[00:02:43] Shawn O’Malley: They focused primarily on investing in public companies until generating some buzz in 1995 with a bid to purchase Rockefeller Center. While that didn’t go through, it brought enough attention to the firm that within a few years, Gotham Partners was managing 500 million of client assets. Ackman would continue to earn a name for himself on Wall Street, and in 2002, he took on the Municipal Bond Insurance Association, also known as MBIA, to challenge its pristine AAA credit rating.

[00:03:10] Shawn O’Malley: He argued that the company was illegally trading billions of dollars’ worth of credit default swaps that it had sold to insure against mortgage backed securities using a second corporation, La Crosse Financial Products. Ackman’s case was later validated during the 2008 financial crisis, which brought NBIA to its knees while Ackman profited immensely from credit default swaps, he had bought against NBIA’s own corporate debt.

[00:03:33] Shawn O’Malley: And just to quickly clarify, credit default swaps are sort of like insurance policies taken out on specific companies, which pay out if a company fails to repay its debts. So he profited during the great financial crisis by betting against NBIA using credit default swaps after having battled against the company for five years already and trying to get them to separate their structured finance and municipal bond insurance businesses.

[00:03:56] Shawn O’Malley: In another public spat that validated Ackman, A feud began between him and the famed investor Carl Icahn over a deal involving Holwood Realty in 2003. At the time, Ackman’s hedge fund, Gotham Partners, was going bust. He needed to do a deal, so he called up Carl Icahn and offered to sell him shares of Holwood for 80 a share, which he did.

[00:04:17] Shawn O’Malley: It was trading at 60, but Ackman thought it was worth over 140 per share. The deal was, if Icahn sold the shares within 3 years and made a profit of 10 percent or more, he and Ackman would split the proceeds. And to cement the deal, Ackman and Icahn signed a 10 page agreement they called Schmuck Insurance.

[00:04:35] Shawn O’Malley: In April 2004, HRPT Property Trust purchased Hollywood for 136 per share, compared with the 80 per share Icahn had paid for his stake from Ackman. While Icon sold out at a profit, it was a technicality since the entire company was acquired and he was forced to sell. They clashed over the definition of the word sell, as Icon didn’t believe that the company being acquired was the same as him turning around and selling the shares in the open market.

[00:05:00] Shawn O’Malley: After ICON refused to pay, Ackman sued, and after eight years, ICON was forced to pay 4. 5 million plus 9 percent interest per year, but this would set the stage for over a decade long feud between the two great investors. Amid this controversial start to his career, Ackman moved in 2004 to start Pershing Square Capital Management with 54 million of his own personal funds.

[00:05:24] Shawn O’Malley: Over the next decade plus, Ackman would wage a number of prominent activists and short selling battles at companies like Wendy’s, JCPenney, Valiant Pharmaceuticals, and Herbalife. But not all of these were successes. After acquiring 18 percent of JCPenney, he abandoned the company after two years due to disagreements with fellow board members at the retailer.

[00:05:43] Shawn O’Malley: And the Valiant Pharmaceuticals episode ended even worse with congressional testimonies and billions of dollars of losses. With Herbalife, Ackman spent tens of millions of dollars on PR campaigns, arguing that the company was a pyramid scheme and hoping to profit by shorting its stock. That would generate plenty of criticism, as Ackman’s campaign against the company crushed its stock at times to his own profit.

[00:06:05] Shawn O’Malley: And again, Ackman was pitted against Carl Icahn, who was a supporter of Herbalife. The financial world nearly came to a stop, which I say jokingly, but isn’t entirely far off either, for about a half hour in January 2013, when the two contentiously debated each other over the merits of Herbalife on CNBC, and let me just say, there was no shortage of personal jabs thrown.

[00:06:26] Shawn O’Malley: The two men very much did not like each other. Five years later, Ackman would close out his nearly 1 billion bet against Herbalife at a considerable loss, but Herbalife today trades at a fraction of its value then, at least partially validating Ackman’s case against it. Despite some huge public battles and losses, Ackman found enough success to be named one of the world’s top 20 hedge fund managers in 2015, generating 11.6 billion of gains for his investors over the decade prior. So that’s the lay of the land with Ackman. As promised, this will be a tumultuous and fascinating story. Love him or hate him. He’s been resilient weathering the ups and downs. So I want to get into all of this, but let’s rewind back in time a little bit.

[00:07:08] Shawn O’Malley: Like so many aspiring investors, a much younger version of Ackman made the pilgrimage to Omaha in 1998, not only to hear the wisdom of Warren Buffett and Charlie Munger, but also to ask them a question for himself. It’s really cooled to watch and hear a young Ackman step before his heroes. And he asked a pretty good question too on when it becomes inappropriate for companies to buy back shares above a certain price using Coca Cola as an example at the time, which was trading at a price to earnings ratio of 40.

[00:07:35] Shawn O’Malley: I’ll link to the whole exchange in the show notes in case you want to listen to it yourself, but I find it really interesting. At this point, Ackman was already managing investments professionally and was 31 years old, but in the thousands of questions that have been asked at Berkshire shareholder meetings, it’s obviously one of those moments that people always look back on and will sort of stand out.

