Monthly Archives: March 2014

“No matter which city wins, California will be losing yet another Fortune 500 company…Texas gets Oxy and is looking for more.”, Los Angeles Times, March 13, 2014

“Unfortunately, every prudent California company, who cares about protecting its officers from inappropriate legal liability, must consider a move to a state that makes clear that it honors the Business Judgment Rule for both directors AND officers. To this day, it is unbelievable to me that as an officer of a California-domiciled corporation, I could be sued for ordinary negligence. (Like every other California corporate officer, I had been assured by counsel over the years that my decisions and actions were protected by the Business Judgment Rule; as they are in nearly every other State.) Even more unbelievable is that thanks to the legislature and the courts, California law on this important issue remains unclear to this day. (However, it was made clear in the FDIC’s lawsuit against me. The lower Federal court ruled that in California, as an officer, I was NOT protected by the Business Judgment Rule. However, the judge agreed that the law was unclear; certified his ruling and allowed me to appeal this issue, pre-trial to the 9th Circuit. The 9th Circuit declined to resolve this matter before trial; essentially forcing me to settle a bogus $600 million negligence suit by the FDIC.) It’s a pretty simple issue. Are California officers protected by the Business Judgment Rule or not? If they are not, how in the world can California officers take direction from California directors (The Chairman and CEO is hired by, and can be fired by, the board of directors.), who are being protected by a higher standard of liability; the Business Judgment Rule? This seems like an unacceptable risk for California officers and a serious corporate governance flaw of California-domiciled corporations (and by the way, we were actually a Delaware-corporation, but California law apparently rules when headquartered in California), and therefore an important concern for shareholders. If there is not a compelling reason to be domiciled in California, it seems “almost negligent” to remain with this important legal matter unclear and unresolved?” Mike Perry, former Chairman and CEO, IndyMac Bank

Federal Deposit Insurance Corporation v. Michael W. Perry (Case No. CV 11-5561-ODW)

Covington & Burling’s Motion to Dismiss on Business Judgment Rule, 9/15/2011, Page 8, line 14:

Covington & Burling attorneys’ for Defendant Mr. Perry:

The FDIC’s single cause of action for ordinary negligence is barred by the business judgment rule. The Complaint, filed by the FDIC after an investigation of almost three years, is notable for what it does not say. The FDIC does not allege —nor could it allege — that Mr. Perry acted in bad faith. It does not allege — nor could it allege — that Mr. Perry had a conflict of interest or was otherwise disloyal to IndyMac. It does not allege — nor could it allege — that Mr. Perry engaged in any kind of loan fraud. And it does not allege — nor could it allege — that Mr. Perry lacked adequate information in making his business judgments. Rather, the Complaint focuses solely on IndyMac’s allegedly “negligent” business strategy of generating “risky” residential loans in an unsettled market environment during a roughly five-month period in 2007. The purpose of the business judgment rule is precisely to preclude second-guessing of such good-faith strategic judgments and balancing of risks by corporate decision-makers. Indeed, the Ninth Circuit has expressly held that, where the business judgment rule applies, a defendant sued by the FDIC is “entitled to immunity from personal liability for acts of ordinary negligence under California law.” FDIC v. Castetter, 184 F.3d 1040, 1044 (9th Cir. 1999)

District Court Denial of Motion to Dismiss on Business Judgment Rule, 2/21/2012, Page 7:

Hon. Otis D. Wright II, United States District Judge:

In light of the apparent lack of authority and the California legislature’s expressed intent not to include corporate officers in codifying common law BJR, this Court holds that BJR does not protect officers’ corporate decisions. Accordingly, to the extent Defendant argues that Plaintiff’s Complaint should be dismissed for failure to plead around BJR, the Court DENIES Defendant’s Motion.

Pursuant to 28 U.S.C. § 1292(b), the Court finds the instant order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate interlocutory appeal therefrom may materially advance the ultimate termination of the litigation.

District Court Order Granting Certification and Stay of Action, 2/21/2012, Page 8, line 5:

Hon. Otis D. Wright II, United States District Judge:

[N]either § 1292(b)’s literal text nor controlling precedent requires that the interlocutory appeal have a final, dispositive effect on the litigation, only that it ‘may materially advance’ the litigation.” Reese, 643 F.3d at 688. As Defendant points out, Plaintiff has not pleaded a claim for gross negligence. Thus, a ruling that the BJR does apply to preclude Plaintiff’s sole claim for ordinary negligence would effectively terminate the litigation.

Thus, even to the extent that a reversal of the Court’s December 13, 2011 Order on appeal may not have a final dispositive effect on this litigation, such a ruling nevertheless may materially advance this litigation. Accordingly, the Court GRANTS Defendant’s Motion for Certification pursuant to § 1292(b).

Defendant seeks a stay pending § 1292(b) certification and any subsequent appeal because “resolution of the appeal in [Defendant’s] favor would . . . end the litigation.” (Mot. at 8.) Plaintiff does not contest a stay pending certification and appeal. Because a ruling on appeal in Defendant’s favor would at least re-focus this litigation on whether Defendant acted with gross negligence as opposed to mere ordinary negligence and thereby alter the scope of discovery, the Court finds that a stay of the proceedings in this case pending certification and appeal would “promote economy of time and effort for itself, for counsel, and for litigants.” Filtrol Corp. v. Kelleher, 467 F.2d 242, 244 (9th Cir. 1972). Accordingly, the Court GRANTS Defendant’s Motion to stay the instant action pending resolution of Defendant’s interlocutory appeal.

Ninth Circuit Court of Appeals Declining to Hear Appeal (Before Trial), 5/11/2012:

Before: THOMAS and MURGUIA Circuit Judges:

The petition for permission to appeal pursuant to 28 U.S.C. § 1292(b) is denied.

Texas gets Oxy and is looking for more

Fresh from getting the oil giant to move to Houston, Gov. Rick Perry plans to woo other California firms

By Shan Li

Rick Perry is coming back to town.

The Texas governor will be in Los Angeles next week to try to persuade local corporations to relocate to the Lone Star State. This is his third swing through the Southland since last year, and Texas this time around comes armed with a $300,000 advertising blitz.

He returns with a big victory under his belt: Occidental Petroleum Corp.

The Los Angeles oil giant, whose roots in the region go back nearly a century, announced last month it is relocating to Houston. Perry said Oxy joins some 60 other companies that have expanded or relocated to Texas since July 2012.

“Oxy’s a big deal,” Perry said in an interview. “It is pretty exciting when you think about what that says. I think it’s important to have these conversations about why … companies are relocating.”

As a warmup to his trip, ads will start airing Thursday on TV and radio touting Texas’ business-friendly ways and slamming California as an impediment to companies.

Los Angeles has to worry about more than just Texas. There is now a competition for what city will be home to Oxy’s operations that are still based here after a planned split of the company.

The Houston part of Oxy will include its operations in the Middle East and Colombia, as well as the chemical subsidiary OxyChem. The California assets will be spun off into a separate publicly traded company with about 8,000 employees and contractors in the state. The split is expected to be completed by early 2015.

Long Beach appears to be the biggest challenger to L.A. in trying to win the jobs and tax revenue that come with playing host to a big energy player.

Like L.A., Long Beach’s history with the oil company stretches back decades. Oxy drills around the Port of Long Beach and also controls four man-made islands off its coast to tap into Wilmington Field, one of the largest oil fields in the United States.

Long Beach Councilman Gary DeLong said officials are “looking at every avenue to bring Oxy’s headquarters” to the city.

“We are far more nimble than L.A.,” he said. “We can turn on a dime when necessary. If they need a building permit, that is something we can get very quickly.”

Meanwhile, Los Angeles Mayor Eric Garcetti has reached out to Occidental directors in hopes of keeping the new company in Los Angeles, a spokesman said.

