Hedge fund managers are the devil du jour in the American political game, Ted Cruz being “Lucifer in the flesh” aside. There are few politicians, particularly on the left, who haven’t, at one point or another, been critical of the concept of the “greedy hedge fund managers.” Hillary Clinton, whose daughter married one and has raised a lot of money from them, has regularly peppered her campaign speeches with namedrops of the faceless boogeyman.
Of course, just like attacks on “big banks” and “Wall Street,” they mean nothing. They’re buzzwords used to rile up crowds and give them a scapegoat to rally against.
But the actions of some hedge fund managers are worthy of a closer look.
One such person is Paul Singer, who runs Elliot Management. A hedge fund betting against a company’s future is normal; a hedge fund betting against a company and attempting to manipulate that company into failure is something else entirely.
Singer is being sued by iHeartMedia, the nation’s largest radio company, alleging he purchased the company’s debt, insured it, then set about trying to force the company to default.
According to the suit, Singer purchased iHeartMedia credit default swaps, then attempted to get them to default. The New York Post reports, “Singer would have been in position to profit handsomely if iHeart went into default — one possible step away from Chapter 11 — because holders of CDSs get paid in full if a company files for bankruptcy.”
It’s one thing to bet against a company, it’s another to bet against it and attempt to manipulate circumstances to make it happen.
Another example is Herbalife.
The vitamin supplement company found itself on the losing end of a bet by hedge fund manager William Ackman, who made a large short against its stock. When it failed to drop, Ackman attempted to make it drop “by using the power of government agencies to sink the stock.”
Ackman’s bet, which amounted to a billion dollars, didn’t worked. So he turned to lobbying government to declare Herbalife a pyramid scheme. Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University, reports, “Using all the political influence his corporate money can buy, he has been putting pressure on state and federal regulators to investigate Herbalife in hope that the company’s stock would finally dive.”
Ackman, according to the New York Times, “has helped organize protests, news conferences and letter-writing campaigns in California, Nevada, Connecticut, New York and Illinois, although several of the people who signed the letters to state and federal officials say they do not remember sending them.”
Further, Ackman’s team “paid civil rights organizations at least $130,000 to join his effort by helping him collect the names of people who claimed they were victimized by Herbalife in order to send the leads to regulators,” the Times found.
It’s not much of a bet if you manipulate the outcome.
Thus far Ackman’s attempts have failed to drop Herbalife’s stock to zero, as he once claimed it would.
As distasteful as these tactics are, they are arguably legal. In the case of iHeartMedia, their attempted recourse has been in civil court, not criminal. Herbalife has had to counter the attack on them with an “army of lobbyists” of their own, costing untold sums of money.
Think what you will of hedge fund managers, but most operate above board. Still others poison the well, skirting the edges of the law, in an attempt to wet their beaks with the aid of loopholes and, in some cases, the government itself.
Ackman and Singer are donors to politicians in both political parties, which mutes some of the attacks on their profession by politicians and shows this is a bipartisan problem. And they’re hardly unique. Overstock.com and Radio Shack, amongst others, have found themselves under these sorts of manipulative attacks. As long as this brand of pseudo-insider trading, get richer quick schemes remain legal, these companies won’t be the last ones either.