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Herbalife Feud Raises Questions About Transparency

While Carl Icahn and Bill Ackman take the main stage, a debate about trading disclosures also rages on.

Carl Icahn of Icahn Enterprises and activist investor Bill Ackman, founder of hedge fund firm Pershing Square Capital Management, revived their public feud over nutritional supplement maker Herbalife this week. The sparring made for good TV, but it also highlighted a lingering debate over what investors actually must disclose about a trade — and when.

The fireworks between Icahn and Ackman, which have been erupting intermittently for several years, began again last Friday when the Wall Street Journal reported that Icahn was preparing to exit his Herbalife stake. In 2013 Ackman claimed that the Los Angeles–based multilevel marketing company is a pyramid scheme and took a $1 billion short position in its stock. Icahn, who believes Herbalife’s business is legitimate, responded to Ackman’s claims by buying a stake several months later and has since built his share of the company to more than 18 percent. Herbalife contends that its business is legitimate. In July, the Federal Trade Commission determined that the company's compensation structure was unfair, and Herbalife agreed to pay $200 million in penalty charges and change some of its practices.

Last Friday Ackman told CNBC that Icahn had approached him through investment bank Jefferies Group about buying some or all of Icahn’s more than 17 million shares, essentially surrendering his long position on Herbalife. “This is a confidence game,” Ackman said on Sqawk Box. “I know he thinks this is toast.”

Icahn, who will appear at Delivering Alpha this month, responded hours later by not only denying the rumor but also purchasing 2.3 million additional Herbalife shares.

The feud continued throughout the week, devolving into a back-and-forth about who was more “boxed in” by their strategy on Herbalife. Ackman claimed Icahn felt trapped in his investment in Herbalife and was purchasing shares to help keep the company afloat; Icahn countered by arguing that Ackman is the one who is boxed in by his short position.

Amid the drama, legal experts and other observers noted the opportune timing of Icahn’s purchase — just after the stock dipped on news that he might be selling — and some questioned his lack of warning to investors that he was about to buy 2.5 percent more of Herbalife.

“The law on when shareholders in Mr. Icahn’s position are required to go public is murky, to be sure, but even if it doesn’t require such disclosure, it should,” wrote Ronald Barusch, a corporate attorney and a Wall Street Journal columnist, on Monday. Barusch argued that Herbalife investors would have benefited from more transparency regarding Icahn’s “apparent 360” on the stock.

Investors are required to file a Schedule 13D, also known as a beneficial ownership report, with the Securities and Exchange Commission within ten days of acquiring more than 5 percent of a company’s shares. Filers are required to disclose whether they have any plans to buy or sell more shares in the near future, and if any facts about the trade change after the 13D is filed, it must be amended “promptly.” The questions this raises — what really counts as a “plan” or proposal, as covered under this regulation, and what counts as “promptly” — have long had legal experts at odds.

Icahn filed his initial 13D back in 2013, when he first became a major shareholder in Herbalife. At the time, Icahn noted vaguely on the form that he might someday buy or sell more shares in Herbalife — or he might not. Last Friday’s trade constituted 2.5 percent of Herbalife’s outstanding shares, and Icahn added an amendment to his 13D the same day.

Barusch argues in his column that although that amendment is likely good legal coverage for Icahn’s actions — noting that Icahn’s motivations are unknown — he should be more forthcoming in the future, especially considering that he recently obtained approval to bump his ownership of Herbalife from about 18 percent to 35 percent. After his most recent purchase, Icahn’s stake is 20.8 percent.

Icahn responded with a letter to the editor refuting Barusch’s comments and suggesting that anyone concerned about lack of transparency look more closely at Ackman’s actions. “We do not know why he made these statements, but in light of the fact that he admittedly has a massive short position and holds put options on Herbalife’s stock, we can sure make an educated guess,” Icahn wrote.

It’s unclear whether regulators will show interest in allegations by both Icahn and Ackman of potential manipulation. Regardless, not all legal experts agree on what level of transparency is actually required for this type of situation or what would constitute manipulation.

Christopher Hewitt, a corporate attorney with Tucker Ellis in Cleveland, argues that requiring advance notice of an opportunistic trade like Icahn’s most recent Herbalife buy would not be in keeping with the spirit of the regulation. If a 13D is meant to protect shareholders from any material trade that could affect the company, he says, such reporting would more likely benefit traders looking to capitalize on the movements of big-name investors like Carl Icahn than anyone who might truly be hurt by such a move.

“I don’t believe you have to disclose the intention on a day-to-day basis, buying on a dip and selling on a spike,” says Hewitt. “Why is that information the market should have? Why does anyone owe it to day traders to make more money on these short-term movements?”

Herbalife stock dipped briefly after news of Icahn’s rumored offer to sell on Friday, spiking back up after he made his purchase, to $63.30 per share on Monday. The price has since leveled out, to about $61 a share. In the end, while Ackman and Icahn threw barbs, the market is no closer to an answer as to the worth of Herbalife itself.

Carl Icahn will be appearing at the Delivering Alpha conference, hosted by Institutional Investor and CNBC, on September 13 at the Pierre hotel in New York.

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