No matter which city wins, California will be losing yet another Fortune 500 company.

By heading to Houston, Occidental is joining a stream of oil companies that have ramped up their presence in Houston, the U.S. oil and gas capital.

Chevron Corp., the San Ramon, Calif., energy giant, announced plans last year to build an office tower in Houston and transfer hundreds of employees from California to Texas. (Chevron later put its building plans on hold to focus resources elsewhere.) Exxon Mobil Corp. is building a vast campus north of Houston, and Phillips 66 is also pouring billions into projects in the area.

Many industry watchers say they were surprised that Occidental, which has large operations in the Permian Basin in Texas and New Mexico, did not move sooner.

“I have always scratched my head — Why would Oxy be comfortable in Los Angeles?” said John Hofmeister, the former president of Shell Oil Co. and now head of the advocacy group Citizens for Affordable Energy. “There is nobody else there.

“When all is said and done, the oil industry, believe it or not, is a people business. Where are the people and workers? The people are in Houston.”

Oxy’s move will position the company to hire workers with experience in the industry and talented graduates from the state’s universities. The company has sought to win goodwill among Houstonians by sponsoring salutes to the military at Astros home games.

But the move signals a huge shift for the long-running Los Angeles company, which had an outsized role in the global oil markets under the helm of Armand Hammer.

Hammer bought the nearly bankrupt company in the 1950s after settling in Los Angeles with the goal of retiring. The lifelong entrepreneur was already a mogul before he bought Occidental, making millions in a wide range of industries such as art and whiskey.

Under his guidance, the company won rich oil concessions in Libya and eventually grew into one of the world’s biggest players in the energy industry. He also founded the Hammer Museum, which showcased his extensive art collection.

“He ran Oxy like a little fiefdom,” one former Oxy executive said. “All the early generations of oil and gas companies had cowboys for chairman.”

Decades later, Oxy is just one oil company among many in the U.S. to focus on growing domestic production. The industry has been boosted by technologies such as hydraulic fracturing that have unlocked previously inaccessible reserves deep underground.

Oxy’s move is “a very dramatic symbol of the kind of major changes that are happening in the oil industry in the United States,” said Daniel Yergin, journalist and author of “The Quest: Energy, Security and the Remaking of the Modern World.”

Experts said that Oxy’s new California company will be able to focus on operations in the Golden State. That could be a boon for the newly formed firm.

“There isn’t anyone who can say today how it’s going to be in California” said Pavel Molchanov, an energy analyst with Raymond James. ” They can run the business as a cash cow and pay out large dividends, or they can be more aggressive and run it as a growth company and invest a great deal.”

Occidental has not given any further details of its plans in the state.

“Thus, (securities) cases certified as class actions—and 77% of decided motions for class certifications are granted, according to a 2014 study by consulting firm NERA—threaten defendants with financial ruin. They subject defendants to relentless pressure to settle, even in cases with weak merits.”, Andrew N. Vollmer, former Deputy General Counsel, the Securities and Exchange Commission

“I joined a brief urging the court to accept the case for review. In Halliburton, the Supreme Court should abandon the deeply flawed fraud-on-the-market theory for an actual reliance requirement.”, Andrew N. Vollmer, March 3, 2014

“Both private securities class action cases against me could not have moved forward with class certification without the “flawed fraud-on-the-market theory”. By way of example, the “Tripp” case involved two elderly individual shareholders who were “straw-men” plaintiffs. Mr. Tripp had to drop out during litigation, because was diagnosed with Alzheimers and the other 88-year-old plaintiff never read or relied on a single IndyMac securities filing (before purchasing his stock…by the way, he purchase more “after the truth had supposedly been revealed”!!!) nor did he read or comment on a single document filed on his behalf by his lawyers; they provided him a copy after filing!!! (He testified to these facts under oath. See blog Statement #147.) The plaintiffs’ lawyers controlled the entire case in violation of the PSLRA and yet the judge still certified him in a ruling that makes no sense and contradicts itself (see Statement #147). Also, in the “Tripp” matter the plaintiffs’ attorneys cited anonymous former employees (as their main witnesses of the alleged securities fraud). Once these individuals were disclosed (whose disclosure the plaintiffs’ attorney fought “tooth and nail”), it was apparent that these relatively junior employees never had any contact with me or others at IndyMac responsible for securities disclosures. (They also worked in an immaterial start-up unit…not even 1% of loan volume…that was closed because it couldn’t make a profit.) The bottom line is that these cases against me were 100% without merit…a fraud…yet these plaintiff’s attorneys were able to legally “extort” multi-million dollar settlements out of the very limited D&O insurance funds available, because they mislead the court and obtained class certification.”, Mike Perry, former Chairman and CEO, IndyMac Bank


A Chance to Rein in Securities Class Actions

Time to restore the idea that investors actually relied on bad information provided by companies.


March 3, 2014 6:55 p.m. ET
On Wednesday, the Supreme Court will hear oral arguments in Halliburton v. Erica P. John Fund, a case that could dramatically decrease the number and size of class-action lawsuits that claim fraud by publicly traded companies. Such class actions are seen as either essential to compensating injured investors and deterring corporate misconduct—or mostly meritless distractions that drive securities offerings overseas and fail to compensate the injured or deter the misconduct.In Halliburton, the court has an opportunity to satisfy both views by trimming securities class actions while still preserving the core benefits of private securities cases.

Halliburton deals with one part of a securities-fraud claim called the reliance issue. In short, what information did an investor rely on when purchasing or selling the security? Historically, when a person sued for injury from a false statement about a security, courts required proof that the plaintiff heard or read the defendant’s misstatement and relied on it when buying or selling.

The Supreme Court removed that requirement in 1988 when it adopted the “fraud-on-the-market” theory of reliance in Basic v. Levinson . According to the new theory, the price of shares traded on efficient secondary markets reflects all publicly available information, including any misrepresentations. Because the market sends information to the investor through a market price, the courts assumed that an investor relied on the integrity of the market price—and therefore on misinformation. Specific proof of actual reliance was no longer necessary.

The theory became the bedrock of securities class actions brought against companies that allegedly made a false statement to public markets. All investors who traded in the public market at issue could join a class action without proof that each investor actually heard or read the misstatement.

The need to show actual reliance had been an important requirement of traditional common-law fraud cases. It defined a person who had been directly wronged by the defendant, even though others could suffer indirect loss from a false representation. Eliminating the need for this proof broke from the tradition as well as securities-law precedent. It was also inconsistent with the court’s decision to narrow the reliance element in the 2008 caseStoneridge v. Scientific-Atlanta, and the court’s decision to toughen class-certification standards in Wal-Mart v. Dukes in 2011 and again in 2013 with Comcast v. Behrend.

The foundation for the fraud-on-the-market theory was the efficient-capital-markets hypothesis championed by economist Eugene Fama. The hypothesis holds that share prices fully reflect information available at the time. But modern economic research, primarily in the field of behavioral finance, has cast doubt on the theory. Economists now recognize that the connections among public information, trading decisions and market prices require more than simple analysis. Information can affect market prices quickly or slowly depending on many factors.

Furthermore, fraud-on-the-market cases greatly expand the size of the plaintiff class. Class actions based on this theory have included hundreds or thousands of investors, such as the Royal Ahold case, which had more than 198,000 claimants. Thus, cases certified as class actions—and 77% of decided motions for class certifications are granted, according to a 2014 study by consulting firm NERA—threaten defendants with financial ruin. They subject defendants to relentless pressure to settle, even in cases with weak merits.

Rejecting the fraud-on-the-market theory would not end private enforcement. Traditional, cohesive class actions and individual securities cases would both remain and serve as a deterrent against securities misconduct.

