Inside Wall Street’s Greatest Feud: Icahn vs. Ackman

Icahn, however, wanted to talk about a stock he professes to be bullish about: Herbalife, the nutritional supplements company that recently reached a $200 million settlement with the Federal Trade Commission over what the agency alleged were fraudulent practices. Icahn now has a 21% stake in the company, and five of his men serve on its board. That’s only part of the story, of course. When it comes to Herbalife—at least, in the mind of investors—Icahn’s financial ambitions are wrapped inside his high-profile feud with hedge-fund manager Bill Ackman, who has made a massive bet that Herbalife shares will collapse.

There’ve been plenty of rounds in the Icahn vs. Ackman steel-cage bout and the most recent occurred last month, when the Wall Street Journal reported that Icahn had asked Jefferies, his longtime banker, to shop his shares, and Ackman promptly appeared on CNBC to gloat about it.

“I am telling you that I’m not just playing games buying the stock,” Icahn said at the Delivering Alpha conference. He then upped the ante. “I’ve gone to the FTC to get accelerated treatment for the right to go to 50%” in Herbalife, he said. Indeed, Icahn intimated he might go further even than that. Prompted by CNBC’s Scott Wapner, who was interviewing him, the investor said he would “consider” a tender offer to buy the whole company. Icahn quickly admitted, “I don’t have any stated intention to do it….it’s something I’ve thought about. Doesn’t mean I will. And I think there are other people that might. I think Herbalife is certainly a candidate to go private.”

Few activist investors signal their intent to increase their stake in a particular company or buy it outright. After all, such news would only make their target more expensive. But a tender offer, Icahn said at the Pierre, would create a massive short squeeze in Herbalife. And the biggest short in Herbalife, of course, is Ackman.

“Ackman loves to think I’m going away,” Icahn said. He spent half of the interview bolstering the notion he was sticking around. But Ackman’s views, at least on Icahn’s attempt to bail out of Herbalife, weren’t mere speculation.

Bill Ackman Gets a Text

On Thursday evening, Aug. 4, as Ackman was vacationing in Venice, the hedge fund billionaire received an unexpected text. It was just after midnight in Italy and the sender asked if Ackman could meet him in New York City the next day.

The text was from a senior Jefferies executive. Ackman didn’t know the man well, and hadn’t done business with Jefferies in the past. But he did know someone who had: Carl Icahn. Ackman was planning to return to New York the next day on his Gulfstream and spend the weekend at his Bridgehampton home. He asked, “Can it wait until next week?” The banker didn’t think so, insisting on a phone call instead.

It is now known that Jefferies was looking for a buyer for Icahn’s stake this summer, and that Icahn may have been open to selling. Also known is that Ackman was contacted, and considered buying part of Icahn’s stake. But most of the details of how the events unfolded have never been reported. This is a portrait of a series of spy-vs.-spy investing machinations—infused with a potent dose of ego, contempt, and rivalry—that provides a fascinating window into how two billionaire investors operate. (Icahn did not return calls seeking comment from Fortune, but he has publicly asserted that he never gave Jefferies an order to sell his shares.)

In the end, despite at least a month of scouring Wall Street, and hamstrung by legal restrictions (more on that later), the best bid Jefferies was able to get Icahn was for a little more than 11 million, of Icahn’s 17 million, Herbalife (HLF) shares at a price of $51.50 a share—about $10 south of where shares of Herbalife were trading on the open market at the time, sources familiar with the bid said. (People close to Jefferies put the figure a few dollars higher.) It didn’t take Icahn long to reject the bid.

On Tuesday at the Delivering Alpha Conference, when asked whether he had been considering selling his stake, Icahn smiled and asked for the next question.

The Long Running Feud

The mutual antipathy between Icahn and Ackman is the stuff of Wall Street legend, a longstanding on-again, off-again conflict between two pugnacious billionaires, the 80-year old lion and his silver-haired 50-year-old antagonist. It began back in 2003, when Ackman sold Icahn his hedge fund’s stake in a publicly traded real estate company, with the agreement that Ackman’s investors would get a slice of the upside. But after Icahn flipped the company for a 75% profit, he declined to share the gains. Ackman sued, and animosity has followed ever since. (Ackman was awarded a judgment that ultimately came to $9 million with interest.)

For more on Herbalife and Ackman, read:
• The Siege of Herbalife
• The Real Winners and Losers in the Herbalife-Bill Ackman War
• Bill Ackman Says Fidelity Dumping Herbalife Shares Is a Sign

The duo’s bitter feud exploded in an infamous expletive-laden name-calling match on CNBC in 2013. A year later they appeared on CNBC together, apparently making up. Last week, though, Icahn denied giving Ackman what looked like a hug. “I think I tripped on the steps,” Icahn retorted.

