Is Bill Ackman's Pershing Square the Target of an SEC/DOJ Investigation Because of Herbalife?

Let me start by saying that this all started with my desire to update an earlier post. New information convinced me that my previous assumptions weren't all correct, although ultimately my conclusion remains unchanged; albeit for different reasons now. You can view my original post (which remains unchanged) at this link. Spoiler alert: it turned out that #2 was the correct answer and indeed there was an ongoing investigation, just maybe not of Herbalife.

Who then you say? Well, it's not entirely clear although a string of recent FOIA's to the SEC may help uncover some of the truth.

On September 8th, Probes Reporter released a report on Herbalife in which they concluded that there is an ongoing SEC investigation *of Herbalife* and that the investigation "somehow involves its conduct, transactions, and/or disclosures."  Based on Mr. Gavin's report, and his experience, this very well may be the case, but what Mr. Gavin's analysis failed to address is with respect to the scope and/or actual target of the investigation. I corresponded with Probes Reporter about this issue and although they were very helpful, we failed to reach an agreement on our conclusions. If you aren't already, I highly recommend you sign up for their service; lots of good stuff in there.

Anyhow looking first at Mr. Gavin's initial FOIA request he asked for the following information:

• copies of the following records of any investigation(s) that directly pertain to the conduct, disclosures, and/or transactions of the registrant Herbalife Ltd (cik #:0001180262) since 13-Jul-2013.
• Correspondence sent to and/or received by the registrant;
• Correspondence sent to and/or received by third parties on behalf of the registrant;
• Wells Notices;
• Subpoenas;
• Orders of Formal Investigation as well as any supplemental orders; and,
• Opening and Closing Reports, including "Case Closing Recommendation", "Matter Under Inquiry Summary", "Investigation Summary", and/or similar documents and/or reports,

Ultimately Mr. Gavin appealed the initial response he received which stated that after having conducted a thorough search they "did not locate or identify any information responsive to your request." His appeal generated another response from the Office of the SEC General Counsel which stated: 

"We have confirmed with staff that releasing the withheld information could reasonably be expected to interfere with on-going enforcement proceedings." (emphasis added)

That is a very important point as the 7(a) exemption utilized by the SEC could also be used for prospective investigations, however the SEC clearly indicated there is an on-going enforcement proceeding. Mr. Gavin includes the SEC response letters in his report and I urge you to read it for yourself.

Ultimately where Mr. Gavin and I disagree is not on his content but conclusion. Mr. Gavin concludes that: 

"We interpret this appeal response to mean Herbalife remains involved in an SEC investigation that somehow involves its conduct, transactions, and/or disclosures." (emphasis added)

Mr. Gavin and his team also conclude that the target of the investigation is in fact Herbalife. Based on previous reports in the New York Times and the Hartford Courant regarding Pershing Square Capital being targeted by SEC and DOJ investigations, Mr. Gavin fails to account for the possibility that the information he sought could have also been exempted under 7(a) provisions by the Office of the General Counsel, because releasing those records could have interfered with ongoing enforcement proceedings against another party, such as Pershing Square, for their trading activity in Herbalife securities. 

Adding to this possibility is John Hempton's recent post that directly quotes a response he received from the SEC after requesting "any documents responsive to the claims that the SEC has investigated market manipulation in Herbalife stock by or on behalf of Pershing Square – the hedge fund run by Bill Ackman." Similarly to a separate FOIA request seeking the three letters sent by Herbalife to the SEC alleging manipulation of their securities(see Roger Parloff's Fortune article, "The Siege of Herbalife") the responsive documents sought by Mr. Hempton were also were exempted under 7(a).  It would be more understandable that the documents Hempton sought could be exempted under 7(a) but how could these three letters sent by Herbalife interfere with an on-going investigation, unless that investigation dealt with manipulation? That is to say, releasing "reasonably segregable" information from letters Herbalife sent about manipulation could have no effect whatsoever on an investigation of Herbalife for alleged pyramiding; the matter under inquiry must deal with an investigation of manipulation or we probably would have observed other exemptions in the response. It seems much more likely, particularly based on the NY Times article citing DOJ subpoenas about the short campaign against Herbalife that Pershing Square is a target of an ongoing investigation. It's important to note though that it is entirely possible the agency investigated Pershing Square and found no wrongdoing, but an investigation of others is still ongoing. This scenario would also lead to 7(a) exemptions from the agency.