Securities class actions would continue because many sophisticated investors actually hear, read and rely on the public disclosures from companies to make investment decisions. They attend investor conferences and hear management speakers; they receive the same earnings reports by blast emails; and they listen as a group to earnings calls and other important corporate announcements. Harmed investors could prove reliance and still cohere as a class under these circumstances.

In addition, institutional investors are increasingly bringing their own lawsuits when they believe a company’s disclosures were false and harmful, reducing the need for class actions to act as a deterrent. A 2013 study by Cornerstone Research of investors opting out of class-action settlements to bring their own cases showed that 53% of settlements valued at more than $500 million had an opt-out. Class actions were only 15%-20% of the total number of federal securities and commodities cases brought in 2012.

I joined a brief urging the court to accept the case for review. In Halliburton, the Supreme Court should abandon the deeply flawed fraud-on-the-market theory for an actual reliance requirement.

Mr. Vollmer, a professor and director of the law and business program at the University of Virginia School of Law, is a former deputy general counsel of the Securities and Exchange Commission. 

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“So, I think it will take a while for scholars to decide exactly what role easing monetary policy had in contributing to the financial crisis. I would not argue with the idea that a long period of low interest rates does contribute to the buildup of leverage and may have touched off a housing bubble.”, Federal Reserve Board Chair, Janet Yellen, February 27, 2014

“The truth about the Fed’s key role in contributing to the U.S. housing bubble/bust and financial crisis has now been revealed by the new Fed Chair. I commend her for telling the truth. Chairman Bernanke denied that the Fed’s pre-crisis monetary policies were to blame (see below).”, Mike Perry, former Chairman and CEO, IndyMac Bank

Excerpt from Chair Janet Yellen’s Testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs: The Federal Reserve Board’s Semiannual Report on Monetary Policy and The U.S. Economic Outlook for The Year; February 27, 2014:

Senator Toomey: On the risk side of this equation, I know you did mention some of the things you are looking for, many people believe that last decade the unusual monetary policy including maintaining negative real interest rates for an extended period of time, at the short end of the curve anyway, contributed significantly to the housing bubble that later burst, of course.  Do you agree that that was a contributing factor?  And secondly, among the risks that you look at, as we hopefully move to normalcy, which ones concern you the most?  And then I’ve got one last, really short question.

Chair Yellen: So, I think it will take a while for scholars to decide exactly what role easing monetary policy had in contributing to the financial crisis.  I would not argue with the idea that a long period of low interest rates does contribute to the buildup of leverage and may have touched off a housing bubble.  But, I think on the regulatory side and the supervision side there were also failings that contributed importantly to the crisis.  We are watching very carefully for the development of any such excesses.  We are very focused on…

 Here is a video clip which takes you directly to the segment, available here:  In the full video it is approximately 1:32:23 in.  It is Sen. Pat Toomey (R-Pennsylvania) questioning Chair Yellen.

Excerpt from Blog Posting Statement #58, September 26, 2013:

Mr. Bernanke (Comments to the FCIC): “Even if you believe that the Fed’s monetary policy was a contributor to the bubbles, it should be noted that even people who are most critical of the Fed’s policy acknowledged that it was only….it was not a large mistake. It was a percentage point or two relative to, say, what the Taylor rule, which is the standard measure of interest rate policy is…if you have a situation where a relatively small mistake…if it was a mistake, I’m just accepting that hypothesis…leads to the biggest financial crisis since World War II, I mean, what does that say?”

Mr. Taylor (“of the Taylor Rule”): “Figure 1 shows that the actual interest-rate decisions fell well below what historical experience would suggest policy should be. It thus provides an empirical measure that monetary policy was too easy during this period (2002 – 2005), or too ‘loose fitting’, as the ‘The Economist’ puts it. This deviation from the Taylor rule was unusually large; no greater or more persistent deviation of actual Fed policy had been seen since the turbulent days of the 1970s.

“Who is right here? Mr. Taylor’s arguments make sense to me and are backed by empirical data. Mr. Bernanke’s comments to the FCIC are not under oath and while I found them to be generally very forthcoming and accurate, I have noted on this blog I felt his FCIC comments re. Fed monetary policy/interest rates were not. I believe they were designed to protect the Fed. Read the excerpts below from Mr. Taylor’s book and from Mr. Bernanke’s 2009 conversation with the FCIC below and decide for yourself. Mr. Taylor’s book has been lauded by famed monetary economist Anna Schwartz, and former Secretary of Treasury; State, and Labor George P. Shultz.” Mike Perry, former Chairman and CEO IndyMac Bank

 Excerpt from Blog Posting Statement #54, September 24, 2013 (discussing an April 2009 WSJ OpEd entitled: “From Bubble to Depression?”,  co-written by Nobel Economist Vernon L. Smith and researcher Steven Gjerstad):

“During the 1976-79 and 1986-89 housing prices bubbles, the effective federal-funds interest rate was rising while housing prices rose: The Federal Reserve, ‘leaning against the wind,’ helped mitigate the bubbles. In January 2001, however, after four years with average inflation-adjusted house price increases of 7.2% per year (about 6% above trend for the past 80 years), the Fed started to decrease the feds-fund rate. By December 2001, the rate had been reduced to its lowest level since 1962. In 2002 the average fed-funds rate was lower than any year since the 1958 recession. In 2003 and 2004 the average fed-funds rates were lower than in any year since 1955 when the rate series began.”

“With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-to-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since ‘owners’ equivalent rent’ is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.”

“With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off…As the Federal Reserve monitored inflation in the early part of this decade, home-price increases were no longer visible in the CPI, so the lax monetary policy continued.”


“Advocates of it say it never costs anything and so that sometimes begs the question: Do you need the federal backstop there?” said Rep. Scott Garrett (R., N.J.). “If other countries want to make bad economic decisions, they’re free to—it’ll benefit the U.S.,” said Rep. Justin Amash (R., Mich.), who has introduced legislation with Sen. Mike Lee (R., Utah) to eliminate the (Export-Import) bank over three years., Wall Street Journal, February, 2014

“The Export-Import Bank is just like Fannie Mae and Freddie Mac. It costs taxpayers “nothing”, until it costs them billions. This is crony capitalism, where mostly large, favored exporters are able to obtain non-market financing from the government for their customers. If Boeing and other major exporters’ customers can’t get their own private sector financing to buy their products and services, then they should step up and provide it directly or through guarantees. In America, if you offer a product or service that requires that your customer finance it…as the seller, you should be required to retain some “skin in the game”…maybe a “first loss piece”, because you are the one directly benefiting from the sale. This applies equally to home builders, auto manufacturers, as well as colleges and universities. If these firms borrowed and directly extended their customers loans…or guaranteed a portion or took a “first loss piece”….then economic interests would be more properly aligned. Hasn’t the financial crisis and housing/mortgage crisis taught us this important lesson?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Future of Ex-Im Bank Divides Republicans

Agency’s Charter Expires Just Weeks Before Fall’s Elections


Feb. 27, 2014 8:24 p.m. ET
Fred Hochberg, center, chairman of Export-Import Bank, at Gulfstream Aerospace facilities in Savannah,
Ga Imke Lass for The Wall Street Journal

WASHINGTON—The Export-Import Bank, caught in a dispute between factions in the Republican Party, is mounting a push to try to prove its worth to the nation’s economy before its charter expires just weeks ahead of this fall’s elections.

The debate over the federal agency, which supports loans to overseas companies to help them buy U.S. exports, splits the party’s business-friendly faction from those who criticize the bank as inappropriate government interference in the market.

