) announced good financial results and then completed just in the last couple of days the acquisition of Tim Hortons (THI), which we think, adds another leg to the story that will create a lot of value for the company and the shareholders going forward. Platform Specialty Products (NYSE:PAH) announced a couple of very significant acquisitions on its way to becoming a very material business in terms of scale and profitability for shareholders.

What else? With respect to Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC) it's still very early in the story. The recent court ruling, which we don't agree with, gave us an opportunity to buy a bunch more stock at favorable prices. We think that's a very interesting story as Fannie and Freddie have become even more important to the housing finance system. Most recently, the Obama administration is in effect taxing Fannie and Freddie to create more funds for affordable housing. The bottom line here is that you have companies in an unsustainable situation. Right now they are sitting without any capital. The taxpayers have very significant risk and the companies are being milked by the government, which is taking 100% of the profits and using them to fill other budget shortfalls. That's not an ideal situation nor do we think it's a legal one but I think that will have to be addressed in the next several years. It's become even more clear that Fannie and Freddie are not going to disappear and so it comes down to striking a deal between the private sector and the government. The good news is that taxpayers own 80% of the company, and so whatever is good for shareholders is also good for taxpayers.

As for Zoetis (NYSE:ZTS), we took a stake in this animal health company as our second new investment of the year. Again, it's very early on but we see a lot of value and potential there too.

As for Herbalife, we began the year with the stock in the high $70s/low $80s. We've made very meaningful progress as regulators have announced investigations whether it's the Department of Justice, FBI, and the FTC. Also, the SEC still has an ongoing investigation. A number of Attorneys General have gotten involved. So, I think on the regulatory front there is work that is happening and then on the business front the fundamentals have begun to deteriorate. According to Herbalife there's a huge opportunity because of all of the obesity in the world, which actually, is something we care about. The Pershing Square Foundation is certainly interested in helping to move the bar on the issue of obesity. Herbalife's deterioration this year, however, has nothing to do with the issue of obesity. There are plenty of obese people in the world but the business is deteriorating because of the spotlight we shone on the company and the beginnings of changes to some of their most egregious business practices. Of course this is making it more difficult for the company to recruit new distributors. We think it's a very interesting question whether the business disappears because regulators shut it down or simply because it collapses of its own accord because it becomes more difficult for the company to recruit people by misleading and defrauding them.

Matt: As an outside observer, you seem to turn to what I will call the "rule of law" as a way of generating returns for your investors. Allergan, Fannie Mae and Freddie Mac and Herbalife all involve an intense amount of legal work. As an activist, can you talk about how you think about the law as it applies to generating ideas for your investors? Is it a source of competitive advantage for your firm vs. passive managers or other activists for that matter?

Bill: We've made a number of investments that are legally intensive. We would certainly put Fannie and Freddie in that realm along with Herbalife. Also, the dynamics of a takeover are legally intensive so Valeant and Allergan fit as well. Still, the key driver of our investments is the business fundamentals. The driver of the Allergan deal was not the law but in fact the very strong fundamentals of that business.

Fannie and Freddie are perhaps the most legally intensive investments we have, but even in that case we think we have very high quality businesses growing in value every day. We have a basic view that the government is not going to be allowed to take private property without just compensation. Inevitably, we think the government's confiscation of 100% of the profits in August of 2012 will be reversed.

As a firm, we're willing to step into situations that have a high degree of complexity. If it is business complexity we are less interested but if it is legal complexity combined with a very high quality business that could be something very interesting to us.

Matt: Your investment thesis in Fannie Mae and Freddie Mac is fascinating. Over what time frame do you expect the litigation vs. the government to play out?

Bill: I think it is difficult to determine. We own the common stock, which is basically the residual claim here as long as we are ultimately treated fairly and the courts do the right thing. The case may ultimately go to the Supreme Court but we'll see. Hopefully, the shareholders will end up with the value of that business. Even if we put aside the law for a moment, right now the government is the risk capital for the business versus the private sector. We think it makes more sense for the private sector to take the first loss position and that ultimately that's an idea that the Republicans and Democrats will support. The rule of law might act as a bit of a stick in this case to bring the government to the table but ultimately the fundamentals will drive the investment. We are a common shareholder as opposed to a preferred shareholder because we don't know the timing. The non-cumulative perpetual preferred stock is a very time sensitive investment. As a common shareholder, even if it takes five or ten years for things to play out we are still going to do very, very well.

