Baby Ace: RUTH SUNDERLAND: US Federal Trade Commission launches probe into vitamin company Herbalife after its accused of unfair business practices

Friday, March 14, 2014

RUTH SUNDERLAND: US Federal Trade Commission launches probe into vitamin company Herbalife after its accused of unfair business practices

By

Ruth Sunderland

Wall Street is transfixed by the Herbalife affair, a potent mix of warring hedge fund barons and political intrigue.

Herbalife, which sells vitamins and supplements in 80 countries including the UK, has come in for criticism for its business practices, which detractors say take advantage of the largely working-class people, often Hispanic and African American, that it recruits as distributors.

Its shares dived sharply this week after the announcement of an inquiry by the Federal Trade Commission into its practices.

Exploitative: Billionaire hedge fund manager Bill Ackman has accused Herbalife of running a pyramid selling scheme

The regulatory probe came after months of agitation by Bill Ackman, the billionaire hedge fund manager who founded New York firm Pershing Square Capital.

Ackman, who accuses Herbalife of running a pyramid selling scheme, has been its bete noire since he took a $1billion bet in 2012 that its shares would fall.

The company denies any wrongdoing and says it welcomes the inquiry, ‘given the tremendous amount of misinformation in the marketplace’.

In setting his face against Herbalife, Ackman has put himself at odds with rivals including George Soros, the man who almost broke the Bank of England, and veteran investor Carl Icahn, both of whom have placed opposite bets.

So far, he has been losing money, as the shares had been rising until the FTC investigation.

The twist in the tale is that Ackman has not contented himself with making his wager and standing back, but has tried to instigate the US regulators to bring about Herbalife’s comeuppance.

He has lobbied hard for an investigation into the company and there were claims in the New York Times this week that he deployed consultants and lobbyists to find alleged victims.

Ackman himself has vowed to donate any profits he might make from going short on Herbalife shares to charity, but the affair throws up some fascinating ethical questions.

There is a queasy feeling about a billionaire hedge funder on a moral crusade, even if one shares his disdain for Herbalife.

One view of his actions is that even hedge fund managers can sometimes be a force for good, by highlighting companies whose business models and behaviour are flawed.

Indeed, that is the argument that was advanced by the hedgies who earned handsomely from the downfall of Northern Rock and RBS.

Some will feel that, whether Ackman’s motives are pure or profit-motivated, he has hit on a worthy target.

The other reading is that hedge funds are predators seeking to profit from the misfortunes of others, whether they be hard-up Herbalife distributors or put-upon British bank customers, and furthermore, that they create self-fulfilling prophecies to make their short positions pay off.

A similar ambivalence surrounds the involvement of hedge funds in the rescue of the Co-op Bank.

Many customers feel this is out of kilter with the group’s ‘ethical’ principles, and that they are picking at the carcass of a lender driven close to collapse by the reckless incompetence of its previous management.

It may still be better, though, than the alternative of a taxpayer bailout. These are ethical dilemmas that would tax a mediaeval theologian – not so much a moral maze, as a morass.
Bonus bounce

There was little sign of malaise in the US economy in the Capital Grille, an eaterie popular with Wall Street financiers where high-rollers keep their own lockers of fine wine to entertain their favoured clients.

No doubt lunchtime spirits are being lifted by this year’s bonus round, the third-biggest ever despite falling profits at the US banks and a costly and damaging round of legal and regulatory wrangles.

The total cash bonus pool rose by 15 per cent to $26.7billion, taking it to the highest level since the crisis hit in 2008, while profits overall dropped by 30 per cent to $16.7billion.

Although we are often told in this country that we British are uniquely churlish in our resentment of banker bonuses, the same debates are raging in the US.

As the Wall Streeters bask in their bonuses, President Obama is battling for an increase in the minimum wage from $7.25 an hour to $10.10.

The Institute for Policy Studies is claiming that the bonuses paid to the 165,000 finance workers in New York would be enough to double the pay of a million bottom-level earners.

In New York, just as in London, the middle class complain they are being forced out of the city by high property prices and the divide between those at the top and bottom of the earnings tree is becoming a chasm.