Already, the bank’s chairman has embarked on dozens of trips across the nation as the institution faces a battle over reauthorizing its charter. The goal: to promote the bank’s ability to help makers of products ranging from airplanes to bulldozers sell their goods abroad. Meanwhile, the bank sends every governor, senator and House member monthly letters detailing what loans and guarantees have been made that aid their district.

Two years ago, the bank faced intense opposition from conservative lawmakers after decades of bipartisan support. It secured reauthorization only after months of wrangling and the help of the leadership of the GOP-led House.

This time around, the House committee that will consider the legislation is headed by one of those conservatives, Rep. Jeb Hensarling (R., Texas). He voted against reauthorizing the bank in 2012 and said in June that “many taxpayers feel that it is indeed time to exit the Ex-Im.”

For the GOP, the issue is likely to be an unwelcome reminder of lingering divisions within the party.

In hopes of avoiding such fights, House Republican leaders took pains to avoid issues that divide their ranks, opting this year not to tackle an immigration overhaul and pushed off the next federal debt-ceiling increase until early 2015. But the simmering dispute over the bank signals that Republicans are unlikely to fully elude intraparty warring that could siphon attention away from their election-year messages.

Aware of the coming fight, the bank’s supporters are ramping up their efforts, both behind the scenes and in public, to win support for reauthorizing the institution and setting its lending cap. In 2012, lawmakers raised its lending limit to $140 billion from $100 billion.

In fiscal 2013, the bank authorized $27 billion to support an estimated $37.4 billion in U.S. export sales, and sent $1.057 billion to the U.S. Treasury, money it earned from interest and fees it charged its customers.

The bank’s chairman, Fred Hochberg, has taken more than 40 road trips since 2011 to tout the bank’s role in fostering sales of exports. Last week, he flew to Gulfstream Aerospace Corp.’s Savannah, Ga., headquarters and posed for pictures to promote a $300 million loan guaranteed by the bank late last year to help finance the sale of eight Gulfstream business jets to a company in China.

The bank, which dates to 1934, borrows money from the Treasury Department and pays interest on the funds to the Treasury. It then lends that money out and charges a higher interest rate, plus a fee, that generate its revenue. It technically has been self-sustaining since fiscal 2008, though Congress provides funding for the bank’s Office of Inspector General and sets the bank’s lending limit.

“I’m not a dreamy-eyed public policy person who wants to give money away. I like to get paid,” Mr. Hochberg, former president of catalog retailer Lillian Vernon Corp., said in an interview, noting the bank’s contributions have helped reduce the federal deficit.

But the bank’s very success has raised questions among some Republicans, who think much of its work would be better handled by private companies.

“Advocates of it say it never costs anything and so that sometimes begs the question: Do you need the federal backstop there?” said Rep. Scott Garrett (R., N.J.).

Mr. Hochberg said the agency’s role is to fill in gaps where the market has shied away, keeping U.S. companies competitive with foreign businesses that benefit from similar help at home.

Some Republicans are unmoved.

“If other countries want to make bad economic decisions, they’re free to—it’ll benefit the U.S.,” said Rep. Justin Amash (R., Mich.), who has introduced legislation with Sen. Mike Lee (R., Utah) to eliminate the bank over three years.

With an eye on the political calendar, industry groups that back the bank are escalating their efforts. The National Association of Manufacturers and U.S. Chamber of Commerce have been briefing lawmakers on the agency’s impact. Marion Blakey, chief executive of the Aerospace Industries Association, said her group has focused on many of the 93 House Republicans who voted against the 2012 reauthorization.

But Mr. Hensarling, chairman of the House Financial Services Committee, looms large in the debate.

Last June, Mr. Hensarling said the bank’s portfolio exposed taxpayers to too much risk, citing the government bailout of mortgage giants Fannie Mae and Freddie Mac as cautionary examples. Mr. Hensarling said in an interview this week that his position hasn’t changed, but added that he had “an open mind” to proposals from a small group of Republicans on his panel examining the bank.

Some House Republicans have said they might be willing to reauthorize the bank if new constraints are imposed or changes made to increase its accountability to Congress.

Democrats question whether GOP-backed changes to the bank could win their party’s support as well as that of Mr. Hensarling.

“What remains to be seen is whether what he would accept would cripple the Export-Import Bank or set it on a death spiral,” said Rep. Denny Heck (D., Wash.), a member of the financial panel.

Outside groups influential among House Republicans, including Heritage Action for America and Club for Growth, oppose the bank’s reauthorization, and lawmakers also have heard from businesses that have expressed concerns.

At the invitation of Rep. Mick Mulvaney (R., S.C.), representatives of Delta Air Lines Inc. came to speak with about 30 Republicans late last year to give “a real-world example of how the bank harmed them,” the lawmaker said. Boeing Co. is the bank’s top beneficiary and Delta has said the agency’s aid in helping Air India purchase Boeing aircraft has made it harder for Delta to compete with the foreign airline.

“The U.S. Export-Import Bank has no business subsidizing foreign airlines that are perfectly able to finance their aircraft purchases in the private market without government assistance,” Delta spokesman Trebor Banstetter said Thursday.

Reauthorization is likely to be a less controversial issue in the Democratic-controlled Senate, where the Banking Committee’s top Republican, Sen. Mike Crapo of Idaho, said this week he supports extending the bank’s charter. He said the bank “provides significant advantages to American businesses.”

Mr. Crapo added that he talks regularly with Mr. Hensarling. It isn’t clear yet whether the House or Senate will go first on a reauthorization vote.

Write to Kristina Peterson at

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“In December, almost 40 percent of the home sales were all cash. Redfin estimates that, on average, 60 percent to 80 percent of San Francisco homes are selling for prices over the original asking price. Most are gobbled up within 16 days of being listed….”, New York Times, March 3, 2014

“Over the last decade, 75,000 people have moved to San Francisco, but only 17,000 new housing units have been built. Over the next 25 years, city officials project, 150,000 more people will arrive. Our approach to housing in San Francisco is very dysfunctional,” said Scott Wiener, a San Francisco supervisor who is a proponent of new housing. “The system is intentionally designed to make it as difficult as possible to build new housing.”, Nick Bolton, New York Times, March 3, 2014

“I believe this massive real estate “bubble” in the Bay Area helps to reveal the truth about the 2000’s U.S. housing bubble and bust. This current housing bubble has nothing to do with imprudent home lenders. It is strictly about supply and demand. A tech boom fuels a huge demand for housing, in a very supply-constrained market, because of limited land and anti-development, government regulation. (Please see Statement #146 on February 27, 2014 for a discussion of inelastic U.S. housing markets.)”, Mike Perry,former Chairman and CEO, IndyMac Bank 


DISRUPTIONS MARCH 2, 2014, 11:00 AM 

The Housing Market With Nowhere to Go (but Up)

Correction Appended

Market Street in San Francisco, a stretch of town that Twitter and other tech companies have called home.

Jason Henry for The New York Times
Market Street in San Francisco, a stretch of town that Twitter and other tech companies have called home.

SAN FRANCISCO — Not long ago the pink house at 1829 Church Street, in the Glen Park neighborhood here, hit the market for $895,000.

It sold for $1.425 million — $530,000 over the asking price — in less than two weeks.

The story of this fixer-upper, with three bedrooms, two baths, linoleum floors and an Eisenhower-era kitchen, is in some ways the story of the moment in the city, where longtime residents complain that Silicon Valley money is basically ruining the place for everyone else.

More wealth is concentrated in the San Francisco Bay Area than just about any other place in the nation. Google alone, the story goes, minted 1,000 millionaires when it went public. Ditto Facebook. And Twitter? Some estimate 1,600. Tech worker bees are doing just fine, too, with average base salaries now north of $100,000.