Matt: As you look at the universe of large cap companies that fit with your investment philosophy, is it currently difficult to find new ideas that trade at a discount or premium to your assessment of intrinsic value?

Bill: It's never been easy. This year we had two new investments. Last year we had a couple. I think there are plenty of things to do. We just try to find the best couple of interesting things to do a year. I think on the short side it isn't hard to find things that look overvalued right now but I think it is harder to find big companies that are outright frauds or should go to $0. Because we don't find many of those, we've only done a couple of shorts in the past eleven years.

Matt: You run a very concentrated portfolio. Can you explain to investors why concentration makes sense to you?

Bill: Ultimately it depends on what you concentrate in. If you concentrate in very high risk situations that could be a disaster. We concentrate in what we think of as some of the best businesses in the world and they are generally very well financed and comfortably investment grade companies with very dominant business franchises. If you think about the concentration of risk, if you own the ten best businesses in the world and you buy them at attractive valuations that can be a very low risk strategy. Yes, the degree of concentration may affect the short-term volatility of the strategy but I don't think it will affect what we think of as the real inherent risk of permanent capital loss.

The benefits of concentration are:

  1. It makes more sense to own the ten or eleven best ideas and obviously it makes more sense to own more of idea #1 than of idea number 20 or 30.
  2. It enables us to really understand the businesses we invest in. At Pershing Square we have a relatively small team of analysts and I can understand everything we own in the portfolio. This makes the business more efficient and less about managing people and more about managing investments. Warren Buffett talks about diversification as protection against ignorance. I would say concentration is something you should only do if you are going to do your homework. Because we own investments for a long period of time and typically only introduce one or two new ideas a year that gives us a lot of time to do our homework before we make a big commitment. If you own the ten best and most interesting things you should generate a higher return than if you own the top fifty things. So, we see a lot of benefits from concentration.

Matt: How excited are you about the future? You are still a young man, what are your long-term goals?

Bill: I'm glad you think of me as a young man. I'm 48 and approaching 50, which is a definite milestone. When you think of other activist investors it seems to be a strategy that allows you to be successful for a long time. Carl Icahn at 78 years old is still quite active. If you think of Warren Buffett who is sort of an activist - at least he was earlier in his career - he is still going strong in his 80s. Nelson Peltz might be upset with me if I said he was an older guy but he is still quite active in the business. So, I think I can do this for another thirty or more years and the good news is I really love what we do.

For us, the goal of the firm is we want to have one of the best investment records ever. We have a great platform that we've built over the last eleven years. We have a very stable capital base, which is a huge advantage, and we have a great team. When you combine the platform, the capital base, the team and the strategy I think we have a sustainable competitive advantage that will allow us to keep doing what we are doing. Our circle of competence also continues to expand. We had done nothing in healthcare until this year. We've now done a couple of things in that space and so we will continue to expand our circle of competence going forward. Overall, what we do is a lot of fun so I hope we will still be doing it 30 years from now.

Matt: What do you think the biggest pluses and minuses are of your form of shareholder activism?

Bill: I think the biggest plus is we don't have to invest in the status quo. We can find a great business that is undermanaged and we can find people who are willing to sell it to us because of the weakness of the management or of the strategy. As new owners, the next day after we own it we can move to make immediate changes to either the management or the strategy or the cost structure. That is a huge competitive advantage. The ability to not have to live with the status quo but to take advantage of the status quo in terms of building the investment and then being able to make the necessary changes. That is the best thing about the strategy.

As for the worst thing about the strategy? What we do is very time consuming. It can be very labor intensive and you can get into these battles occasionally that can be very intense. Herbalife is one. I would say the Allergan/Valeant situation was one of the most hostile defenses ever of any company in a takeover situation. That of course leads to a lot of media involvement. A frustration I have had over time is that the media doesn't always get it right. I don't mind a negative article in the press. I just mind an inaccurate article in the press. There's only so much you can do to keep up with people who have written articles that don't fit with the facts so that is a frustrating thing about the strategy but overall I would say that if you are trying to live a balanced life, sometimes the time consuming nature of the strategy can tip things out of balance for everyone involved.

