What's up guys and welcome to wall street millennial on this channel, we cover all things: stocks and investing in this video we're taking a look at one of the most legendary short selling fails of the past decade. This short selling fail saw two hedge fund titans clash and nearly destroyed one of them's career, a multi-million dollar smear campaign, a billionaire battle on national television, insider trading and an fbi investigation bill, ackman's activist short of multi-level marketing. Firm herbalife went down in the history books as one of the most disastrous shorts of all time, shout out to our channel members who voted on this video topic and get access to our non-time sensitive videos. One day in advance, usually epic short selling, fails, tends to involve high flying high, high-growth tech stocks like tesla or stocks that don't conform to traditional models of valuation.

Like gamestop, we've already seen david einhorn's drawn out battle with elon musk and tesla, which almost destroyed his hedge fund and mark spiegel's short position that ruined an otherwise impressive investing record. But this short selling disaster centers around a multi-level marketing, firm herbalife in late 2012 bill. Ackman released a research report accusing herbalife of running a pyramid scheme. He had done extensive research on the company and was convinced that it was a fraud and took on a 1 billion position against the company.

This eventually led to a drawn-out battle between him and another wall street titan that involved the sec fbi and insider trading scandals. Bill ackman is one of the most prominent investors today, but he's had a decorated career as an investment professional since the early 2000s, a harvard college and harvard business school graduate. He started his hedge fund pershing square capital management in 2004. After previously running a different investment firm with a fellow harvard grad, he immediately made a name for his company by taking a large position in the fast food chain, wendy's and then pressuring the board to sell off tim hortons in an ipo.

This eventually happened and brought millions of dollars of profits to ackman's fund throughout the next several years, ackman continued to generate market beating returns through activist, investing by purchasing significant shares of companies and pressuring management to take certain corporate actions after returning 40, 22.5 and 41 in 2005 2006. In 2009, his fund's assets under management had grown to three billion dollars and continued to grow to a peak of 16 billion dollars. In 2014., his activist investing strategy was working and he seemed unable to make sub-market returns for his investors, and then herbalife happened in 2013. Ackman took notice of a multi-level marketing.

Company called herbalife herbalife sells nutritional supplements, but instead of selling through traditional retail channels, they sell through a multi-level marketing structure. Anyone can become an herbalife distributor as a distributor you get to buy herbalife products at a discount and sell them to your friends, family and other people in your community for a markup. Importantly, if you refer a new distributor to herbalife, you also earn a commission on each one of their sales. Multi-Level marketing schemes are controversial because they are oftentimes scams designed to extract money from the distributors, who are often just regular working class people.

If the end product is any good, you could usually sell it through traditional retail channels, and customers would buy it. The fact that herbalife uses independent distributors to sell its products should, at the very least, raise questions when a new distributor joins herbalife. They are required to put up some money up front to buy the first batch of herbalife products. If they can sell these products for a markup or recruit other distributors, they can make a profit, but if nobody wants to buy the products they have to eat the loss of the upfront investment, not all multi-level marketing schemes are bad.

Sometimes they sell legitimate products that have real demand from end consumers. However, if there is very little end demand from consumers, eventually, the distributors will be unable to sell their inventory and will be left holding the bag. If the company knows this will likely be the case, but tricks distributors into joining anyways, this is called a pyramid scheme and is illegal. In 2013, bill ackman came to the conclusion that herbalife was a pyramid scheme and shorted the stock in a very public manner.

Thanks for coming in today bill sure, first of all, what are you accusing herbalife of being a pyramid scheme? We believe herbalife experiments came and explained. What do you mean by that? Well, herbalife sells uh products, weight, loss, products, nutritional supplements, uh vitamins, things like that, but they what they really sell, what their distributors make money from is by selling a business what they call a business opportunity. The business opportunity is to sell the business opportunity to your friends who in turn, sell the business opportunity to their friends, and we don't believe this really end demand for the product by true retail consumers at the suggested retail prices for the product. How much money have you spent betting against herbalife uh? We have a short position of over a billion dollars.