[00:07:53] Shawn O’Malley: About 10 years earlier, between earning his bachelor’s degree and MBA, Ackman was working in New York city as a hedge fund analyst. And he gained credibility at the time for foreseeing the 1989 collapse of the high yield corporate bond market. That early success set the stage for him to found Gotham Partners in 1992 with just 3 million in assets, which by its peak had ballooned to 568 million in 2000.

[00:08:18] Shawn O’Malley: The fund earned a 20.7 percent return in 1993 before dropping 3. 4 percent in 1994 and rebounding 38.7 percent in 1995, with another two years of similarly excellent returns in 1996 and 1997. Overall, it was an impressive track record, but that only lasted for a period of time. A 2003 New York Times article titled A Rescue Ploy Now Haunts a Hedge Fund That Had It All recounts Ackman’s time running Gotham.

[00:08:47] Shawn O’Malley: I’ll read the opening paragraph of the article for some context. It says, quote, They had a glittering client list, dazzling reputations, and smarts galore. But as 2002 drew to a close, William A. Ackman and David P. Berkowitz, hedge fund managers at Gotham Partners, were desperate. They had received a mountain of requests from investors asking for their money back and had suffered a devastating setback in one of their biggest investments.

[00:09:10] Shawn O’Malley: The men who just a few years earlier had been at the top of the hedge fund world were facing a run on the bank. That is not exactly the sort of article you want to read in the news about yourself as a hedge fund manager. As the article details, Gotham had begun a hedge fund specializing in undervalued stocks but morphed into a portfolio of private companies and thinly traded public ones.

[00:09:32] Shawn O’Malley: By the dawn of 2003, Ackman and Berkowitz had to break the news to investors that they were winding down the fund and assets would be sold at potentially depressed prices. As things grew dire, Ackman and Berkowitz took the uncommon approach then of quote unquote talking their book, publishing research in favor of one of their holdings pre-paid legal.

[00:09:50] Shawn O’Malley: The problem was that after they published the upbeat research and maintained a buy recommendation for their company on their website, they were quietly selling shares in the same stock ahead of announcing that the fund would be closed. That’s at least according to the New York Times. The Times argues that the incident looked, quote, very much like a classic pump and dump scheme.

[00:10:09] Shawn O’Malley: That, alongside another post arguing in favor of its short bets against MBIA, brought Gotham unwelcome scrutiny from Eliot Spitzer, the New York State Attorney General, who began investigating Ackman’s hedge fund. Ackman has since argued that the probe found no wrongdoing, yet it damaged his reputation.

[00:10:26] Shawn O’Malley: What allegedly spurred the decision to begin publishing research on prepaid legal and NBIA, according to the New York Times in 2003, was pressure from mounting losses in the hedge fund’s investment in Gotham Golf, a money losing golf company that they built and that had come to dominate some 20 percent of their fund’s portfolio.

[00:10:43] Shawn O’Malley: While Ackman and Berkowitz hoped to merge Gotham Golf with the real estate investment trust First Union that they had acquired in 1998, the deal was held up by lawsuits that threatened to inflict substantial losses on the hedge fund. They had made the classic mistake of throwing good money after bad, lending 15 million dollars from the hedge fund to keep Gotham Golf afloat, while pledging some of their own assets to help the troubled golf company get other loans.

[00:11:08] Shawn O’Malley: As the issues at Gotham Golf piled up, investors in Ackman’s fund went fleeing, requesting to withdraw a quarter of the hedge fund’s total assets. One investor is quoted at the time as saying, they were the money manager’s money manager. They had a client roster like you wouldn’t believe, yet obviously not all was well behind the scenes.

[00:11:27] Shawn O’Malley: The New York Times wrote damningly that, quote, an examination of Gotham’s activities in recent years shows a series of ill-timed bets, a surprising lack of diversification, and a dangerous concentration in illiquid investments that could not be easily sold when investors wanted their money back. In one such example, Ackman and Berkowitz seemingly strayed from their value investing roots by investing $2 million at the peak of the.com bubble and gift certificates.com.

[00:11:54] Shawn O’Malley: Gotham’s bad bets essentially blew up the fund, but perceptions of whether Ackman manipulated the market have changed in the decade since. In 2023, Ackman shared his perspective in a series of tweets saying that the investigation was primarily politically motivated as retribution for publishing his research against MBIA.

[00:12:12] Shawn O’Malley: He states that after sharing his arguments for why NBIA’s credit rating was too high, quote, the SEC shortly launched its own investigation. I spent the next seven months delivering 170,000 documents and giving a dozen days of on the record testimony to two regulators. My lawyers advised me to say nothing publicly, and I was presumed guilty by the public at large.

[00:12:34] Shawn O’Malley: He adds that he, quote, had naively believed that regulators were only interested in the truth. I was wrong. While the SEC took a somewhat measured approach to the investigation, it became clear that some lawyers at the New York Attorney General were interested in finding me guilty regardless of the facts.

[00:12:50] Shawn O’Malley: He argues that, quote, ultimately, the Attorney General and the Securities and Exchange Commission found no wrongdoing. They later launched successful investigations against NBIA, and the company finally blew up when the financial crisis made clear that it was swimming naked. Ackman goes on in the tweet thread to explain how Elliot Spitzer publicly apologized to him for the incident.