Part Two - On Herbalife

Matt: Turning attention to Herbalife, it has been two years since your allegation that Herbalife operates a confidence game. The ride has certainly been wild and volatile. For investors new to the Herbalife thesis, Herbalife has an enterprise value of roughly $5 billion. Sports fans might call this the over/under for the value of the company. Can you explain quickly why you think Herbalife's intrinsic value is far less than this amount? Do you still think the intrinsic value of the equity is $0?

Bill: The bull case for Herbalife has been the earnings and the growth and the cash flows that the business has generated over the past 12 years and on that basis up until recently, I would say the stock price looked cheap. The earnings only went up. The cash flow only went up. The company used all of its free cash flow to buy back stock and to pay dividends. A company that compounds at a relatively high rate and doesn't employ a lot of capital is hard to find particularly at relatively low earnings multiples. So, let's call that the bull case.

Today, we think the stock is massively overvalued and the reason that we believe that is because we do not believe that this is a perpetuity. We believe that in the relative short term the company will be gone. One of two things will catalyze the company's demise. One will be that one of the many regulators who have been investigating the company will decide to require the company to eliminate certain practices or otherwise seize the assets of the business. Other pyramid schemes that have been identified by the FTC wake up one day to find the FTC with a court order to seize the assets of the company to preserve as much value as they can for the victims. That can happen here.

Alternatively, the more mild form is that they can force the company to eliminate all of their various illegal recruiting practices and then Herbalife will disappear of its own accord. Herbalife is not a company driven by health and wellness or as they say by the obesity crisis around the world. This is a company that only exists because it sells a very over-priced product to people who buy thousands of dollars' worth of inventory with the hope of making hundreds of thousands or millions of dollars trying to advance in the marketing plan. That hope is a false hope. The more that people understand that fact, or if the company were forced to disclose that fact to the people they are trying to recruit into the business opportunity, they would very quickly go out of business. We think the last couple of quarterly results reveal that the company's business is deteriorating. We think the next quarter will also be quite a bad quarter for Herbalife. We think it is becoming increasingly difficult for the company to recruit new distributors. The best evidence of that is that they have been easing the requirements to become a Supervisor in terms of the amount of volume people need to purchase and the amount of time people have to purchase it. The company is also running what are effectively "sales" over the past few weeks to help keep their Supervisor statistics up.

Also in Venezuela, I think the exchange rate is now 180:1. This used to be one of their most profitable markets. Now they are losing money in Venezuela and they will continue to lose money there. What's interesting about Herbalife is the currency risk in the business. Herbalife probably has bigger currency risk than most other companies because they manufacture and ship from the US while generating most of their revenues overseas. If you look at what is happening to currencies in places like Mexico, Russia, Argentina, Brazil and Venezuela, these are important markets to Herbalife where exchange rates are now a big headwind moving forward, so we think the company is going to have another bad quarter and continue to deteriorate. One way or another we think this stock goes to $0. That remains our target price. We simply do not think there is a viable company here if they are required to obey the law.

Matt: Leading into Ira Sohn, how much due diligence did you do on Herbalife? Had you sound-checked your thesis with regulators at all before going public with the idea?

Bill: We started work in the summer of 2011. Our analysis became more intensive beginning in December of 2011. We went public in December of 2012, and our team of analysts and lawyers who worked on the idea had done an enormous amount of work over that period of time. We sought independent legal advice and an independent assessment of Herbalife's legitimacy from a highly regarded law firm. We also gave a heads-up to one of the regulators prior to releasing the presentation, but we had not had any sort of meaningful dialogue with regulators prior to going public with the idea.

Matt: Earlier this year, you restructured your investment position. Roughly 29 million Herbalife shares are sold short. Are you able to help investors understand how many shares you currently hold short, how many additional put options you own and when they expire? Rumors abound that you have rolled your put position to 2016. Is that true? How patient are you prepared to be with the thesis?