It is illegal to run a pyramid scheme. It's much like a chain letter. If remember as a kid, you know you get a letter in the mail and it says well, you know, send 10 send 10 cents to the the six people on the on the envelope who came before you and in three weeks you'll have a thousand dollars the Problem with endless chains, the problem with pyramid schemes is that it requires an enormous number of recruits at the bottom to feed the people at the top and never believe that people at the bottom lose money and only the people at the top make money. And it's not a legitimate business and it's as a result.

It's inherently fraudulent admin came out publicly calling the company a scam and put his money where his mouth was initiating a one billion dollar short position on the company. Ackman was one of the most well respected investors at the time, so his acquisitions had a significant impact on the stock which fell roughly 40 after he initiated the short after initiating the short position. Ackman spent 50 million dollars on a sophisticated pr campaign designed to expose the company and hurt its share price. This campaign included private investigators, lobbying interviewing former herbalife distributors and other primary research.

He gave numerous media appearances and multi-hour presentations showing the findings of his investigations to the public. He thought the company will eventually be shut down by regulators and the stock will be worth zero dollars. If this happened, he stood to make 1 billion dollars from his short. So the 50 million pr campaign was just a small cost of doing business.

However, the fact that he stood to benefit from the stock price declining caused many to doubt the integrity of his accusations. When you have one billion dollars on the line, this could motivate you to over exaggerate the accusations or otherwise make herbalife stocks look worse than it actually is. In early 2013, another billionaire hedge fund manager, carl icahn, announced that he had taken the opposite side of the trade to acme, with a 13 long stake in herbalife on the news. Herbalife stocks shot up 23 in after hours trading.

This was also after another hedge fund manager. Dan loeb of third point also took a significant long position in the same company. Suddenly bill ackman's short position seemed fallible and the public began to lose confidence in his accusation of herbalife. As a fraud in one abc clip, a former herbalife employee was revealed to have been paid by akron to spread dirt about herbalife.

I had a moral conflict that was really big: a former executive who left the controversial herbalife company in 2011. Boraqua said he was ready to put himself in jeopardy in order to reveal what he called the ethical shortcomings of the nutrition products company. I decided to leave my job. Boraques told us.

His legal bills and travel were being paid by one of the company's wall street critics, but he wasn't receiving. He said any other benefit, no, not at all, nothing, i'm not getting a benefit, but now we've learned there was something he did not tell us. This secret deal with herbalife wall street critic, bill ackman, a financial cushion that could pay boraquez as much as 250 000. A year for 10 years, if he lost his new job for talking to the media or the government with other benefits, a potential total value of 3.6 million dollars, we're not paying him for what he has to say.

What we're doing you did pay him. You don't think, that's a problem. I think it's important that it's disclosed that's a very, very important fact, but ackman and boraqua's only disclosed the deal to us after questions were raised in this new york times story about ackman's financial ties to other critics of herbalife. At a meeting in the park near his california, home borac was told us his answers in our first interview were truthful because he was not receiving payments at the time.

He says he only asked for and began receiving the payments. Twenty thousand dollars a month. A few weeks after the abc news interview, at which point he says he had lost his new job and his wife had lost her job too. So far he has collected eighty thousand dollars from africa.

Look you tried to hide this from me. Look there were things: why did you do that? How can anybody believe what you say if you're not truthful about this look? Ryan, no answer that question: can you look? I had a job? No, how can i do my job? This agreement protects me from any losses. According to the deal, boraques has already provided information to government agencies investigating herbalife. Did you disclose this to the federal agencies uh? His lawyer, stephen alexander, then ended the interview.

We're done. This is an important question. We're done we're not talking. We told you we're not talking about what he's talking about several months later in march of 2015, it was reported that the fbi, as well as manhattan, u.s attorney's office, were investigating ackman for possibly having hired people to make false statements regarding herbalife.