[00:13:11] Shawn O’Malley: So, without having lived through the period, it’s really hard to say how things went down. A short summary is that Gotham Partners ended very messily with allegations of market manipulation and, more certainly, bad bets by Ackman and Berkowitz. Amid the hangover from Gotham Partners implosion and the ongoing SEC investigation in 2004, Ackman pivoted to something new, starting Pershing Square Capital Management, though he struggled to raise funding for the firm.

[00:13:36] Shawn O’Malley: But fortunately for him, a previous relationship with Lucadia National helped him bring in 50 million to get things started again. Redemption would come for Ackman via Pershing Square, particularly as his scathing analysis of NBIA proved prescient during the great financial crisis. In fact, an entire book is dedicated to Ackman’s bet against NBIA called Confidence Game, How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff by former Bloomberg reporter Christine Richard.

[00:14:03] Shawn O’Malley: Here’s just a little teaser from the book’s description. Well, it’s a story of Bill Ackman’s six year campaign to warn that the 2.5 trillion bond insurance business was a catastrophe waiting to happen. Branded a fraud by the wall street journal and New York times and investigated by Elliot Spitzer and the securities and exchange commission.

[00:14:21] Shawn O’Malley: Ackman later made his investors more than 1 billion when bond insurers kicked off the collapse of the credit markets. As we’ve already discussed, Ackman first published his bet against NBIA while running Gotham Partners, but the drama with NBIA carries through into his time with Pershing Square. Ackman is quoted in Confidence Game as being subjected to a power play by NBIA’s then chairman and CEO, Jay Brown, who allegedly told him, quote, You’re a young guy, early in your career.

[00:14:47] Shawn O’Malley: You should think long and hard before issuing this report. We guarantor of New York State debt and New York City bonds. In fact, we’re the largest guarantor of municipal debt in the country. Let’s put it this way, we have high friends in high places. That veiled threat did not stop Ackman from publishing the report, questioning NBIA’s AAA credit rating, and disclosing that he had both shorted the stock and bought credit default swaps against the company’s bonds.

[00:15:14] Shawn O’Malley: Ackman was waving a red flag in response to the types of financial engineering that eventually plunged America into a financial crisis and a recession a few years later. Ackman’s initial bet against NBIA didn’t pan out since he had closed Gotham Partners, but he persisted from there, pushing for an investigation from regulators that drove NBIA to restate seven years of earnings on top of a 75 million fine.

[00:15:37] Shawn O’Malley: He continued to push though hiring forensic accountants to bring forth evidence of fraudulent accounting at NBIA to credit rating agencies. As Richard puts it in Confidence Game, Moody’s AAA credit rating is so powerful and credible that investors don’t do any due diligence on the underlying credit.

[00:15:54] Shawn O’Malley: Every day that Moody’s incorrectly maintains a AAA credit rating on NBIA, these extremely risk averse investors unwittingly buy bonds that are not deserving of Moody’s AAA rating. Yet, according to Janet Pavicoli, the president of a structured finance consulting firm and author of three books on credit derivatives, structured finance, and the 2008 global financial crisis, NBIA only continued to escalate its risks.

[00:16:19] Shawn O’Malley: It continued to create triple A rated financial products that on paper had the least amount of possible risk but were actually tied to what she calls malignant mortgage loans. She writes that it didn’t matter how much confidence Wall Street rating agencies, bond insurers, and regulators had in maintaining a collective financial lie, MBIA was unstable.

[00:16:40] Shawn O’Malley: Bond insurers like MBIA charge premiums to companies and governments that issue debt while agreeing to take over responsibility for repaying the outstanding borrowings with interest if the original borrower slips into default. And by venturing into structured finance to ensure products like collateralized mortgage obligations, which pulled together thousands of mortgages into a single, supposedly almost risk free financial asset, MBIA was exposed to enormous potential insurance payouts through a pay to play dynamic that temporarily benefited it but exposed it to huge risks.

[00:17:12] Shawn O’Malley: Investment banks could pay considerable fees to NBIA in exchange for its insurance, which enabled them to receive better credit ratings from agencies like Moody’s, and then sell more of these products to investors. Ackman rightly saw the perverse incentives here, and that NBIA was taking on far greater insurance risks than it realized.

[00:17:31] Shawn O’Malley: He writes in his original research report on MBIA, quote, It appears to us that an actual or perceived downgrade of MBIA would have fairly draconian consequences on the company and create substantial drains on the company’s liquidity. The self-reinforcing and circular nature of the company’s exposure make it a poor candidate for a AAA rating.

[00:17:52] Shawn O’Malley: The company would be at risk of a downgrade in the event it were to incur losses of 900 million dollars to 1.7 billion dollars. For context, a 900 million dollar loss, which Ackman argued would trigger a downgrade and spiral for MBIA, translates to a mere 0. 2 percent loss on its more than 480 billion dollars in insurance liabilities.