To understand how all this money is transforming San Francisco, for better and worse, look no further than this city’s hyperventilating real estate market. As technology companies have moved in — more than 5,000 start-ups now make their home locally — the influx of well-paid workers has pushed rents and home prices through the roof. Worsening matters, San Francisco has also become a bedroom community for many of the young people who work in Silicon Valley. Each day, Apple, Facebook, Google and others shuttle tens of thousands of their employees to work using private buses that have become a controversial symbol of rising tech wealth.

At a recent open house for 1829 Church Street, the broker explained the property’s dilapidated appeal.

“It’s a block away from all the tech shuttles,” he said.

On one level, the technology industry and its riches have been very good to San Francisco. The unemployment rate is 4.8 percent, compared with 6.6 percent nationwide. Entire neighborhoods are being revitalized — or destroyed, depending on whom you talk to. To some, San Francisco is losing its soul as it gentrifies rapidly.

There is reason to worry. Over the last decade, 75,000 people have moved to San Francisco, but only 17,000 new housing units have been built. Over the next 25 years, city officials project, 150,000 more people will arrive.

“The city is surrounded by water on three sides, and there is nowhere for people to go,” said Glenn Kelman, chief executive of Redfin, an online real estate brokerage firm.

Little wonder, then, that a feeding frenzy is underway in the housing market. Landon Nash, a real estate broker, said it was not uncommon for open houses to see hundreds of people shuffle through and conclude with a 20-person bidding war. People are waiving mortgage contingency clauses and home inspections — and paying cash.

In December, almost 40 percent of the home sales were all cash. Redfin estimates that, on average, 60 percent to 80 percent of San Francisco homes are selling for prices over the original asking price. Most are gobbled up within 16 days of being listed, down from 61 days five years ago, when the nation’s real estate market was still soft.

But here’s the problem: As more people move in, the city will also need more public-school teachers, police officers and firefighters. Living in San Francisco on a city salary is difficult if not impossible. According to Redfin, in San Francisco County, where the average teacher earns $59,700 a year, not a single home now on the market is within the reach of the average public-school teacher. For police officers, who make an average of $80,000 a year, there is one affordable home. Five years ago, police officers and teachers could have afforded 36 percent of the homes on the market, according to Redfin.

Even some tech entrepreneurs and programmers say they are being priced out. They are competing with co-workers who got in early on a tech start-up, or started one of their own, and have seemingly unlimited money at their disposal.

When Mark Zuckerberg bought his pied-à-terre in San Francisco’s Noe Valley in 2012, he had a representative knock on the door of the home he liked — it wasn’t even for sale — and then offered the owners all cash at double the value of the property.

On Tuesday, 250 San Francisco residents congregated at Virgil’s Sea Room, a bar in the Mission district, to discuss the housing crisis. It didn’t take long for the event, called Tech Workers Against Displacement Happy Hour, to erupt into an expletive-fueled yelling match between tech workers and people running nonprofits that are trying to stop evictions in the city.

City officials know they have a housing problem on their hands.

“Our approach to housing in San Francisco is very dysfunctional,” said Scott Wiener, a San Francisco supervisor who is a proponent of new housing. “The system is intentionally designed to make it as difficult as possible to build new housing.”

There are long lists of rules, regulations and hurdles developers need to get around before building in the city that Mr. Wiener said were created to curb new construction. Real estate experts say the only way to build is up, but many longtime residents have shot down proposals for high-rise housing.

Additionally, with each new housing unit, there need to be some affordable options. According to the Public Policy Institute of California and the Stanford Center on Poverty and Inequality, more than 23 percent of San Francisco residents are below the poverty threshold.

In recent years, officials have managed to approve some new high-rise housing in the SoMa and Tenderloin areas. But it seems to be too little, too late.

“We’re in an absolute housing crisis right now,” Mr. Wiener said. “There’s no easy solution, and it’s going to take us time to fix this.”

Twitter: @nickbilton Email:

Correction: March 7, 2014

The Disruptions column on Monday, about the housing market in San Francisco, using data from the online real estate brokerage firm Redfin, misstated the typical sale prices of homes in that city. Sixty to 80 percent of homes in San Francisco are selling for more than list price; homes are not selling for 60 to 80 percent over list price.

A version of this article appears in print on 03/03/2014, on page B6 of the NewYork edition with the headline: Housing Market With Nowhere to Go (but Up).

“Sounds a lot like the short sellers who attacked IndyMac and the U.S. housing, mortgage and financial system. I think they might have coordinated. I read that short seller Paulsen donated millions to the Center for Responsible Lending. Then they issued misleading reports about us (and others). Did they get New York, U.S. Senator Schumer to publicly release his letter of concern and spur our bank run (and failure)? Don’t we all deserve to know the truth?”, Mike Perry, Former Chairman and CEO, IndyMac Bank

“If you are trying to spread the truth, that is O.K. If you are trying to move the price of the stock to vindicate your investment philosophy that’s not O.K….(it is starting) to look like an effort to move the price rather than spread the truth.”, Harvey L. Pitt, former Chairman of the Securities and Exchange Commission (commenting to the NYT’s on Ackman’s activities against Herbalife)

“It is seems to me that these short sellers were coordinated and attacked publicly-traded subprime mortgage lenders first. Then mortgage reits and securities broker dealers, who relied on capital markets funding. Then they attacked others like Lehman, Fannie, Freddie, AIG, and the Too-Big-to-Fail banks (who the SEC protected temporarily by banning short selling). Then they went overseas and attacked foreign banks and the weaker sovereign governments. They looked for flaws they could attack. In the U.S. financial system, they knew that capital markets (wholesale) funding was a weakness. And if a bank was forced to rapidly raise capital by its regulators, they knew that by coordinating and driving the stock price down, they could force the bank to raise capital at substantially below book value per share and guarantee themselves a big profit, even if the bank didn’t fail. And they knew that the Euro currency (sovereign governments without their own currency) was a weakness they could exploit. Then they came back to the U.S. to attack private, for-profit secondary educators (because they relied on student loans and had some similarities to subprime lending). How can these short sellers coordination/collusion (and use of government officials and non-public information) not be illegal? If it is not, it should be.”, Mike Perry, former Chairman and CEO, IndyMac Bank


After Big Bet, Hedge Fund Pulls the Levers of Power

Staking $1 Billion That Herbalife Will Fail, Then Lobbying to Bring It Down


MARCH 9, 2014

William A. Ackman has made a $1 billion bet on Herbalife’s collapse, and lobbied aggressively for it. 
Credit Scott Eells/Bloomberg, via Getty Images

WASHINGTON — 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.

Mr. Ackman told his dinner companions that Representative Linda T. Sánchez, Democrat of California, had sent a letter to the Federal Trade Commission the previous day calling for an investigation of the company.

The commission had not yet stamped the letter as received, nor had it been made public. But Mr. Ackman, who had personally lobbied Ms. Sánchez and stood to profit if the company’s stock dropped as a result of the call for an inquiry, already knew what it said, and read from a copy of it that he had on his cellphone.

Representative Linda T. Sánchez, Democrat of California, sent a letter to the F.T.C. asking it to investigate Herbalife. Mr. Ackman obtained a copy of the letter before it was made public.

The letter was a small hint of Mr. Ackman’s extraordinary attempt to leverage the corridors of power — in Washington, state capitols and city halls — for his hedge fund’s profit after taking a $1 billion financial position called a short, a bet that will pay off only if Herbalife’s stock drops.

Corporate money is forever finding new ways to influence government. But Mr. Ackman’s campaign to take this fight “to the end of the earth,” using every weapon in the arsenal that Washington offers in an attempt to bring ruin to one company, is a novel one, fusing the financial markets with the political system.