Only a few days later, a separate lawsuit against herbalife for running a pyramid scheme was dismissed by a u.s district judge following this herbalife stock jumped another 13 percent. This was the beginning of an epic bull run for the stock and foreshadowed ackman's biggest shorting disaster. Ever in another development, on september 30th of 2014, the sec announced charges against two people for engaging in insider trading around bill ackman's short announcement. According to the sec, they were tipped off to blackman's plan to announce his 1 billion short position and bought puts ahead of time.

These charges did not directly involve acne but still spread negative publicity around his highly publicized herbalife short in early 2013. After carl icahn made his long position in herbalife scott wapner hosted both ackman and icon on cnbc's halftime report. In a legendary heated interview in the nearly 30 minute exchange, the two hedge fund, titans, traded, insults and accusations of dishonest business dealings, take a listen to the most heated parts of the interview, carl carl. Let me let me just ask you, though i mean the the crux of the the the argument: doesn't really go back or doesn't so much focus on on 10 years ago, or maybe it does.

It focuses on the most recent history, and that is bill. Ackman's short play on herbalife, you criticized him quite heavily for the way in which he he went public with the short would. Would you be willing to admit that in the past i mean look, you've got sharp elbows as well. You've got weight to throw around too that it that's the way of the short world.

Isn't it carl, hey, listen! If i'm going to admit it, i'm not going to, then i don't stock, i'm not going to admit it with a guy like you on that tv, because i don't think you've you've been handling this fairly. I think you're trying to attack me and and bullying me into admitting something, and so you expect me to do it on your show. No, i'm not i'd like to ask you a question if you think you're going to bully me into doing it, you seem like a nice enough guy. I don't think i've ever been on a show with you, but i don't think i take the bullying.

So i think that you're giving me all this box buyer said i could say what i wanted on the show. So i'm saying it all right, hey we'll, send we'll send max the uh the bill on your show. You have to use, try bullying me and come out okay up against me. Do you all right? Well, let me i'm known hey.

Nobody here is bullying you first and foremost. Second of all, i simply asked why the heck are you getting involved in it? I i simply asked you to reveal whether you were long herbalife as the world wants to know and the motives behind it. That's all i we want to know that's what every person watching this program wants to know and if that position is in all, can i answer? Can i answer it? Let's do what you want to keep talking, i'm going to answer it to you yeah, but i'm going to tell you about herbalife and i'll. Tell you what i will tell you and what i said before: uh uh, you know i think ackman did herbalife, because i don't, i obviously don't like ackman ackman is lying about what happened and right now.

I believe i and i'm not going to the sec or the ftc, but i believe he goes out. He has 300 people in a room. This is the typical act. I wouldn't care if it was anybody else, but ackman, but he goes in this room and he gets 300 people and he tells them how bad this company is it's a classic stuff they did in the 90s.

You you scare, the hell out of people, get the stock down. He marks the stock on december 31st and makes 600 million bucks on paper and tells the world how great he is he's given to charity and shows the world he's made 12, which isn't so great anyway. I'd like to say, we made 28 last year without going and having to go, pump and dump stocks and having to go and have rooms full of people and in 2011, at the risk of being a modest we made 33 without having to do what. I consider to be manipulation, okay and that's what he did in herbalife and if it wasn't, if it wasn't ackman, i wouldn't give it.

You know: i'm i'm not here to change the world, but this is what he did. He got a bunch of hidden innocent investors. Retirees they're going to lose their money, so acme could show a good record at the end of the year and by the way, took an inordinate risk. Because in a company like herbalife, you could ask almost any pro.

You don't go 20 and but what the hell he's not risking his money he's risking his investors, money you go in and you got 20 and if there's ever a short squeeze which well might be an herbal life, what the hell does he do? I'd like him to answer: where does he get the stock to to when they call back all the stock? Let's say: there's a tender offer for herbalife and they call back the stock. And if you know you know wall street, but there's a tender offer, everybody calls back the stocky bar and if they ever does it, that stock could rush to a hundred what the hell does zachman do. I've asked him he's on the phone he's right here on the phone. I'm happy i'm happy to answer.

