Earlier this month, Carl Icahn declared that Bill Ackman of Pershing Square is “dead wrong” on his short bet relating to Herbalife.  He was correct, and Ackman knows it. In a last-ditch effort to make his bet pay off, Ackman has started a deceptive public relations war to kill the nutrition company. When his PR campaigns are unsuccessful, he attempts to pull the levers of government power in his favor to prop down the value of Herbalife’s stock.  The actions of Ackman are a classic case study in hedge fund crony capitalism.

In a Fortune story published on September 9, 2015, Roger Parloff chronicled the war that Ackman has waged in a story titled “The siege of Herbalife.” Parloff wrote that Ackman kicked off his campaign with a massive bet on the failure of the company:

At about 2 p.m. on Wednesday, Dec. 19, 2012, CNBC’s Kate Kelly broke the news that billionaire Bill Ackman’s hedge fund had taken a massive short position—about $1 billion worth, we know now—in the stock of a nutrition company called Herbalife.

Parloff then wrote that Ackman presented to investors the reasons why they should dump stock in Herbalife:

The day after the CNBC report, Ackman presented a “public short” the likes of which no one had ever seen before. A public short is a risky, fairly rare phenomenon in which an investor not only bets on a stock to go down—known as short-selling—but publicly announces that he has done so, explaining why. On this occasion Ackman delivered a 3½-hour, 342-slide webcast lecture at a 500-seat auditorium at the AXA Equitable Center in Midtown Manhattan in which he called the company the “best-managed pyramid scheme in the history of the world.” He expected the stock not just to decline but to go to zero, he made clear. If his bet paid off, he’d donate his personal profits to charity, because he considered any proceeds from a corporation so villainous to be “blood money.

The stock didn’t go to zero, so Ackman had to resort to using his friends in Washington, D.C. to make good on his big bet. The New York Times reported this in its March 9, 2014 story, “After Big Bet, Hedge Fund Pulls the Levers of Power”:

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.

Ackman’s “evidence” was a letter from Rep. Linda Sanchez (D-CA) to the Federal Trade Commission calling for an investigation.  Evidently, Ackman had this letter which he personally lobbied for before it was even sent.  The New York Times story chronicled a massive lobbying and public relations effort to crush the company, including the organization of letter-writing campaigns to federal officials in hopes of spurring a government investigation of Herbalife.

And this is where Ackman crossed the line from capitalist to crony capitalist.  Hedge funds serve an important purpose when they take short positions on companies that they think are flawed business models.  They cross the line when they bet on the failure of a company and then hire lobbyists that use the power of government in order to make good on those bets.  Ackman’s actions contribute to the bad reputation of the hedge fund investment model.

Hedge funds should not be allowed to use the government to make billions.  It is the opposite of free market capitalism for a rich hedge fund manager to use government influence as a means to squash a functioning company that Icahn described as a “company (that) creates work for many people and to say it doesn’t is ridiculous.”

Icahn said on CNBC that “Ackman is completely and totally wrong on this company.”  Icahn is correct, but it is also true to argue that Ackman’s crony capitalist actions to hurt the company are just as wrong.