Bill: Sure, I would say roughly 30% of our position is held in an actual short position in Herbalife common stock. The balance of our position is held principally in over-the-counter put options. Originally, most of those put options were going to expire in January of next year [2015]. We have now rolled out their maturities. We have the flexibility to further extend them if we choose to do so. Our decision on what to do going forward will be made as fiduciaries for our investors. When I look at things today, we shorted originally at an average cost of around $48. Today, with the stock around $38 [at the time of this interview], I think it is a much better risk/reward than it was when we started. So, as a result, we are keeping the position on.

When we started, we had no idea how long it would take to get the government interested. The business was performing extremely well. Now, we have multiple regulators [State, Federal, Civil and Criminal] who we believe are intensely interested in the situation. Herbalife is spending tens of millions of dollars defending itself. The business has now taken a turn for the worse. They've put out guidance showing further deterioration in Q4 and for next year. Frankly, I don't think they have any real clue what the revenues and earnings are going to be next year. I think it was at best a guess on the part of the company. If they turn out to be wrong again as they have been the past two quarters, I think management credibility will deteriorate even further, and the bull case for the stock will simply disappear. So, we think there's not much upside in the stock here, but we still see the potential for the stock to decline 100% in value. We haven't disclosed publicly the size of our position but what I will say is that it is as big as it has ever been.

Matt: You have stated publicly that you will pursue Herbalife "to the end of the earth." In the past, you have revealed a very emotional reaction to Herbalife's business practices. Can you talk about why you have such a visceral response to this company's behavior and why it impacts you personally? What is your current level of commitment towards this investment thesis?

Bill: Sure, let me clarify. One, I will pursue this to the end of the earth in terms of doing whatever I can in my power to get this company shut down and to have it held accountable for the harm it has caused other people. So, that I will do. That is separate from the investment. I can pursue whatever I want personally, but when I am pursuing something from an investment perspective with other people's money we will do what is best for our investors. Even in the unlikely event that we decide to close our position in Herbalife, I will personally continue to work on exposing the fraud. Why? Because I think the company has caused and continues to cause enormous harm and I find that upsetting and I think I can have a social impact here, and if I can help stop this company from defrauding millions of people that will be a significant outcome. It makes me happy to help other people and I think I can help a lot of other people by shutting this company down or by helping the regulators to ultimately shut this company down.

Am I emotional? I got a bit emotional during the Nutrition Club presentation. I was thinking about my great grandfather coming to this country as a recent immigrant, not speaking the language, and getting his first job. I started thinking that had he gotten bilked out of his savings by some pyramid scheme operator, life could have turned out very differently.

When I think of the Latino immigrants in this country - many of whom are undocumented trying to find honest work who are being ripped-off by Herbalife - I find that to be abhorrent. If you watch the Nutrition Club presentation closely, it becomes crystal clear that Herbalife targets what they call "the bottom of the pyramid" socio-economically speaking. Herbalife is the only pyramid scheme that we are aware of that deliberately targets poor people. They've been very successful taking money from the poorest people of Mexico, Brazil, Argentina, Venezuela, China, etc. and they do so because it is such a large market segment. Their target market is financially unsophisticated and very vulnerable. It's bad when you steal money from rich people. It's much worse when you take money from poor people. There's almost nothing worse that a financial scheme could do.

Matt: Your firm has invested in excess of $50 million in research and private investigation into Herbalife and the behavior of their executives and distributors. How important are the recent returns in your fund to your ability to practically sustain the pressure on Herbalife as we head into 2015?

Bill: Obviously it's very helpful to us. I think our investors are much more enthusiastic about Herbalife today than they were when it was at $81 [chuckle]. We spent an amount of money that we think is proportionate in view of the scale of the investment. It's a large number in absolute terms but in light of the amount of potential profit we think it's appropriate. The funds we've spent were directed not just towards investigative costs but also towards legal research as well. That's money we've spent over the course of about three years. Obviously, we would have rather not spent those funds but we can justify those resources in light of the scale of the investment. We also spent a lot of money on legal fees for Allergan but that is the nature of our strategy. Certainly, the money we've spent on Herbalife is the most we've spent on any single investment in our history, which speaks to our level of commitment to the thesis.

