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March 12, 2014  Wed 8:12 AM CT

When do you investigate the investigator? When is a smear campaign, even against some company easily smeared, regarded as manipulation and not just the dissemination of conceivably worthwhile information?

You have to wonder: Isn't that exactly what you have to ask about Bill Ackman and his Ahab-like pursuit of Herbalife, the supplements company that he has endlessly contended is nothing more than an illegal pyramid scheme that should be shut down by some authority, any authority, right now, this minute?

While Ackman contends that his motives are not about remuneration, I don't see anything about how he's willing to forego his limited partners' profits if Herbalife goes down, even as he has made it clear that he won't profit personally.

Of course we all know that a hedge fund is graded on performance, and I doubt that Ackman is about to exclude the Herbalife crusade from his performance figures.

So does he just get a free pass from his lobbying attempts to get an entity to shutter the company? Is that OK in the eyes of the law? Does the gravitas of the allegations, like the China news yesterday, make a difference?

This one's a surprisingly easy question to answer, because it's all up to the prosecutors. In other words, just like Ackman's trying to bring down Herbalife by trashing it as a pyramid scheme and hoping to get the attention of prosecutors and investigative agencies to crush the company, Herbalife must now hope that a New York Times investigation triggers the same kind of examination.

Should the Securities and Exchange Commission look into what Ackman's doing as a form of stock manipulation? That's up to the agency. I am sure that a law firm has checked off on all of Ackman's activities before he conducted them, but that might not matter to the commission.

Similarly, anyone in the Justice Department could take a hard look at it simply because when the Times does an investigation like this it often leads to that kind of inquiry. logoNow I am not saying that Ackman doesn't have every right to help bury a company that he genuinely believes is a Ponzi scheme. Anyone can crusade against anything under the First Amendment unless that person is creating a clear and present danger to the country. You could argue that Ackman's libeling the company but, again, he has every right to say what he wants. The company could, conceivably, sue for tortious interference of its business, but it hasn't chosen to go that route.

But as broad as the protection for free speech might be, the one thing that's always been very clear to me is that the securities laws do trump the First Amendment. In other words, you can't just say or do anything you like to take down a stock if you are short it.

The commission can investigate whether a person is trying to foment activity in a stock. It could investigate you for manipulation. Remember, the key word here is "investigate," not "prosecute." Obviously, the commission can go after anyone if it feels that there is a violation of the 10b5 clause of the 1934 Securities Exchange Act.

Will it happen? Again that's simply up to the enforcement division.

Will it matter? I think that it could, because the commission can always decide to bring an action, and an action has tended to precipitate a withdrawal of funds.

Could there be actual criminal activity? That depends on whether the SEC turns it over to Justice Department or whether Justice sees enough in the Times article to investigate.

Again, of course, I believe that Ackman must have gotten comfort from a high-powered law firm saying that everything he's done is kosher. That could matter if the commission brings Ackman in, but, again, that's at the discretion of the enforcement division. What matters is that the article creates exposure, and that's what is likely to draw the scrutiny of the regulators.

What do I think should happen? If the Times article is accurate, I don't see how this isn't some form of manipulation that is NOT protected by the First Amendment. But then again, I am not in that enforcement division, and I don't know if they think that Herbalife is such a bad actor that Ackman is simply doing a good deed and philanthropically motivated, given that he has agreed to waive any gains.

Cramer's charitable trust has no positions in the stocks mentioned.
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