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This really should be defined as a WTF moment.  From The New York Times:

WASHINGTON — At a Midtown Manhattan steakhouse last June, William A. Ackman, the activist hedge fund manager who had bet a billion dollars on the collapse of the nutritional supplement company Herbalife, offered his latest evidence to a handful of other hedge fund managers about why the company’s stock could soon plummet.

Mr. Ackman told his dinner companions that Representative Linda T. Sánchez, Democrat of California, had sent a letter to the Federal Trade Commission the previous day calling for an investigation of the company.

The commission had not yet stamped the letter as received, nor had it been made public. But Mr. Ackman, who had personally lobbied Ms. Sánchez and stood to profit if the company’s stock dropped as a result of the call for an inquiry, already knew what it said, and read from a copy of it that he had on his cellphone.

When Ms. Sánchez’s office ultimately issued a news release a month later, it was backdated as though it had been made public the day before Mr. Ackman’s dinner talk.

The letter was a small hint of Mr. Ackman’s extraordinary attempt to leverage the corridors of power — in Washington, state capitols and city halls — for his hedge fund’s profit after taking a $1 billion financial position called a short, a bet that will pay off only if Herbalife’s stock drops.

Corporate money is forever finding new ways to influence government. But Mr. Ackman’s campaign to take this fight “to the end of the earth,” using every weapon in the arsenal that Washington offers in an attempt to bring ruin to one company, is a novel one, fusing the financial markets with the political system.

Others have criticized the business practices of Herbalife, a company that sells vitamins and other health supplements through independent distributors, many of whom are lower-income Latinos or African-Americans. But Mr. Ackman’s attack is unprecedented in its scale, and Herbalife officials strongly deny his accusations that the company is a pyramid scheme that stays afloat by constantly recruiting new distributors.

This NY Times story is fairly long, and complicated.  I will continue this story below the fold.

This hedge fund guy Ackman decided to place a huge bet against Herbalife, hoping the company will collapse and probably make billions in profit for Ackman's hedge fund.  Herbalife does not collapse, and Ackman has lost a $1 billion dollar bet.  What does he do?  He calls on congressmen and lobbyists to persuade the federal government to investigate Herbalife, hoping such an investigation would shut down the company.  If Herbalife is shut down, Ackman's hedge fund still profits.   According to the Times:

Yet Mr. Ackman’s staff acknowledges that this crusade is really rooted in one goal: finding a way to undermine public confidence in Herbalife so that his $1 billion bet will produce an equally enormous return. Mr. Ackman has said he will donate any profits he personally earns to charity, calling it “blood money.” The clients who invest in his hedge fund, however, would still benefit enormously.
Apparently, Herbalife is a multi-level marketing business, which sells nutritional supplements through “independent distributors, many of whom are lower-income Latinos or African-Americans.”  Ackman has spent $130,000 to civil rights organizations in order to collect names of individuals who claim they were “victimized by Herbalife in order to send the leads to regulators.”  Ackman has recruited “four members of Congress, a New York State senator, a City Council member in Boston, the majority leader of the Nevada Senate and other elected officials in California to join the cause.”   This is what the NY Times has foundin its investigation.

Ackman is responsible for organizing protests, news conferences, and letter writing campaigns in five states.  In the letter writing campaigns, individuals and non-profit groups acknowledge to the NY Times that they were lobbied by representatives of Ackman’s hedge fund to write letters to federal regulator—or they do not even remember writing letters at all.  Ackman then apparently uses these letters to pressure federal regulators to take action against Herbalife.  The payment of $130,000 was also to some of these groups to help in the letter writing campaigns.  At least five letters are nearly identical in their style and language, as the NY Times shows.

In the organizing department, Ackman’s hedge fund team sent a former Clinton White House aid, Minyon Moore, to host a meeting in a predominantly black, Los Angeles church to talk about Herbalife’s “deceptive sales techniques.”  After that, a demonstration took place against a Herbalife conference in L.A., with prominent Latin American and African-American community leaders writing even more letters to officials.

Finally, there is another detail of dueling hedge fund managers taking place in this mess.  While Ackman is trying to discredit Herbalife through his lobbying of federal regulators, billionaire investor and corporate raider Carl C. Incahn has decided to invest in Herbalife.  

So now you have two billionaires fighting it out over this MLM nutritional supplement company.

What worries me here isn’t that Herbalife is a multi-level marketing business—Both Amway and Mary Kay are MLM businesses that have independent distributors selling their products inside customer homes.    I don’t even care if Herbalife’s nutritional supplements work or not—there is plenty of nutritional supplements in the consumer markets, health stores, grocery stores that I can purchase.  What worries me here is that you have an extremely rich and powerful hedge fund manager, who makes a risky bet on against a company.  He loses that bet.  In retaliation, he uses the federal government to not just punish the company for his placing a bad bet, but also to influence events to profit from his bet.  If Ackman succeeds in driving Herbalife into the gutter, who is to say he will not do the same thing against another company to profit from?  Who is to say that other hedge funds will not copy Ackman’s method with their own bets on companies and markets?  It is almost like shooting the card player next to you, saying he's cheating, and should lose and you should take his winnings.  

This is too much power that Wall Street and corporations have.  It is not enough that they have power to make the rules and legislation favorable to profit from, or even to create "Get Out of Jail Free" cards to escape any consequences of breaking laws or harming society as a whole.  Now they need to be able to use the federal government to punish any opposition to their right to make profit--even to punish the opposition for their own incompetence or placing bad investment bets.   This is beyond manipulating markets and regulations.  This is even beyond Wall Street Casino gambling.  This is about owning the Wall Street Casino and the cops in manipulating and punishing those who may win bets against you in that Wall Street Casino.  Power corrupts.

Then again, how do you stop someone or some entity which controls such power?  It is disgusting.

Bondibox provides this comment, on part of my story:

You got part of it backwards

This hedge fund guy Ackman decided to place a huge bet against Herbalife, hoping the company will collapse and probably make billions in profit for Ackman's hedge fund.  Herbalife does not collapse, and Ackman has lost a $1 billion dollar bet.

With a short position, the maximum profit you can reap is the dollar amount of the initial short sale.  If he shorted $1 Billion of HLE stock, then the best case scenario for him would be if the stock price goes to zero and he can "cover" his short at no expense.

Conversely, the maximum loss on a short sale is virtually unlimited.  HLE stock rose 148% during the last year, so someone holding a short position from a year ago would now be liable for paying back, or "covering" at the new price. So someone who went short for $1 Billion a year ago would have had to cough up $2.48 Billion at the peak price of $81 per share.

My apologies if I have gotten part of this short sale description backwards.  I will admit that I am not a financial expert, trying to go through a complex story here.  It still worries me that whatever investment scheme that Ackman made on Herbalife, he is lobbying the federal government to investigate and take down Herbalife, so that Ackman's hedge fund profit from Herbalife's demise.  To me, that seems despicable and wrong.  

And thank you everybody for your comments.  

Update 2:  I found another Vanity Fair article, The Big Short War, which provides even more information on this story.  I have not gone through the article yet, but I want to provide the link to you.  Thank you DisNoir36.

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