Matt: Investors on the long side of Herbalife common include Mr. Carl Icahn, Mr. Bill Stiritz, Fidelity, Cap Research, etc. Obviously, for your investment thesis to prove correct, these investors have to be wrong. Based upon your investigation and the evidence you have collected, do you think these investors underestimate the size, scale and scope of the Herbalife fraud? Or, do you think they just assume that the government will not have the determination to arrest its proliferation? Do you have any advice for the Herbalife longs?

Bill: The answer is, unfortunately I don't think the long investors here have done their homework, and I think that if they were to do their homework[pause to switch gears] you know it's interesting, people have an enormous skepticism about short sellers. They say "Oh, they're only saying that because they are short the stock. They don't really believe that or they're looking at it too critically." So there's some amount of people just being skeptical of short sellers.

Now in this case, I would say if the short seller is operating secretly or spreading stuff covertly on the internet I think you could probably ignore it. If on the other hand the short seller is very public, making several hundred-page presentations, has invested time, energy and financial resources and otherwise has credibility as an investor, I think you have to give the thesis even more credibility if you are long.

Then, if the short seller says "I'm going to pursue this thing to the end of the earth and I'm not going to keep one penny of profit from this investment personally and I'm going to give any profit to charity," then I think you have to pay even more attention. And then lastly, I would say that if the short seller has a position on and it goes from $45 to say $81 and the short seller actually increases his bet with a time component by buying put options in the face of some of the highest profile investors in the world - multiple billionaires, in this case four on the other side of the trade - but then maintains the position despite that, you have to stop and say "Hmm, either that guy is crazy or maybe he knows more than we do?" So I guess my point is, if I were long this stock I would say you're not being a fiduciary for your investors unless you've very, very intensively gone through everything that we've disclosed.

I find it very hard to believe that the investors who are long the stock have done that kind of homework. As a result, when this stock goes to $0, I think their investors, the people they are fiduciaries for I have a lot of respect for Capital Research and I have a lot of respect for Fidelity Investments. These are two of the best firms in the country and I've made a lot of money working together with those firms. I find it shocking that they both own Herbalife stock. I think it will be an incredible embarrassment to both of those firms in the same way that when Madoff went down if you were a fund of funds and you were an investor in Madoff, pretty much all of those funds of funds went down when people asked, "How can you be a fiduciary for me if you missed this fraud?"

In this case, it's not like the Madoff situation where Markopolos didn't go public with his concerns but only shared them privately with the SEC. Here, I've been incredibly public, so I just don't understand how two of the most reputable investment firms in the world have such large positions here. It just makes no sense to me.

Matt: In general, do you ignore the people on the other side of the trade and just stick to your thesis? How do you think about that?

Bill: So, one of the things we always do and Allergan is no differentin the case of Allergan, we were proposing a merger between Valeant and Allergan and Valeant has its critics and there are some pretty well known short sellers out there and one in particular who was short that stock. So, as part of our due diligence we spoke to Jim Chanos who was, at least at the time, short Valeant just to understand his thinking. We obviously didn't tell him what we were planning. Still, we always find it useful to listen to the bear case on something we are long or the bull case on something we are short.

If somebody has a credible argument as to why we are wrong on Herbalife, we would obviously listen to it. One of the things that has given us more conviction over time is that we have not heard one credible bull argument for owning the stock. In fact, all of the bull arguments have largely been chipped away. If you can think back to 2013, the bull case was the valuation, the growth, the earnings, the buyback and the idea that "Why would the government do something when it hadn't done anything for 33 years?" This year we've had multiple government agencies reveal investigations into the company so there goes that argument. The buyback has been completed at prices close to $65 per share. We view that ultimately as favorable for the short thesis even though it had the technical impact of keeping the stock price up in the first half of the year. So, they no longer have the capacity to buy back stock.