[00:18:15] Shawn O’Malley: So as the real estate market started melting down, NBIA began realizing these losses and its insurance costs ballooned. By February 2008, NBIA was forced to cut its dividend and suspend structured finance activities and shortly thereafter, it lost its AAA rating. Meanwhile, in 2008, while the financial world was burning down, thanks to bets against NBIA through Pershing Square, Ackman generated 1.1 billion in gains for his investors. Lawsuits against banks that had structured the mortgage bonds and insured are all that really kept NBIA alive, according to a 2017 Wall Street Journal report. Today, NBIA stock is a fraction of its former value, down over 90 percent since its peak more than 15 years ago.

[00:19:01] Shawn O’Malley: After its disastrous experience insuring mortgage bonds and other financial products connected to mortgages leading up to 2008, MBIA pivoted to focus on insuring primarily municipalities, which would again backfire for the firm amid a year’s long dispute over billions of dollars of Puerto Rico’s government debt as the island territory went into bankruptcy in 2018.

[00:19:22] Shawn O’Malley: The incredible amount of work that Ackman did to dig up the truth about MBIA is just mind numbing. Thousands and thousands of pages of financial and legal documents, even just a 55 page research report. He published highlighting in BIA’s vulnerabilities is really tough to get through. Honestly, at the same time, Ackman had another success with Wendy’s, which was his first big win at Pershing square, not connected to his time at Gotham partners.

[00:19:48] Shawn O’Malley: He acquired a 9. 9 percent stake in Wendy’s in 2004. And use that ownership leverage to pressure the company to spin off Tim Hortons, one of Canada’s most beloved brands. In his letter to Wendy’s CEO and chairman at the time, Ackman makes the case that Wendy’s market capitalization was undervalued by as much as 46 percent and that spinning off Tim Hortons could unlock 1 to 2 billion worth of value for shareholders.

[00:20:13] Shawn O’Malley: To unlock that value, his plan outlined first spinning off Tim Hortons, re franchising a significant portion of Wendy’s operated restaurants, and then repurchasing Wendy’s own stock using proceeds from the re franchising. Basically, Ackman felt that Tim Hortons was worth a lot more than it was being valued for while owned by Wendy’s and spinning it off would allow Tim Hortons to operate independently as a publicly traded company.

[00:20:37] Shawn O’Malley: While rewarding Wendy’s shareholders with newly created shares in Tim Hortons, which they could choose to either sell or hold. And then as mentioned by taking stores operated by Wendy’s and selling them as franchises for others to operate, the company could unlock cash while also freeing itself long term to instead focus on things like new product development, marketing, and quality assurance.

[00:20:58] Shawn O’Malley: Ackman has since described his activism with Wendy’s as providing an investment banking service without directly collecting the fees and instead trying to get paid from the investment opportunity itself. But to provide some credibility for his assessment, especially as a pretty relatively small hedge fund at the time, Ackman enlisted the help of Blackstone’s investment bankers who came up with a similar valuation, suggesting that Wendy’s was considerably undervalued and could unlock value from a Tim Hortons spinoff.

[00:21:27] Shawn O’Malley: Weeks later, Wendy’s agreed to do just that and eventually distributed 160 million shares in the new Tim Hortons spinoff to its shareholders. Wendy’s shareholders received roughly 1. 35 shares in Tim Hortons for every share of Wendy’s that they owned. Ackman likely doubled his investment on the deal after his victory as an activist and quickly closed out his stake in Wendy’s by 2006.

[00:21:48] Shawn O’Malley: I went through and actually read Ackman’s full letter to Wendy’s CEO and it’s really fascinating. It’s a chance to see a great investor formally outline their investment case and logic for a company, which I just enjoyed going over with that. I want to touch on another defining story from Ackman’s career, a moment that is considered one of the greatest hedge fund trades of all time.

[00:22:09] Shawn O’Malley: By January 2009, Ackman had built up a 7. 4 percent stake in general growth partners, which was the second largest us shopping mall owner. And that stake would eventually grow to over 25%. This may sound funny, but ahead of buying its stock, he actually expected the company to go into bankruptcy. His bet, though, was that General Growth could eventually emerge from bankruptcy while keeping its shareholder base intact.

[00:22:31] Shawn O’Malley: In pushing for the firm to file for bankruptcy protections, he actually saved it from a more damaging collapse. In 2011, Ackman told Bloomberg that the effort, quote, turned 60 million into 1. 6 billion after he bought up stock for as cheap as 0. 35 per share. With Ackman’s help, General Growth filed the largest real estate bankruptcy in U.S. history after amassing 27 billion in debt during the Great Financial Crisis. As part of its exit from bankruptcy, General Growth spun off 30 retail properties and the Howard Hughes Corporation, which owns a number of master planned communities. In a Reuters article from the time, Ackman explains that even if general growth emerged from bankruptcy with a 9.4 percent cap rate, he would get back 13 times his original investment. He says, quote, this is not your typical bankruptcy. That was because the cap rate, which is a real estate term that divides a property’s operating profits by its market value, ultimately underpins the value of general gross assets.

[00:23:30] Shawn O’Malley: And he felt the cap rates being used to estimate general gross property values were far too low. Quote. In other words, Ackman assumed that General Gross real estate properties were more resilient than most people believed, meaning they could continue to earn solid operating returns even in a recession.