If i get a chance to show you, here's a short squeeze. Okay, a couple couple of interesting things number one bill. Let me just say quick: we have to be quick because we're at the end of our our road here - okay, okay, so number one carl's free to make a tender offer for the company carl. You want a bid for the company, go ahead and bid for the car - hey, hey! You don't have to tell me what i'm free to do.

Okay, well, maybe number one number two. Obviously we don't think there's going to be a tender offer for the company. We don't think this company is viable. Okay, we don't think any person is going to write a check for five or six billion dollars to buy a business that we believe is fraudulent.

Okay, that's number one number two carl icahn says it. He doesn't like this. Behavior says it's bad. Meanwhile: 2003 at the ira stone conference in front of 500 people, carl icahn, pitched trinity industries, which he was short and he was short 22 of the outstanding shares.

According to fortune magazine carl, you can tell us whether that's true or false, but you did precisely that. So i find it interesting that you have an issue with what we did in herbalife in herbalife. We simply provided to the public full transparency on this investment. 330.

Slides in detail not scaring people, but going through the facts about the company. Okay, we did exhaustive research over a year and a half there we could afford and we will be either proven right or we'll be proven wrong. Okay, we shorted the stock. We have not covered our shares, we believe in what we and we have more to come by the way so uh we have we, we have some questions.

The company has given us the opportunity to ask. We will have responses for every issue they raised in their responsive presentation to us and what i thank carl for is, he certainly helped highlight herbalife and the issues that herbalife and i don't. My guess is that carl bought herbalife if he did, because that's what he someone, i think shop leaked to the press and he flipped it out when the stock went up and he made a good trade. Congratulations on a good trade.

I don't believe, there's any real investor who can own this business long term, because we believe it's a pyramid scheme. We believe you can prove that to a high degree of certainty right, hey, uh. I appreciate bill that you called me a great investor. I thank you for that.

Unfortunately, i can't say the same for you, but i'd like to ask you. Congratulations on what could trade i i sort of missed that from 2014 to 2017, herbalife's revenue declined gradually. The decline was not as precipitous as backman probably expected, but it was moving in the right direction for his short position, but from 2017 through 2020. Inexplicably, the revenue started to increase, despite all the effort ackman put into trying to expose the company, new distributors were still signing up and the company was making more and more money.

The strong financial results from the company caused the stock price to increase and in 2018 ackman finally threw in the towel and covered his short position. It's unclear exactly how much he lost from the trade because he changed the size of the position from time to time and for some periods he bought put options from the time he started shorting it to the time he covered. The stock increased by roughly 80 percent, based on the size of his position he easily could have lost in excess of one billion dollars. This bet, along with his disastrous investments in jcpenney and valiant pharmaceuticals, caused his fund to suffer four consecutive years of negative returns and his assets under management declined by more than 60, as investors pulled their money out since closing out the herbalife short bill.

Ackman publicly said that a humbled pershing square would return to his value, investing roots and start afresh in the two years. Since then, ackman has actually made an impressive comeback. In 2019, he made several huge and successful investments that led his fund to 58 returns on the year. The first was in berkshire hathaway warren buffett's company that returned 20 over the course of 2019..

Another hugely successful trade was a large stake in chipotle, which more than doubled in 2019. Ackman was bullish on the company's new ceo in efforts to become more technologically savvy. His fund's concentrated positioning, usually only holding less than 10 different stocks at a time, allows his fund to achieve extremely high returns, even when only a few of his stock picks do well, but especially when most of them have great years. In 2020, he matched his fund's 2019 performance in only a couple of months with his legendary coronavirus trade.

In that trade alone, he made two and a half billion dollars for his investors in a nearly half billion dollar paycheck for his own company. This comeback has landed him among the top spots on forbes list and revitalized, his name as one of wall street's most admired investors.