They have a large amount of debt coming due in March of 2016, which is not very far away. We're 15 months away from the expiration of their credit facility. They've eliminated the dividend. Revenues are declining in various markets and will soon decline overall. We expect earnings will decline. I don't know what the bull argument is anymore. The best I can come up with is that the stock is cheaper now in the sense that it is cheap relative to management's guidance. I think management's guidance is wrong and the people who are long the stock are assigning no probability of any negative outcome from an investigation. I think the biggest mistake a lot of people have said "well, we don't think the government is going to shut the company down." I think what they haven't thought through is this: Let's assume that the government doesn't outright shut the company down, but they shut down various practices that the company has relied upon to recruit new distributors. We believe that if the company is forced to put in place a legitimate compliance regime then the business can't survive because we don't think you can sell Herbalife products without misleading and defrauding people about the income opportunity.

Matt: Herbalife's balance sheet has changed materially since January. How do you view the balance sheet today? What risks do you see both on and off the balance sheet for equity investors? Is there currently estate value for victims if the government acts to intervene forthwith?

Bill: Obviously, the sooner the government intervenes the more likely it is there will be some funds left for victims. The problem is the amount of debt the company has and the contingent liabilities they have vastly exceed the company's assets. The company disclosed last quarter something like $650 million of cash. Some of that is in Venezuela, a good chunk of that is overseas and will cost a lot of money to repatriate. There is over $2 billion of debt. A lot of people get the debt number wrong because they put the converts on the balance sheet based on GAAP accounting. Obviously, you have to look at the face value of the converts so there is more than $2 billion of debt. As I just mentioned, the credit facility comes due in March. I don't see any bank renewing that facility. So, they may have to replace it with equity or they may default. If this company has to raise equity I think it is going to be difficult if not impossible. At best it will massively dilute shareholders. So, I think there is a lot of balance sheet risk in the company.

Pyramid schemes are inherently unstable. They can grow incredibly quickly on the way up but once the distributors lose confidence they can vaporize. We've seen that in various markets with Herbalife with this "pop and drop" phenomenon but they've been very good at finding replacement markets either in the same countries just by going "deeper" as they say to lower and lower income people with things like Nutrition Clubs. We think that they've exploited most of the addressable universe of victims and we think that the publicity around the business is making it harder for them to recruit people.

Since the company modified its credit facility when it issued convertible debt in January, the government issued a CID [Civil Investigative Demand] in March. The banks can't be happy about these investigations and they can't be happy about the credit deterioration from the buyback. Banks generally don't lend money unless they are confident that they are going to be repaid. This company has very little in the way of assets. They have a plant in the Carolinas and some product inventory that probably isn't worth much. Historically, the company's credit facility has been underpinned by the cash flow generated by the business. Now that cash flow is deteriorating and we think the company is going to have trouble refinancing its facility. We also think that this year's audit is going to be an interesting exercise for PWC.

Matt: Investors seem to discount some of the primary evidence you have collected perhaps because you have a pecuniary interest in HLF common. Do you think regulators are concerned that your firm or Mr. Carl Icahn or Mr. Bill Stiritz have an investment here or do you think that they will simply search for the truth? In general, should hedge funds be viewed as credible sources as whistle blowers?

Bill: I think the government cares about disclosure. They don't like to receive information from somebody who claims to be unbiased only to discover later that they have an economic interest. Obviously, we've been incredibly transparent about the scale and nature of our short position. They know our lawyers well. I think our lawyers have a lot of credibility. They are not short the stock. So, I think we have the benefit of credible counsel. We have a lot of information that we provide to regulators based upon empirical data such as videos, transcripts, recordings, hidden cameras, hidden recording devices so they can listen to the evidence and form their own conclusions.

If we did not exist, Herbalife would be defrauding billions of dollars from even more people. Interestingly, the SEC actually pays whistle blowers and gives them financial remuneration for credible evidence. Hopefully, the fact that we stand to lose a lot of money if we are wrong and risk our capital in support of this thesis gives us more credibility rather than not.

Ultimately, there are some very well known billionaires who are long this stock and may stand to profit if the regulators do nothing. There is also a well-known short seller who is short the stock. I think in some sense the longs and the shorts cancel each other out here and I do have confidence that regulators are less concerned with who stands to make money or to lose money on Wall Street. My belief is that regulators are more concerned with getting to the truth. We think that the fact that Herbalife continues to target the poor is going to draw the attention of the people at the FTC more so than anything any equity investor might do.