[00:23:45] Shawn O’Malley: So, the cap rate was the biggest question in the debate about General Growth. Because the company had such high leverage, even small variations in the implied cap rate yielded large differences in its equity value. However, Ackman continued to believe that general growth was well managed given that it had the second highest occupancy rate among U.S. mall operators, positioning it to generate more cash than it needed to operate. Its problem was in fulfilling its debt payments during the 2008 crisis, which sent its stock valuation from a peak of 20 billion in April 2007 to as low as 100 million. Yeah, this was more of a temporary liquidity issue than a structural problem with general gross assets.

[00:24:25] Shawn O’Malley: Ackerman explained that if they could extend their debt for seven years, there’d be no need for a fire sale. Ads quote, you can make a lot of money investing in a company, even if it files for bankruptcy, as long as the assets are worth more than the liabilities. Just to recap things so far, General Growth was a mall based real estate investment trust struggling to refinance its debts and secure enough cash on hand, yet its assets were quite high quality despite many panicking and writing them off during the great financial crisis.

[00:24:54] Shawn O’Malley: Ackman recognized this and bought into the company, hoping that it would go into bankruptcy where it could work out a deal with creditors and sort through the true value of its assets, which he thought exceeded Growth’s liabilities. That would leave plenty of meat on the bone for equity investors, but the market couldn’t see it at the time.

[00:25:11] Shawn O’Malley: General growth was not one of these horror stories of extreme risk taking that were so common in 2008, especially in real estate. Instead, it was more like a victim because debt markets were so frozen that it became unjustifiably difficult for a company of its quality to refinance debts that were coming due.

[00:25:28] Shawn O’Malley: It’s an example of the sometimes destructively circular logic in markets, where a panic generally spurs a sell off in a stock, which drives more people to panic and sell because they think others know something they don’t. This continues until the stock hits rock bottom, at which point the implied value of the company’s assets becomes so low that creditors won’t lend it any money, causing an actual crisis.

[00:25:48] Shawn O’Malley: Fast forward a few years to 2014, And Ackman had cashed out his stake in General Growth for 556 million and sold his shares back directly to the company. After General Growth regained its footing from its stint in bankruptcy court, Ackman had lobbied for the firm to put itself up for sale. While he hoped to get even more out of his investment by orchestrating a sale of General Growth to Simon Property Group that never eventually happened, Ackman still walked away with a more than nine times gain on his original capital.

[00:26:19] Shawn O’Malley: This brings us to the next major episode in Ackman’s career running Pershing Square, Herbalife. I touched on it briefly earlier, but this one did not have the happy ending like some of his other big bets. That doesn’t entirely mean he was wrong though. In an interview with Bloomberg in February of this year, Ackman continued to hold his conviction that Herbalife is a fraudulent company.

[00:26:41] Shawn O’Malley: While he closed out his short bet in 2018, he joked that he still has a psychological short on Herbalife, which has been validated by the stock’s nearly 25 percent drop this year. In 2012, he opened a billion dollar bet against Herbalife, claiming that the supplement company was an illegal pyramid scheme and kickstarting a more than five year battle with it.

[00:27:00] Shawn O’Malley: Bloomberg’s Scott DeVoe calls it one of the longest and most colorful battles in Wall Street history after Ackman’s nemesis at the time, Carl Icahn, took the other side of the trade, becoming Herbalife’s biggest shareholder. Ackman’s arguments centered on Herbalife illegally relying on an army of outside distributors to recruit members with the promise of get rich quick schemes.

[00:27:19] Shawn O’Malley: While pouring millions of dollars into investigating the company, he, at one point, delivered a nearly four hour anti Herbalife presentation that backfired on him and sent Herbalife stock up 25 percent that same day. He summed up the debacle with two simple words. My bad. In reflecting on the presentation, Ackman concluded that the event was too long and overhyped, especially since many were expecting an Enron level of corporate fraud to be revealed.

[00:27:45] Shawn O’Malley: He adds, quote, It was a PR failure. I think we raised expectations. People were looking for the dead body and the smoking gun. And instead, what they got was a three hour detailed regulatory presentation. While Ackman was forced out of betting against Herbalife, ICON reportedly made over 1 billion dollars by going long at stock according to CNBC in 2018.

[00:28:07] Shawn O’Malley: Whether Bill Ackman lost the struggle with ICON is somewhat subjective. On the one hand, shorting a stock is just really hard. It is the opposite of regular stock investing. Instead of having unlimited upside with your losses capped at zero, like with regular stock investing, when you short a stock, you can at best double the money if the company’s equity value is wiped out, while you can rack up unlimited losses if the price surges.

[00:28:31] Shawn O’Malley: That’s because short sellers borrow shares of stock and turn around and immediately sell them, holding the proceeds as cash. They then wait for the stock to drop to their target price, where they hope to buy back the shares and return them while pocketing the difference between what they originally sold them for and how much they bought them back for.

[00:28:47] Shawn O’Malley: So, you may generally be right that a company’s business is deeply flawed or fraudulent, but if something sends a stock shooting up, you might experience intolerable losses along the way. And, since you’re technically using borrowed money when short selling, if your position goes underwater, you have to add more and more cash to backstop it, otherwise your broker will automatically close out the trade and force you to realize a loss.

