Mar 14

Does short selling + lobbying = stock market manipulation?



As extensively detailed by the NY Times in a recent article, this is the business model of Bill Ackman’s Pershing Square Capital Management’s short bet on the stock of Herbalife.

The most questionable conduct outlined in the NY Times article is the reported fact that Mr. Ackman was informed about government action before the action was made public. Specifically, Mr. Ackman was told about a letter sent by Congresswoman [Linda T.] Sánchez  to the F.T.C. before this information was released to the public. This is troubling because Mr. Ackman could have purchased additional short options before the news was released that Ms. Sánchez had asked the F.T.C. to investigate Herbalife. If disclosure of Ms. Sánchez’s letter to the F.T.C. had caused the price of Herbalife’s stock to drop, Mr. Ackman’s firm would have reaped the benefit. Similarly, Senator Edward Markey’s office may also have provided Mr. Ackman  a copy of a letter being sent to the F.T.C. and the S.E.C. before the letter was sent to the agencies. This advance notice would have given Mr. Ackman time, again, to purchase additional short options in anticipation of the effect of the public disclosure of Mr. Markey’s letter on the stock price of Herbalife.

This is material, non-public information. It is information that existed as a result of Mr. Ackman’s own efforts. In my mind, this gets close to the definition of stock manipulation.