Matt: This week, you released another profile of Herbalife Perpetrator Pedro Cardoso. Can you explain clearly to investors why the publication of these profiles is important? What laws do these perpetrators break? Do you have any additional thoughts on Mr. Cardoso?

Bill: We've put out a series of about 20 or so profiles so far at We focused our efforts on the top Herbalife distributors. These are the people the company is closest to. These are the people the company pays so-called "Mark Hughes" bonuses to. There are two Chairman's Club members on the board, John Tartol and Mr. Cardoso. One of the claims Herbalife makes is that they don't really know what their distributors are doing and perhaps there are a few rogue ones out there. By highlighting the behavior of the top distributors we are making it clear that not only is this fraudulent behavior pervasive but that also Herbalife is aware of it. Everything we publish on the website we also forward to the regulators. I don't know how these individuals are going to be able to get away with what they have done and continue to do. It also sends a message to these distributors that they are going to get a lot of scrutiny from the government. So, if I were a top distributor of Herbalife, I would preemptively go to the government and become a whistle blower. Inevitably, the SEC and the government will likely target the top people unless they turn and become whistle blowers for the government.

Matt: Last week you also issued a video revealing distributors making false product efficacy claims in violation of a 1986 California Injunction vs. the company. Can you talk about why this information is important?

Bill: If people watch the video, they will see that these are not just random Herbalife distributors. These are some of the highest profile, highest compensated Chairman's Club and President's Team members explaining the method of recruiting people by lying about the health benefits of Herbalife products and then once you've got them in, then you just lie to them about the business opportunity and that's how you recruit a distributor. That method is a method that's been taught by the top Herbalife distributors over many years. One of the things that puzzles us is why the California AG has not used their injunction to shut down Herbalife.

Matt: Today, you released video footage and a White Paper revealing further evidence of Herbalife's deceptive marketing practices. What are the key takeaways from this revelation?

Bill: The significance is that we have more confirmatory evidence that Herbalife is a pyramid scheme. In this case, we have a video that was actually taken by Herbalife of a private meeting of top distributors and mid-level distributors talking about how the business actually operates in practice. It's really a remarkable video and I expect it will ultimately play an important role in prosecuting Herbalife. So, it's just more confirmatory evidence and I strongly encourage everyone to watch it.

Matt: Herbalife CEO Michael Johnson seems resolute if not outright defiant. Even as 2 million people will likely quit Herbalife this fiscal year alone (a new record for the company), he continues to travel on a private jet to recruiting events like Extravaganzas to tell people "there's never been a better time to join Herbalife." Meanwhile, Herbalife's management team has missed earnings expectations two quarters in a row. Do you think the tide of credibility is turning against Mr. Johnson and his management team? Is it likely he is fooling regulators in the face of the overwhelming evidence of churn and failure in the business?

Bill: If Michael Johnson is going around saying "there's never been a better time to join Herbalife" he's lying and those kinds of lies are illegal ways to attempt to recruit people. I'm confident that regulators won't be fooled by Herbalife. I think regulators here are pretty sophisticated. I think when they look at the facts they will know the answer.

Yes, I have to believe management credibility has declined dramatically. It was one thing when the company was reporting quarter after quarter of earnings beats and growing cash flow and buying back stock. Now the company basically has to acknowledge they spent $1.3 billion buying back stock at an average of $65 per share earlier this year. Meanwhile, the stock's now $38, they're not buying back stock, they're no longer paying a dividend, they put at risk the company's balance sheet and now the business is deteriorating. So I have to believe they've lost a lot of credibility, which is why it puzzles me that whatever your argument was for owning this stock in 2013, I just don't see an argument for owning it today.

Mutual fund companies have to list all of their holdings in their annual reports to shareholders. If I am right and this company goes to zero, the first thing the press is going to do is to look at the list of shareholders. It's one thing for Mr. Icahn to lose what is largely his money. It's another thing for Mr. Stiritz to lose what is largely his money and the same thing for Soros but Cap Research and Fidelity are fiduciaries for individual investors and if they've failed to do adequate due diligence here I think it will be very damaging to their respective franchises.