[00:29:09] Shawn O’Malley: And that is arguably what ICON was trying to do to Ackman. He wanted to squeeze him out of his big, short position, forcing him to buy back shares, and push the stock higher as he tried to close out his short bet. Ackman had made public just how big his bet was, and Icahn saw a chance to make him pay by piling money into Herbalife’s shares and speaking publicly in favor of the company, with the hope that that would cause a short squeeze, forcing Ackman out of the trade.

[00:29:34] Shawn O’Malley: Like I said, short selling is just harder and more complicated than regular stock investing, especially when you have two hedge fund titans vying for influence against each other. Ackman, of course, understands the challenges and limitations of making profitable short trades, but my point is that the investment obviously didn’t work out, though you may or may not agree for yourself with whether his critique generally of Herbalife is fair.

[00:29:57] Shawn O’Malley: On top of that, the episode inspired a book and movie called betting on zero that brought enormous media attention to Pershing square that has actually been good for business as Ackman’s public persona has grown. So has his ability to raise funds, increasing the assets under management that he can earn fees on.

[00:30:14] Shawn O’Malley: And Ackman’s wishes for regulators to examine Herbalife did come true. In 2016, the Federal Trade Commission sued Herbalife following a two year investigation into its business practices and complaints that the company deceived customers about how much they could make selling its products. As a result, Herbalife settled with the FTC and agreed to pay a 200 million fine to compensate consumers and restructure its business.

[00:30:39] Shawn O’Malley: The FTC’s chairwoman at the time said, quote, Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.

[00:30:56] Shawn O’Malley: Yet regulators stopped short of calling the company a pyramid scheme. Herbalife’s CEO responded by saying, quote, So, just to recap the Herbalife episode, Hackman, of course, lost big on it, and ICON won hugely. But at the same time, there does seem to be some legitimate claims that the FTC found that Herbalife was not a completely honest business either.

[00:31:27] Shawn O’Malley: So, in terms of highlighting the issues with Herbalife, Ackman succeeded, but in terms of actually making an investment gain from that insight, he did not. And that leads us to Ackman’s next very public miss, Valiant Pharmaceuticals. In 2017, a year before he would call it quits on Herbalife, Ackman was calling it quits on Valiant.

[00:31:47] Shawn O’Malley: He sold his shares in the company and did not stand for re-election as a director, while Pershing Square lost something like 4 billion over two years on the investment. As Ackman framed it at the time, quote, The investment required a disproportionately large amount of time and resources. As a result, we elected to sell our investment and realize the large tax loss which will enable us to dedicate more time to our other portfolio companies and new investment opportunities.

[00:32:12] Shawn O’Malley: Once his biggest position, shares of Valiant fell 96 percent from their 2015 highs by spring 2017. A truly epic loss and one that Ackman by his own words called a very big mistake. The bet was so big and so bad that it drove two years of negative returns at Pershing Square’s main hedge fund, while Ackman’s assets under management were nearly cut in half.

[00:32:35] Shawn O’Malley: As Forbes frames it, Ackman never made money on Valiant, but he did initially make a lot of money because of it. He first partnered with Valiant’s CEO, Michael Pearson, on Valiant’s effort to buy another big drug maker, Allergen. Pershing Square took a big stake in Allergen, not Valiant, and championed the deal, even as it went hostile and Allergen fought to kill it.

[00:32:55] Shawn O’Malley: Ultimately, Allergen was successful, but to stop Valiant, Allergen had to take a deal to be swallowed by drug company activists. Since Ackman owned shares in Allergen, his fund benefited greatly from the deal, fueling Pershing Square’s best year ever and returns of more than 36 percent in its main fund in 2014.

[00:33:12] Shawn O’Malley: From there, Ackman turned his sights directly onto Pearson’s company Valiant, and quickly became one of its biggest shareholders. Unfortunately for him, the timing really just could not have been worse. Within months of his investment, Valiant came under scrutiny for boosting drug prices and for questionable accounting practices.

[00:33:30] Shawn O’Malley: Pearson was pushed out as CEO, and the company struggled under piles of debt while federal prosecutors started their investigations. Ackman cited a few lessons that he shared with his own investors in 2017. His listed four takeaways from the investment were that managerial competence in deploying capital doesn’t always translate to value added for a business, that changes in regulations, politics, or other external factors can’t be accounted for and can dent value, that even a strong management team can make mistakes, and that a big price decline in a stock can destroy substantial amounts of intrinsic value, including morale, retention, and recruitment.

[00:34:06] Shawn O’Malley: As the New York Times puts it in a 2017 article, Ackman staked his own reputation on Valiant even as the company faced steep challenges and regulatory scrutiny for its aggressive pricing tactics. He went to bat for Valiant when its executives were questioned during a Senate hearing, and he loaded up on the stock when everyone else was selling.

[00:34:24] Shawn O’Malley: At one point in 2015, Ackman compared Valiant to a quote, quote, Very early stage Berkshire. This really couldn’t have been more wrong. Meanwhile, in 2015, others were seeing the problems in Valiant that Ackman missed. Andrew Ross Sorkin wrote at the time, quote, How can Mr. Ackman find comfort in Valiant’s management, which has expanded its business by buying rival companies, slashing their research and development arms, and then raising drug prices, while at the same time calling Herbalife’s chief executive a predator running a criminal enterprise?