Although Probes Reporter and I disagreed on this possibility, I didn't have to rely solely on Probes Reporter's many years of expertise; I was able to separately verify directly with the SEC that these types of cross exemptions occur. The SEC confirmed that it is entirely possible they closed its inquiry into Herbalife, but Mr. Gavin's requested investigation records would still have been exempted under 7(a) due to a separate, but related investigation of Pershing Square for their campaign against the company. Although the SEC did not confirm in any way that Pershing Square was being actively targeted by an investigation or that Herbalife was not, they did indicate unequivocally that in a situation such as Herbalife vs. Pershing Square, many such records would likely be cross exempted under 7(a). The SEC representative also offered that the Commission may actually not have any investigation but that they could be utilizing a coordinated 7(a) exemption in this scenario because of an ongoing investigation by another agency, such as the DOJ. Hmmm...interesting.

After speaking with the SEC I see four very real possibilities on the table:

1. Neither Herbalife or Pershing Square are the target of an investigation, but releasing documents about them could interfere with enforcement proceedings against another party.
2. Mr. Gavin is dead on and Herbalife is the sole target of the enforcement proceedings.
3. Herbalife and Pershing Square are both targets of enforcement proceedings.
4. The Herbalife documents Mr. Gavin requested are only *involved* in the enforcement proceedings but the actual target of the SEC (and/or DOJ) is another entity such as Pershing Square or a Pershing Square affiliate.

Normally there would be a fifth possibility in that nobody is being investigated at all and the agency would prospectively exempt records that could be included in an investigation but we know from the SEC's OGC, that the proceedings are "ongoing", so strike that one off the list.

But who are we kidding, it's highly unlikely anybody is investigating Pershing right? It's not like the SEC didn't already have BOXES filled with almost 50,000 pages of investigative documents by August, 2014 or anything. Oh wait, they do.

The FOIA that turned that up was limited to August 2014, and includes MBIA, CDSs of JC Penney, Longs Drug Stores and Target, although both Valeant/Allergan and Herbalife are conspicuously absent from the list of investigative documents; this seems to indicate that whatever on-going enforcement proceeding involving Herbalife that is causing all the current exemptions was officially opened after last August. (I was a bit surprised to see that per the response from the agency, neither the JCP or Target matters were closed as of August 2014, although they may be closed now.) Wow, even though there are only 87 consumer complaints against "Herbalife Pershing Square and William Ackman" the agency had a hefty Ackman/Pershing collection including 11 boxes, ~45,500 pages, 7 transcripts, 5 CD/DVDs, 1 file folder and a 1 redweld. That's nearly as comprehensive as Ackman's Sohn presentation.

This brings us back to the original question, who is the target of the investigation kicking up all these FOIA exemptions? Well, if Herbalife indicated as early as February 2013 that the SEC had opened an inquiry into them, but there was no report of Herbalife being a component of the SEC's investigations into Pershing Square in August of 2014, it leads me to conclude that the current enforcement proceeding involving Herbalife was opened after August 2014, and although it involves Herbalife it is focused on the activities of Pershing Square's alleged manipulation of Herbalife securities. This possibility would coincide very well with the DOJ's activities, as well as all of the recently reported FOIA exemptions. It could also possibly explain why the SEC missed any "documents related to any SEC Investigations of the subject company"(Herbalife), back in July.

And based upon Pershing Square's ongoing trading activity in Herbalife(restructuring for the more semantically inclined) through 2014 and 2015, I could see why the DOJ and the SEC may be so interested in his very public campaign against the company.