Matt: If you had to point to one idea that makes you feel confident that Herbalife's fraud will ultimately be arrested, what would that idea be?

Bill: Ultimately, the truth in my experience wins and the truth here is just overwhelming that Herbalife is a pyramid scheme. We have yet to identify nor has anyone else identified one fact that is inconsistent with Herbalife being a pyramid scheme. There was actually just a very good piece on Seeking Alpha (here) written by a guy comparing Herbalife to other members of the Direct Selling Association. In November of 2014, the DSA put out a survey of their clients and Herbalife's claims are completely at odds with what's reported by the other members of the association so there's just fact after fact. Now the business is deteriorating. If this was really about people buying weight-loss powder, why are sales deteriorating in various markets around the world?

Matt: Is it necessary for government to completely shutter Herbalife for your investment to be successful? Or, is Herbalife just an unstable "House of Cards" destined to fail on its own? How do you think about this?

Bill: We do not know if the government will shut down Herbalife first or if Herbalife will collapse on its own before the government shuts it down. I don't really have any true sense of the timing of when the government is going to do whatever the government is going to do. The SEC has been involved here for two years. The FTC has been involved here for 9 months. We assisted the regulators by providing in a very public way an enormous amount of documentation about everything from the top distributors to how Nutrition Clubs work with an amazing degree of granularity, so I think they've got enough evidence. I think that the government could act any day. Meanwhile, the business deteriorates and as I've mentioned, pyramid schemes are inherently unstable so it's not going to take that many more quarters of deterioration before the bulk of distributors lose confidence and walk away from Herbalife. Certainly, there are plenty of other multi-level marketing companies where people can take their downlines and go to work.

Matt: As you look back on the past two years, what have been the most important lessons for you as an activist investor from the Herbalife thesis? How will this experience shape your approach to investing in the future?

Bill: What I would say is that the only thing that surprised me about the Herbalife situation was Carl Icahn's involvement and the pile-on from other investors who joined the attempt to create a short squeeze here. That surprised me. It seemed, I would call it, unseemly behavior. I know a lot of very high-quality people who work in the industry and this did not seem I'd never seen anything like this before so I found it disappointing so that was a surprise. Beyond that, there weren't a lot of surprises. We expected the company to put up a big fight. We didn't expect this investment to work out overnight.

Matt: Is there any doubt whatsoever in your mind based upon all of the evidence you have gathered that Herbalife is a pyramid scheme? Do you remain steadfast and confident that our government will enforce the law against Herbalife?

Bill: It's an absolute certainty that Herbalife is a pyramid scheme. Obviously, I can't have 100% certainty about what the government is going to do. I don't know. Ultimately, I think this will be a profitable investment because either the government will shut the company down or the government will help divide up the spoils after the company collapses on its own for victims and creditors. Obviously, fewer people will be harmed if the government steps in sooner rather than later.

Matt: You have pledged to donate your personal profits from Herbalife to charity. Might you direct some of that capital to victims of the fraud?

Bill: Yes, Actually we are starting to look at some organizations who can help the people who have been harmed here. For example, there's a charity that helps provide scholarships for undocumented immigrants. Don Graham of the Washington Post family started an organization to help this community. We've also gotten more interested in obesity. We're starting to explore ideas on what we might do with some of the funds as and when this investment thesis plays out.

Matt: You may have some capital to redeploy in the new year. Might you be tempted to add to your Herbalife position further?

Bill: I think we are as big as we possibly can be in the Herbalife position. There's a limit to the amount of put options you can buy and we are pretty much at those limits. So, we have about as big a position as you could possibly make.

Matt: Are there any other comments you would like to make either in regards to Herbalife or in general?

Bill: I guess what I would say is if you own this stock, you owe it to yourself and your investors to do due diligence. I would be delighted to talk to any of the major shareholders and to hear their long arguments. I would consider them carefully and answer any questions they may have about anything they might be puzzled about with respect to our analysis. I think that would be an interesting thing for them to do. We stand ready to take their calls.

Thank you for your time.

Disclosure: The author is short HLF.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.