[00:34:53] Shawn O’Malley: Charlie Munger would chime in too, calling Valiant deeply immoral. As just one example of the company’s problems, two of its former executives were arrested for running a fraud and kickback scheme that cheated Valiant out of millions of dollars. The two helped Valiant set up a company called Philidor, primarily to market and distribute Valiant’s drugs in 2013.

[00:35:13] Shawn O’Malley: And a year later, they orchestrated Valiant’s agreement to buy an option to purchase Philidor, which cost at least 133 40 million of that went to a shell company controlled by the two executives, where they used that money to buy stocks and luxury goods, including a 50, 000 custom wine cellar. Its former CEO Michael Pearson and ex financial officer Howard Schiller would face their own fraud charges while Congress accused Valiant of price gouging patients for the 30 year old drug Cyprene, which suddenly saw a 3, 000 percent price increase after being acquired by Valiant in 2010.

[00:35:48] Shawn O’Malley: In July 2018, Valiant changed its name to Bausch Health and agreed to pay a 45 million penalty to settle SCC charges of improper revenue recognition and misleading disclosures. Its stock peaked at 257 per share in July 2015 and today trades at around just 7 per share. For Ackman, Andrew Ross Sorkin again captures things well with respect to Valiant and his approach to investing generally.

[00:36:14] Shawn O’Malley: He says, quote, Mr. Ackman is no charlatan. He genuinely believes what he says, but he also seems to be able to compartmentalize his views and rationalize his investment philosophy in contradictory ways. His declaration that he will never own Coca Cola because its products are unhealthy is tough to square with his ownership position in Burger King.

[00:36:33] Shawn O’Malley: Wall Street is fascinated by Mr. Ackman because he makes big, bold bets and is never shy about talking about them. He is seemingly interested only in home runs, which means he’s also likely to strike out with some frequency. Andrew Left, who runs the short selling firm Citron Research, also had criticisms of Ackman during this period to share.

[00:36:52] Shawn O’Malley: Referencing Ackman’s crusade against Herbalife, he says, If Mr. Ackman feels so much moral indignation about a company selling health shakes to people and takes such umbrage at their sales channel that he launches a full on jihad against them, how can he stand by while a company charges 300, 000 a year to cure Wilson’s disease?

[00:37:10] Shawn O’Malley: So if you didn’t believe me before when I suggested that Ackman’s career has been one long controversial rollercoaster ride, perhaps you now see why. From the collapse of Gotham Partners and investigations into market manipulation, to spotting the looming blow up at NBIA before anyone else, driving Wendy’s to spin off Tim Hortons, and being on the right side of one of the best bankruptcy trades ever with General Growth Partners, to then the overlapping embarrassments surrounding Herbalife and Valiant, it’s just been a series of highs and lows for Ackman.

[00:37:41] Shawn O’Malley: And there are a handful of other stories that I don’t even have time to touch on today that highlight both the punishing mistakes and strokes of genius that he’s made over his career. These very public dramas have turned Ackman into a huge celebrity today, arguably the embodiment of Wall Street to millions of people around the world.

[00:37:59] Shawn O’Malley: Ackman’s successes are truly inspiring, while his losses are just deeply, deeply humbling, such as the cost of making big bets in the public eye. I want to wrap up today’s episode by talking about where Ackman is today. I talked about him recently in my episode on Universal Music Group, since he pitched the stock back in 2021 as a target for his SPAC, and it still remains one of his largest holdings overall.

[00:38:24] Shawn O’Malley: SPAC is an acronym for Special Purpose Acquisition Companies and you may recall how their popularity surged during the pandemic. These are essentially shell companies that IPO on an exchange with just cash as their only assets with the plan to acquire a private company or return funds to shareholders if they can’t find an attractive target.

[00:38:42] Shawn O’Malley: In some sense, it’s a way for private companies to bypass some of the headaches of the traditional IPO process by instead merging with a shell company that has shares already trading. It’s also a way to negotiate a set sale price to raise funds with, whereas the amount of capital companies will raise in IPOs can be uncertain.

[00:39:00] Shawn O’Malley: Ackman SPAC raised 4 billion in 2020, and Inc. to deal with Universal Music Group at one point Only to abandon the deal after the SEC questioned its unconventional structure, which spurred shareholder lawsuits. Shortly thereafter, the SPAC was dissolved and capital was returned to investors. But Ackman has more recently revisited the idea and added his own wrinkle on this trend with an investment vehicle named Pershing Square Spark Holdings, where SPARC stands for Special Purpose Acquisition Rights Company.

[00:39:29] Shawn O’Malley: The primary difference between his SPARC and a SPAC is that it doesn’t require money upfront. SPACs raise capital by generally outlining the characteristics of the type of company they want to acquire without naming a specific target, and SPAC investors have the chance to vote down a potential acquisition.

[00:39:46] Shawn O’Malley: With Ackman’s SPARC, money is only raised once it is disclosed a deal to buy a company. And while SPACs usually have two or three years to find an acquisition target, SPARC has up until 10 years to complete a deal. While the amount of money to be raised for the Spark depends on the target, Ackman has said it will be at least 1.