Others have criticized the business practices of Herbalife, a company that sells vitamins and other health supplements through independent distributors, many of whom are lower-income Latinos or African-Americans. But Mr. Ackman’s attack is unprecedented in its scale, and Herbalife officials strongly deny his accusations that the company is a pyramid scheme that stays afloat by constantly recruiting new distributors.

To pressure state and federal regulators to investigate Herbalife, an act that alone could cause its stock to dive, his team 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, an investigation by The New York Times has found.

His team has also 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 investigation found. Mr. Ackman’s team also provided the money used by some of these individuals to travel to Washington to participate in a rally against Herbalife last month.

Herbalife has mobilized its own army of lobbyists to defend itself against Mr. Ackman’s charges. “These accusations are provably false,” said Herbalife’s chief financial officer, John G. DeSimone. “And they can all be traced back to the same source: hedge fund billionaire Bill Ackman, who is motivated by one thing — getting even richer by winning a billion-dollar bet he made against our company, by any means possible, no matter how unscrupulous.”

The feud has touched off a bidding war of sorts, emails obtained by The Times show, as the advocacy groups have in some cases pressed Mr. Ackman’s team and Herbalife to contribute more money in exchange for their allegiance.

Mr. Ackman is not new to playing chess on a billionaire’s scale. The brash 47-year-old, a graduate of Harvard Business School, built his $12 billion, New York City-based hedge fund, Pershing Square Capital Management, on enormous, risky bets on companies like Jim Beam and Canadian Pacific Rail that earned billions for him and his clients. He has had some big losses too, including an estimated $473 million last August on an investment in J. C. Penney, the struggling retailer.

Regulators frequently get entreaties from financiers urging action for their own financial gain, like the hedge fund executives who in 2010 tried to secretly push Obama administration officials to investigate for-profit colleges, again citing fraudulent industry practices, after betting that their stocks would decline.

But Mr. Ackman’s efforts illustrate how Washington is increasingly becoming a battleground of Wall Street’s financial titans, whose interest in influencing public policy is driven primarily by a desire for profit — part of an expanding practice in the nation’s capital, with corporations, law firms and lobbying practices establishing political intelligence units to gather news they can trade on.

So far, Mr. Ackman has persuaded four members of Congress, a New York State senator, a City Council member in Boston, the majority leader of the Nevada Senate and other elected officials in California to join the cause. Prominent consumer advocates in Washington, as well as leaders of well-respected Hispanic and African-American community groups who have been lobbied by Mr. Ackman’s team, have also written regulators demanding action.

Mr. Ackman has trumpeted the news conferences and protests to create the image that the walls were closing in on Herbalife, a company no stranger to controversy, whose sales reached a record $4.8 billion last year.

He has argued that he is trying to protect Hispanics, who he says are most frequently recruited by Herbalife as distributors, only to find out that there is little money to be made.

Yet Mr. Ackman’s staff acknowledges that this crusade is really rooted in one goal: finding a way to undermine public confidence in Herbalife so that his $1 billion bet will produce an equally enormous return. Mr. Ackman has said he will donate any profits he personally earns to charity, calling it “blood money.” The clients who invest in his hedge fund, however, would still benefit enormously.

Brent A. Wilkes, the national executive director of the Washington-based League of United Latin American Citizens, or Lulac, rejected any suggestion that he had become Mr. Ackman’s tool — even though his organization accepted a $10,000 contribution early last year, and since then has taken a position at the forefront of the anti-Herbalife campaign.

Brent Wilkes of the League of United Latin American Citizens, which said it would return a $10,000 contribution.
Credit Fred Prouser/Reuters

Instead, Mr. Ackman’s bet is just helping draw attention to longstanding abusive practices by Herbalife, said Mr. Wilkes, who acknowledged that he had never previously focused on the issue.

“It’s not the Latino groups that are helping Bill Ackman,” Mr. Wilkes said. “Bill Ackman is helping the Latino groups. He has elevated this battle.” On Sunday evening, after questions from The Times, Mr. Wilkes said he had decided to return the donation, so there was no chance anyone could suspect he had undertaken the effort “for a mere $10,000 table purchase” at one of his fund-raising events.

Harvey L. Pitt, a former chairman of the Securities and Exchange Commission, said that Mr. Ackman’s campaign was starting “to look like an effort to move the price rather than spread the truth.”

“If you are trying to spread the truth, that is O.K.,” Mr. Pitt said. “If you are trying to move the price of a stock to vindicate your investment philosophy, that’s not O.K.”

Mr. Ackman rejected the assertions that he had done anything wrong.

“Our goal here is to shine a spotlight on Herbalife and let the government know all the facts and motivate them to do something,” Mr. Ackman said in an interview on Sunday.

So far, Mr. Ackman has little to show for his efforts. Herbalife’s stock has climbed higher, in part because the billionaire investor Carl C. Icahn decided to buy a large stake in the company, and the regulators lobbied by Mr. Ackman have not taken any formal action against the company.

That has not deterred Mr. Ackman, who is not known to retreat from a risky investment without a fight, even if it takes years.

In February, 14 months after he announced he had wagered big money on the collapse of Herbalife, and with around $500 million in paper losses so far, he announced that instead of backing down, he had made his bet even bigger.

If Herbalife “were to disappear tomorrow, we’d make a lot more than had it just blown up the day after I gave my last presentation — although life would be a little easier,” he told an audience of Wall Street investors and media attending an investor conference last month.

Pitches to Regulators

One of Mr. Ackman’s first stops in his crusade to bring Herbalife down was a meeting at the regional field headquarters of the S.E.C. in Lower Manhattan, where more than 400 enforcement lawyers, accountants, investigators and other staff members work to police some of the nation’s biggest corporate players.

He presented investigators in New York with a year’s worth of financial research that he said showed that Herbalife was misleading investors by failing to properly disclose that most of its sales were generated by simply recruiting more distributors, rather than by selling large amounts of its product to consumers.

Kiosks are used to place orders of Herbalife products at a Carson, Calif., distribution center.
Credit Patrick T. Fallon/Bloomberg

Mr. Ackman, according to people who were present at the briefing, pointed to internal company records that showed a large share of these distributors, recruited to join the sales teams based on extravagant predictions, quickly gave up.

He made other presentations, to investigators from the F.T.C. and state authorities, because he knew regulatory action would be among the quickest ways to make good on his prediction that the company’s stock was going to crash.

“So the risk we took in making this investment was could we get the world to focus on a company, could it get enough of a spotlight so that the S.E.C., the F.T.C., the 50 attorney generals around the country, the equivalent regulators in 87 countries, if any one of them, or at least any powerful member of that group, could we get them interested?” Mr. Ackman explained at the investors conference in February, 14 months after he made his bet on Herbalife public. “And I think that was the biggest risk we took in going short” on Herbalife.

Mr. Ackman once made a similar bet against the bond insurer MBIA, one that reaped him and his investors a $1.1 billion return. In a book about his MBIA wager called “Confidence Game,” the reporter-turned-financial analyst Christine S. Richard chronicled how he fought with regulators for seven years before his prediction that MBIA stock would “spiral downward” came true. In a twist, it was Ms. Richard, who left Bloomberg News to start up the Wall Street research shop Indago Group, who gave Mr. Ackman the idea to short Herbalife.

After listening to Mr. Ackman’s pitch, S.E.C. investigators moved almost immediately last January to begin an inquiry into Herbalife — which newspapers reported, creating the coverage that Mr. Ackman needed to fuel his strategy.

From there, his team worked to create outside pressure, assigning lobbying, public relations and so-called grass-roots advocacy teams to attempt to build support across the country.

The team includes lobbying firms run by two former members of Congress: Toby Moffett, a Democrat who once represented Connecticut, and Robert S. Walker, a Republican from Pennsylvania. Mr. Ackman also hired firms run by former top White House aides for President Obama and President Clinton. Jim Papa, who handled legislative affairs for the Obama White House, also joined the effort, with his firm, Global Strategy Group, a longtime consultant to Mr. Ackman.

