Did Bill Ackman Just do a Reverse Pump and Dump?


Did Bill Ackman influence a market dip? Did he profit off of any fear that he might have stirred? On the surface, it looks like Ackman did what can be deemed a “reverse pump and dump,” where he shorted the market and then made a grim announcement in an effort to drive prices down. But is that really what happened?

What is a Pump and Dump?

Traditionally, a pump and dump is when someone artificially inflates a stock’s price by giving false or misleading statements and then selling the stock after its value spikes.

For example, a famous person picks up a thousand shares of a penny stock. The person goes on TV or uses his or her large social media presence to talk about how great the company is when it really is incredibly unlikely to succeed. Trusting the famous person, the person’s followers buy shares of that penny stock, driving up the value significantly. The famous person then “dumps” the stock by selling off at the inflated price that resulted from the endorsement.

Pump and dumps, like the previous example, are illegal. They are a form of securities fraud. The government wants to protect people from dishonest advice from powerful people. Since many people invest on pure emotion, rather than with more trustworthy fundamentals, pump and dumps can do a lot of damage.

Who is Bill Ackman?

Bill Ackman is Pershing Square’s billionaire hedge fund manager. He is worth $1.5 billion. A double graduate of Harvard, Ackman launched Gotham Partners back in 1992 and started earning a reputation as a savvy investor. A little over a decade later, in 2004, he founded Pershing Square Capital Management.

He made significant money during the 2008 financial crisis by buying credit default swaps, which are basically insurance contracts that allow the holder to profit off of the borrower’s default on a loan. He is a fairly unorthodox investor, sometimes severely under-performing, but, lately, over-performing compared to the rest of the market.

What did Bill Ackman do?

Ackman seems to have done a sort of reverse pump and dump, if it can be called that.

Ackman had shorted the market, meaning he would make money if the market went down enough. This is done by borrowing shares from a brokerage, selling them immediately, and then hoping that the stock price goes down so that the investor can buy the stocks back at a lower price to return them to the brokerage, pocketing the difference. It is a relatively risky strategy that can be very, very lucrative.

So, in other words, Ackman was positioned to make money if the market went down. That in itself is fine; many investors hedge their position by shorting stocks or indices. Some do practically the same thing with put options, like Ray Dalio did back in November 2019, while others short stocks, while others still might buy inverse funds.

But the problem arose when Bill Ackman went on CNBC on March 18, 2020, and declared that “Hell is coming” in relation to the pandemic and a subsequent economic downturn. Here’s the link to that CNBC interview. In short, he gave a very grim short-term outlook on the pandemic and the economy, and warned of the pain to come.

That same day, the market dropped yet another 4% after his dramatic decree.

Pershing Square ended up netting $2.6 billion on its short position when it closed it out days later.

Media Backlash Against Bill Ackman

As the news spread about what happened, the media expressed their outrage. As an example, punchable face Tucker Carlson aggressively denounced Ackman’s actions. In short, he called him an “amoral greed head” among other prestigious titles.

Worse for Ackman, this is not the first time that he has been called out for trying to move the price of a stock to favor a short position. Back in 2012, Ackman attacked Herbalife, calling it a pyramid scheme. He had a massive short position on Herbalife, which ended up surviving despite his attacks. He closed his position in 2017 after Herbalife stock rose drastically, partly thanks to enemy-billionaire Carl Icahn’s protection. His attacks while he held the position could have easily been interpreted as another attempt at a “reverse” pump and dump.

Is the Backlash Justified?

Ackman has repeatedly claimed that “Our hedge had already paid off prior to my going on CNBC,” and that “The idea that my appearance pushed the market down an additional 4% that day is absurd.”

He has explained that he was already in the midst of purchasing a large amount of stock, specifically in Hilton, Starbucks, and others. So he was largely bullish too.

Pershing Square is flat on the year. Ackman triumphantly has proclaimed that, “our hedging strategy worked. While we incurred mark-to-market losses on our portfolio equal to $2.6 billion, we made the same amount on the hedges.” If Ackman was truly bearish and wanted to drive a market dip, one would think that he would have had a larger bearish position in the first place. Then his gains on the downswing would have be larger than his losses elsewhere. But that was not the case; instead, his short position was used as a hedge and his portfolio came out neutral.

Others might argue that he wanted to drive prices down to make stocks cheaper to buy since his portfolio was already insured on the downside.

Innocent or not, perhaps it is inappropriate for a respected investor to appear on TV to talk about the markets at all, at least without candidly disclosing his or her current positions. Even if it might not be illegal, it certainly is a terrible look.

Conclusion

What’s the lesson here? Well, for one, our actions have consequences, whether any backlash is justified or not. From an investment standpoint, hedging an otherwise bullish position with something like shorts or put options can be very lucrative. Hedge fund managers do just that: they hedge positions. Volatility in either direction can turn into large profits with sophisticated investment techniques.

But, when you become a billionaire, recognize the fact that your words will be under a microscope from the media and many other investors.

Jack Duffley

Jack Duffley is a real estate investor and attorney based in Houston, TX.

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