![Bill Ackman]()
Hedge fund manager Bill Ackman has little to fear from a government investigation into Herbalife stock manipulation, legal experts say — at least based on what has been reported about the inquiry so far.
The investigation centers on Ackman's billion-dollar short of Herbalife with his hedge fund, Pershing Square. To be liable for stock manipulation, these experts say, prosecutors would have to prove not only that Herbalife's stock was illegally manipulated but also that Ackman and Pershing Square knew about the illegal acts and sanctioned them.
Looking back on how the US Attorney's Office in the Southern District of New York — the one Preet Bharara heads — has handled similar cases, legal experts say the path to Ackman, if there is one, will first go through outsourced consultants and lieutenants if it is to prove wrongdoing at Pershing Square. Bharara's prior investigations into other Wall Street power players, from now-jailed Galleon Group founder Raj Rajaratnam to Steve Cohen, another hedge fund executive who has paid a fine but did not admit criminal culpability in an insider-trading case, took a similar route.
A grand jury has subpoenaed people and documents related to Ackman's investment in an effort to determine whether to pursue a case. One of the people who received a subpoena from the grand jury in New York late last month was a Connecticut-based hairstylist named Israel Alvarez, the Hartford Courant reported, citing an unnamed attorney. According to the Courant, Alvarez said he could not discuss the matter.
Investigators are following a standard playbook in the Herbalife investigation, experts say. They are starting with the "little fish" with the aim of working their way up to the "big fish" at the top.
But so far there is no indication that the big fish, Ackman and his colleagues at Pershing, knew what some of the people hired by Pershing's consultants were doing, much less colluding with them.
Ackman has loudly, repeatedly, vigorously proclaimed his innocence.
"Market manipulation is when someone intentionally makes false or misleading statements about a company for the purpose of driving down the stock or driving up the stock. I have made only truthful statements backed up by enormous research," Ackman told Bloomberg TV.
Ackman has also said he has had no contact with the FBI or anyone else involved in the examination of his bet against Herbalife, a multilevel marketer that sells nutritional shakes and supplements. Ackman believes the company operates as an illegal "pyramid scheme" that targets lower-income people. He's betting the stock goes to $0.
But what if Ackman is wrong about Herbalife? What if he made some statements that were inaccurate? What's the worst that could happen? Legal experts told us the following.
At the crux of an investigation into market manipulation is not just whether someone did something that illegally affected a stock's value, but whether anyone else — like a hedge fund manager — colluded with him or her to make that happen.
Details about the investigation remain murky, and a representative in the US Attorney's Office in the Southern District of New York would not comment.
Without proof or irrefutable testimony, it will be difficult to move forward with a market-manipulation case, experts say. However, looking back at Bharara's successful prosecution of Galleon Group founder Raj Rajaratnam, legal experts and sources see parallels between the insider-trading case and a market-manipulation investigation.
The worst-case scenario for Ackman and Pershing is much more than a headache, though Ackman is most likely prepared for this.
The attorneys of the Southern District of New York successfully pursued an insider-trading case against Rajaratnam and, separately, SAC Capital traders. A source said Bharara had displayed a tendency to work cases "up," offering less-senior employees deals in exchange for testimony.
![Raj Rajaratnam]()
Ackman, for his part, recently hired a former US attorney who worked securities cases in New York. He already has half a dozen lawyers working at Pershing Square.
"It's not easy to make a market-manipulation case," said one lawyer who asked to remain anonymous and had previously battled Bharara in court. "You're inevitably going to have to have a witness."
Absent of that witness, there is little reason to expect that Ackman or Pershing even has anything to sweat.
In previous interviews, Ackman has said no current or former Pershing Square employee had been subpoenaed in relation to any ongoing investigation. It suggests that, if any government arm is looking into trades, an investigation is only in the early innings and unlikely to yield anything anytime soon, one legal source said.
Prosecutors combing through evidence chasing a market-manipulation case have their work cut out with them — particularly when it comes to short-sellers.
John Coffee, a professor at Columbia Law School, notes that while pump-and-dump schemes are more easily identified, prosecutors would have to prove Ackman (and not just a third party or employee) willfully aimed to artificially drive the price of Herbalife shares down.
"There has to be some evidence he tried to push the stock beneath what he thought it was worth," Coffee said.
Given that Ackman has repeatedly and publicly said Herbalife stock is headed to $0, that could prove difficult.
If a grand jury investigation does proceed, it will have to bring forth a charge against someone, anyone — especially if the inquiry really is aimed at Ackman.
![Steve Cohen SAC Capital]()
If the investigation does not lead to criminal charges, it could still head to civil court after being handed off to the Securities and Exchange Commission. While the US Attorney's Office failed to put Steve Cohen behind bars, it did manage to put a serious dent in his abstract art budget, when the SEC later slapped him for a fine of about $1.8 billion.
One legal source privately chided the SEC for a perceived unwillingness to take a case that appeared to be anything less than "a slam dunk," but Coffee points out that the burden of proof is different when prosecuting a civil case.
"A civil case would be easier [to prove] than a criminal case," Coffee said.
The lawyer who spoke with Business Insider on background said that beginning the probe with a hairdresser signaled that the investigation was not a "top-down case" and instead aimed to flip witnesses against higher-value targets.
Business Insider reached out to Alvarez, the hairdresser, but he did not respond to requests for comment.
"This is the way Preet operates, but it's also the way a lot of prosecutors operate," the source said.
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Ackman, for his part, recently 
If the investigation does not lead to criminal charges, it could still head to civil court after being handed off to the Securities and Exchange Commission. While the US Attorney's Office failed to put Steve Cohen behind bars, it did manage to put a serious dent in his abstract art budget, when the SEC later slapped him for a fine of about $1.8 billion.