In some cases, the hiring was even more strategic. In Massachusetts, Mr. Ackman’s firm hired the lobbyist Larry Rasky, who was an aide to Senator Edward J. Markey, Democrat of Massachusetts, when Mr. Markey was a member of the House. Another lobbyist, Malcolm Grace, is a former aide to Ms. Sánchez. Both Mr. Markey and Ms. Sánchez would ultimately play critical roles in the effort.

Edward J. Markey, Democratic senator of Massachusetts.
Credit Nicholas Kamm/Agence France-Presse — Getty Images

Mr. Ackman also retained the Dewey Square Group, a Washington-based firm that specializes in “grass-roots advocacy,” to influence officials by recruiting surrogates to speak out against Herbalife in emails, tweets, letters or rallies.

He employed Dewey Square to focus on Hispanic and black community leaders and politicians based on a belief that because many of the individuals who are recruited as distributors by Herbalife are minorities, taking on the company might in some way help the Latino community. Separately, the lobbyists and grass-roots organizers set up meetings with major consumer groups.

Enlisting Allies

A wave of additional letters started to be sent to federal regulators by groups like the Hispanic Federation and the Consumer Federation. Each person contacted by The Times acknowledged in interviews that they wrote the letters after being lobbied by representatives from Pershing Square, or said they did not remember writing the letters at all. Mr. Ackman’s team also then started to make payments totaling about $130,000 to some of these groups, including the Hispanic Federation — money he said was being used to help find victims of Herbalife. The pitch by Mr. Ackman peaked in early February, when nearly 30 people affiliated with Latino advocacy and church groups, several of whom had joined the cause after being briefed by consultants hired by Mr. Ackman, flew to Washington to meet with members of Congress and the head of the F.T.C., again pressing for investigators to take action against the company.

Three of the nonprofit group leaders who participated in the event, from Massachusetts, Illinois and Washington, said they took part because they also believed that Herbalife was taking advantage of the working class and poor.

“At the end of the day, these people are becoming millionaires off the back of the people in the shadows,” said Julie Contreras, the president of the Lulac chapter in Waukegan, Ill., who traveled to Washington for the event, adding that she had not taken any money from Mr. Ackman or anyone on his team.

Mr. Ackman did not publicize his role in helping generate these letters or rallies, or the fact that his consultants in many cases wrote the language that is used in these letters, but his team still issued news releases noting that yet another group had called for an investigation.

In Washington, Mr. Ackman’s efforts bore fruit on Jan. 23, when Mr. Markey’s office, which Mr. Ackman had lobbied himself and which had been provided with detailed information about Herbalife by Mr. Ackman’s team, sent letters to the S.E.C. and F.T.C., calling for investigations of the company. A little more than a half-hour after the stock began trading that day its value fell by 14 percent.

The letter sent by Ms. Sánchez in June, which Mr. Ackman discussed at the dinner, did not move the stock. Ms. Sánchez’s office acknowledges that it sent a copy of this letter to Mr. Ackman’s team a month before it issued its news release on the matter, and says that it backdated the letter when making it public because The New York Post reported its existence a week after the dinner. The dinner itself was reported in August by The Wall Street Journal.A spokeswoman for Ms. Sánchez said backdating the news release was not inappropriate, as the office considered the document public when it was sent to the F.T.C.

Linda T. Sánchez, Democratic representative of California.
Credit Brendan Smialowski for The New York Times

Despite his efforts, Herbalife’s stock over the last 14 months has actually gone up. But Mr. Ackman, at least publicly, has tried to maintain the confidence of his investors, telling them last summer that he was confident he had made “material progress” in his attempts to persuade regulators to crack down on the company — an act that would be certain to hurt its stock price.

“We believe that the probability of timely, aggressive regulatory intervention has increased materially,” he said in the letter.

A Lack of Victims

The Nevada attorney general, Catherine Cortez Masto, was among the many officials who found herself enmeshed in the debate. But as the fight unfolded, with Latino groups holding a news conference in East Las Vegas demanding that she investigate Herbalife, she had some questions.

She says she was struck by the appeals for an investigation of Herbalife, at first directly from representatives for Mr. Ackman’s firm and then from others: All three of the letters from nonprofit groups demanding an investigation were identical — except they were signed by three different Hispanic community leaders, each on a different letterhead.

When Ms. Masto invited the Hispanic leaders to meet with her individually, none of them could identify a victim of abusive practices.

“We are not going to move forward unless we have victims,” she told the community leaders.

In Nevada, the Ramirez Group, a political consulting firm run by a former aide to the Senate majority leader, Harry Reid of Nevada, helped line up Hispanic groups and then contacted local reporters to attend a news conference, emails obtained by The New York Times show.

The attorney general in Connecticut, George Jepsen, said he had a similar experience. He received five letters with almost identical text. “Herbalife is a complex and abusive pyramid scheme,” the letters each said. “Herbalife unfairly targets minority groups and falsely markets itself as an easy business opportunity.”

One came from the mayor of the city of Waterbury, another from a former state legislator that Mr. Ackman had hired as a lobbyist, and a third from Israel Alvarez, a Puerto Rican-born hairstylist in Hartford.

Five Nearly Identical Letters

Five people in Connecticut sent letters with very similar language urging the Federal Trade Commission to open an investigation into Herbalife.

Letter to Ct. Attorney General

Evelyn C. Mantilla
Ms. Mantilla’s government relations firm was hired by Global Strategy Group, which Mr. Ackman’s firm had retained to discredit Herbalife. Her letter does not mention her connection to Mr. Ackman.
Letter to Ct. Attorney General
Israel Alvarez
Mr. Alvarez, a hairstylist in Hartford, said he never wrote the letter signed in his name and did not know anybody who had been harmed by Herbalife.
Letter to Ct. Attorney General
Mary Ann Turner
Ms. Turner declined to say who asked her to send the letter. “I don’t remember anything,” she said. Asked how it could have been identical to others, she said: “It is just something I wrote. I guess we are really smart.”
Letter to Ct. Attorney General
Neil O’Leary
Mr. O’Leary, the mayor of Waterbury, Conn., does not recall who contacted him about the letter, his chief of staff said.
Letter to Ct. Attorney General
Liliana Madrid
Could not be reached for comment.

In a telephone interview, Mr. Alvarez said he did not recall writing the letter. Asked if he had ever heard of the company named Herbalife, he said it was “a vitamin thing, and food thing.”

None of the letters cited any specific victims of Herbalife’s business practices. In fact, only one person had filled out a formal complaint form with the Connecticut attorney general’s office. State investigators were ultimately unable to substantiate the person’s claim that he lost $1,500 through the company five years ago.

The effort reached the West Coast as well. In California, Mr. Ackman’s team sent Minyon Moore, a former senior Clinton White House aide, to host a meeting in October at the landmark West Angeles Church of God in Christ in the city’s predominantly black South Central neighborhood. Ms. Moore detailed what she said were Herbalife’s deceptive sales techniques, participants in the meeting said.

Minyon Moore, a former Clinton White House aide.
Credit Melina Mara/The Washington Post, via Getty Images

Within a matter of weeks, Mr. Ackman’s consultants had helped organize a demonstration outside an Herbalife conference in Los Angeles and helped persuade nearly two dozen prominent Latin American and black community leaders to send letters to state and federal officials demanding action — letters that are now posted on an anti-Herbalife website that Mr. Ackman’s consultants control.

Najee Ali, a longtime activist in Los Angeles who attended the meeting at the church and then wrote one of the letters to California’s attorney general, said he was moved by Ms. Moore’s appeal.