[00:40:04] Shawn O’Malley: 5 billion, and his hedge fund will contribute between 250 million and 3. 5 billion as an anchor investor. Ackman is apparently still hunting for a target to acquire in Spark, and tweeted last September the following. If your large private growth company wants to go public without the risks and expenses of a typical IPO with Pershing Square as your anchor shareholder, please call me.

[00:40:28] Shawn O’Malley: We promise a quick yes or no. Besides Sparks and SPACs, Ackman has made other recent headlines too. In May, Ackman made the big reveal that he was planning on taking Pershing Square public in what the Wall Street Journal described as the quote, boldest move yet by the hedge fund manager to capitalize on his social media fame.

[00:40:46] Shawn O’Malley: Ahead of a Pershing Square IPO, Ackman privately sold a stake in his firm that valued it at nearly as much as its current assets under management. Pershing Square’s valuation was pegged at 10. 5 billion, despite the firm only managing roughly 16. 3 billion. To clarify, if that’s not clear, 16 billion is the amount of client assets that Ackman manages for other people and earns fees on.

[00:41:09] Shawn O’Malley: So for the value of his investment management business to be placed at more than 60 percent of the total assets it manages, despite charging only a small fraction of that amount in fees each year, was shocking to many, to say the least. That places Pershing Square’s market value in the same ballpark as asset managers that oversee several times as much money.

[00:41:29] Shawn O’Malley: So everything about the deal is an anomaly, from the valuation to a hedge fund firm going public, which is something the market generally soured on over 15 years ago, as it became clear during the great financial crisis, how volatile hedge fund businesses can be to say nothing of the rise of low fee passive investing and how that has pulled capital away from active management transcribed.

[00:41:49] Shawn O’Malley: Yet anomaly or not, it’s also a testament to Ackman’s star power. The 10 billion valuation almost certainly reflects optimism that Ackman can use his tremendous reach to dramatically increase Pershing’s assets under management. With the billions of dollars of funds raised from selling a stake in Pershing to select investors ahead of a broader IPO, Ackman plans to put at least half of that money into a new closed end fund aimed at individual investors in the U.S. called Pershing Square USA. From Spark to a potential Pershing Square IPO, to most of Pershing Square’s capital being tied up in a closed end fund trading in Europe that investors can sell only on the secondary market but can’t actually pull capital from, to the newly planned U.S. closed end fund, Ackman’s approach in recent years has shifted noticeably toward more durable capital.

[00:42:38] Shawn O’Malley: Whereas money can flow out of an ETF or traditional mutual fund at any time, as well as from hedge funds too, but with some lockup periods, usually Ackman has shifted to managing money that is locked up indefinitely. With spark, he has 10 years to pick a target and won’t actually raise money until a target is picked.

[00:42:56] Shawn O’Malley: By IPOing Pershing Square, he raises permanent capital from adding new shareholders instead of raising capital by taking on new clients who can pull their money out if they’re unhappy. And as I mentioned, with Pershing’s close in funds, there’s another layer of permanence there, since investors cannot redeem their shares to cash in and pull money out.

[00:43:15] Shawn O’Malley: With close in funds, money in the fund is tied up indefinitely, which is why they typically trade at a discount to the net asset value of their investments. Ackman is building Persing Square into an investment management juggernaut, one that is as immune as possible from the whims of investors who might want to withdraw their funds.

[00:43:32] Shawn O’Malley: The aim, then, seems to be tying up large and ever growing sums of capital through Ackman’s name recognition while charging not entirely modest fees for his team’s investment management services. In many ways, it’s probably every asset manager’s dream, to be honest, it’s just that few have the clout and status to actually mold their businesses in this way.

[00:43:52] Shawn O’Malley: As a result of Ackman focusing more on turning Pershing into a diversified asset management behemoth, he’s drifted considerably from his maverick hedge fund days. He’s also had enough success in the past that he doesn’t have to work as hard to convince companies that they should listen to his advice, so he said that he’s now less of an activist and more just an engaged investor.

[00:44:13] Shawn O’Malley: He’s able to work with companies without staging battles in the media to enact change. At least, that’s the case for now. His days of corporate activism seem to be behind him, as he’s increasingly turned his focus onto political and social activism. Still, Ackman’s returns are as good as ever. His European close in fund earned a 31.2 percent five year average annual return at the end of 2023. And with that, since Ackman continues to run an extremely concentrated investment portfolio, I just want to run through some of those names. His largest picks across Pershing Square’s funds are Google’s parent company Alphabet, Universal Music Group, Chipotle, Hilton, Restaurant Brands International, which owns Burger King, a railroad company, Canadian Pacific, and the property development company, Howard Hughes.

[00:45:00] Shawn O’Malley: Ackman is just a fascinating person to study and follow, and I know I’ll be keeping a close eye on changes to his portfolio, Pershing Square’s potential IPO, and new close in fund, as well as his spark, and anything else that he does, really. After digging into Ackman’s career, I think it’s hard not to have mixed feelings about him.

[00:45:18] Shawn O’Malley: He’s a great activist and value investor, but he’s also been caught up in no shortage of controversies and embarrassing mistakes. He comes across as charming and smooth. Yet you also know that there’s probably a cold blooded side to him too, as is probably true of many investing legends. And that’s all for today, folks. Thanks a lot for tuning in and I hope I’ll see you again next week.

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