“Her remarks were very touching and compelling, and her credibility across black America — it is unquestioned, so I really took to heart her argument,” Mr. Ali said.

But he had no idea that Ms. Moore was working on behalf of a hedge fund manager who had made a bet on Herbalife’s stock — and that his letter had become part of a lobbying strategy.

“Have I become an instrument in some billionaire’s investment campaign?” he said, adding that he now regrets sending the letter. “I don’t want to be an unwitting pawn, and that is how I am feeling right now.”

Pershing Square and its lobbyists argue that many of Herbalife’s victims are afraid to come forward because they are undocumented. “It’s a problem that we haven’t been able to find victims to come out,” said Maria Cardona at Dewey Square, who specializes in appeals to Hispanic Americans.

But Mr. Ackman once again had a solution: Pay nonprofit groups across the United States to find the victims Mr. Ackman knew he needed to compel the regulators to act.

So Global Strategy Group, a consulting firm helping Mr. Ackman conduct the campaign, began to make such payments, including about $120,000 to the Hispanic Federation and another $10,000 to Make the Road New York.

Other leaders of prominent Hispanic nonprofit groups said that a New York-based lobbyist hired by Mr. Ackman, Luis A. Miranda Jr., had also been holding a series of meetings offering payments at the same time that he was asking for their help in the anti-Herbalife campaign. Mr. Miranda denied these allegations, but emails obtained by The Times include discussions of possible support for programs run by groups whose leaders he had just approached for help on the Herbalife campaign.

The effort to find Herbalife victims now also includes toll-free numbers set up in at least four states, with recordings in English and Spanish urging people to report wrongdoing by the company.

“If you, a loved one or a friend have fallen for Herbalife’s deceptive marketing practices, we need you to share your story,” the recording says. “Every story can make a difference.”

A Global Powerhouse

Herbalife, according to the company’s official history, was born out of the trunk of a car in 1980, when a 24-year-old California man, Mark R. Hughes, began selling a protein shake that he had concocted, he said, after his mother had died of an accidental overdose of diet pills.

Herbalife products are on display at a distribution center in Carson, Calif. The company has repeatedly denied the claims that it is a pyramid scheme.
Credit Patrick T. Fallon/Bloomberg, via Getty Images

The company has grown into a global powerhouse, with a worldwide team of more than three million so-called members and distributors who operate as independent contractors through a system that rewards many of them not only based on actual sales, but also on their ability to recruit more distributors.

The sales tactic, popular with many nutritional supplement companies, has frequently been the target of criticism. In 1986, California authorities issued an orderprohibiting Herbalife from making false claims about the weight-loss powers of its nutritional drinks.

But never before has the company met an opponent quite like Mr. Ackman. In fact, company executives acknowledge that they underestimated just how far-reaching his effort would be.

Herbalife’s opinion changed on Jan. 23, when Mr. Ackman’s campaign scored its biggest hit yet: a United States senator, Mr. Markey, sent letters to the S.E.C. and the F.T.C., and Herbalife’s stock fell.

Staking $1 Billion That Herbalife Will Fail, Then Lobbying to Br... (03-10-2014 15.45.57)

Mr. Ackman’s anti-Herbalife website originally posted copies of the letters dated Jan. 22, while Mr. Markey’s office sent them out to the public dated Jan. 23. Mr. Markey’s office attributed this to a clerical mistake and added that Mr. Ackman’s office had merely obtained early versions of their letters from Mr. Markey’s website.

Herbalife, after Mr. Ackman announced his bet, had already expanded its own lobbying team, hiring, among others, the Glover Park Group, founded by former top Clinton administration aides, and the Podesta Group, run by Tony Podesta, who is known for his close ties to the Obama White House. With help from this team, last month the company held a private briefing for more than 30 Capitol Hill aides, defending itself against Mr. Ackman’s charges — and the echo chamber they argue he has manufactured.

They also retained the law firm Dickstein Shapiro, which has a large practice that specializes in lobbying attorneys general around the United States. Herbalife was so determined to force Mr. Ackman to back down it asked an investment adviser it retains, Moelis & Company, to approach some of the investors in Mr. Ackman’s fund, suggesting that his bet was dangerous and could cost them dearly.

To counteract the appeals Mr. Ackman had made to Latino groups, it also decided to significantly boost its spending on donations to such nonprofits, such as a $25,000 payment to the National Puerto Rican Coalition. Its president, Rafael A. Fantauzzi, was among the signers of a letter sent in February from a group that called itself Friends of Herbalife, which defended the company’s business practices.

Dueling Donations

In recent weeks, the back-and-forth donations by the two sides have generated something of a bidding war.

For example, a top executive at the United States Hispanic Leadership Institute informed a member of Mr. Ackman’s consulting team in late February that he had already received a $30,000 donation from Herbalife. He then solicited payment of the same amount from Pershing Square in exchange for the group remaining “neutral.”

“Are you able to match the $30K we have received from Herbalife?” Juan Andrade Jr., the president of the Institute, wrote to the consultant. “If Herbalife says neutrality is unacceptable and wants their money back, are you able to replace it?”

One of Mr. Ackman’s consultants at Dewey Square suggested in a note to Mr. Ackman’s lawyer that “I think it would be worthwhile to keep them neutral.” But a spokesman for Mr. Ackman said that the company refused to pay Mr. Andrade’s group, arguing that he is paying groups to help find victims, not for their allegiance to his cause.

For now Mr. Ackman shows no sign of backing down. In fact, he has just agreed to increase the payments for the victim identification effort.

Mr. Ackman said that even if he decides at some point in the future to shift his investments and financially back out of the fight with Herbalife, he is not going to give up on the campaign.

“I am going to personally pursue the Herbalife matter to the end of the earth — meaning I think this company is a criminal operation, I think they are harming people,” Mr. Ackman said. “This is something that angers me. I am going to pursue that.”

A version of this article appears in print on March 10, 2014, on page A1 of the New York edition with the headline: Hedge Fund Lobbies Hard to Back an Investment Bet.

“Aggressive (U.S. government) housing programs have not always helped the poor and middle class. The median net worth of American adults is now one of the lowest among developed nations—less than $45,000, according to the Credit Suisse Global Wealth Databook. That compares with approximately $220,000 in Australia, $142,000 in France and $54,000 in Greece.”, Michael Milken, WSJ, March 6, 2014

“Uniquely among nations, the U.S. gives mortgage borrowers a trifecta of benefits: extensive tax advantages, no recourse against the borrowers’ nonresidential assets if they walk away, and typically no protection for the lender if the borrower prepays the loan to get a lower rate.

These policies long seemed like a great deal for borrowers, but they wreaked havoc on the financial system. People with marginal credit were encouraged to finance more than 90% of the purchase price with 30-year mortgages. If interest rates later fell, they could refinance. If rates rose, they could congratulate themselves for locking in a low rate. If prices rose, they enjoyed all the upside and could tap the equity. If prices fell and they faced foreclosure, their other assets were protected because the loans were usually non-recourse.

Investments in quality education and improved health will do more to accelerate economic growth than excessive housing incentives. That will give everyone a better chance to achieve the real American dream.”, Michael Milken, WSJ March 6, 2014

“In my opinion, Mr. Milken’s arguments and facts in this WSJ OpEd are powerful. As a (former) leader in the mortgage industry for more than 25 years, I have always been troubled by the government’s (Fannie Mae, Freddie Mac, FHA, Ginnie Mae, etc.) overpowering role in establishing underwriting standards and other important terms in housing finance. I agree with Mr. Milken, the government needs to substantially reduce its role in supporting housing and mortgage finance, so that investment (which has been distorted towards housing for decades) can more properly flow to other important areas of the economy.”, Mike Perry, former Chairman and CEO, IndyMac Bank