Icahn’s huge investment in Herbalife, which he took soon after Ackman announced his short position, was widely seen as revenge, and so far a successful one, against Ackman. After the FTC opened its investigation of Herbalife in 2014, Icahn became even more active, eventually putting five people on Herbalife’s board and shepherding the company through the probe, which ended with the July 15 settlement.

Scott Wapner interviews Icahn, and Ackman at the CNBC Institutional Investor Delivering Alpha Conference in New York in 2014.Heidi Gutman — CNBC/NBCU Photo Bank via Getty Images

The FTC settlement imposed changes that it said would force Herbalife, which neither admitted nor denied liability, to restructure its U.S. business practices. The settlement also put the company under a federal monitor for seven years.

Icahn and Herbalife nonetheless claimed victory. Shortly before the FTC officially announced the settlement, Icahn issued a press release saying the FTC had determined Herbalife was not a pyramid scheme. FTC Chairwoman Edith Ramirez took issue with Icahn’s statement, saying it was “inaccurate” to say the FTC had found that Herbalife was “not a pyramid.” But the FTC would not go so far as to say that it was one, either.

At first, Herbalife maintained that the deal with the Feds would not force major changes to its business. Michael Johnson, Herbalife’s CEO, initially called the settlement “an acknowledgment that our business model is sound and underscores our confidence in our ability to move forward successfully.” But in filings since then, Herbalife has warned that “there is no guarantee that we can fully comply with the Consent Order” and that “the impact of the Consent Order on our business could be significant.”

The majority of investors seemed to side with Herbalife. After the settlement news broke, the stock soared, closing the day up 9% at $65.25.

Ackman was undaunted. In his quarterly investor presentation on July 20, he claimed victory as well. The FTC agreed with substantially all of his criticisms of the company, Ackman contended. Some investors seemed to buy his argument. Following the settlement, short interest, a gauge of how many investors are betting a stock will drop, spiked. It’s now more than 27 million shares, its highest level since July 2014.

Ackman Is All In

Following the inquiry from the Jefferies banker in early August, Ackman dashed off an email to his investment team: “My guess is he’s calling about Icahn, who wants to sell his shares.” (Ackman spoke with Fortune for this article, but would not say whom he talked to at Jefferies. But other investors with knowledge of Icahn’s relationship with Jefferies say Richard Handler, the firm’s CEO, is likely the only person Icahn would trust with such a sensitive matter. For their parts, both Handler and Jefferies declined to comment for this story. Herbalife did not respond to calls seeking comment.)

(For more on Richard Handler, read Wall Street CEO Turns Down $2.2 Million Dollar Bonus He Didn’t Deserve)

For all of the animosity between Ackman and Icahn, the stars had aligned in such way that it just might make sense for one to buy shares from the other. Herbalife had reported better-than-expected earnings on Aug. 3, the day before the banker called Ackman, lifting the stock—and increasing the losses for Ackman. The hedge fund manager was sure if news that Icahn was exiting the stock got out, Herbalife’s shares would drop, erasing Ackman’s losses.

Ackman speaks to the audience in New York, July 22, 2014.Eduardo Munoz — Reuters

As for Icahn, the timing was also good. Normally, sales of securities involve a fair amount of red tape. But there’s an exception, called Rule 144, that allows insiders with big positions like Icahn to sell quietly, and with little hoopla, if certain conditions are met. In this case, the company’s July 15 FTC settlement had caused the volume of trading in its shares to spike, hitting an SEC threshold that would permit Icahn to sell his entire stake within four weeks using an unregistered block trade, rather than a formal registered offering. (The latter would require Herbalife’s approval and involvement.) There was one additional wrinkle: Since Icahn is an insider (members of his firm sit on Herbalife’s board), he had to wait until after the earnings announcement to sell. That meant Icahn had an eight-day window—from Aug. 4 to Aug. 12—to sell.

Ackman seemed interested—even excited. He didn’t wait to get off the plane. As soon as it landed at the West Hampton airport in Long Island, he called the Jefferies banker, who confirmed Ackman’s suspicions. The banker was trying to put together a bid to sell Icahn’s 17 million Herbalife shares. Was Ackman interested? “I’m not saying it’s going to happen. One never knows with Carl,” the banker cautioned, saying Icahn could change his mind about selling at any time.

Becoming a buyer of Herbalife’s shares might seem surprising for Ackman, who has vowed to continue his fight against Herbalife until the company is shut down. But Ackman had actually considered helping Icahn sell his stake before, thinking it would hasten Herbalife’s demise. Ackman told the banker he wasn’t going to stop betting against Herbalife’s stock. Ackman’s firm, Pershing Square, has wagered roughly $1.2 billion that the stock would fall, and through July, Ackman’s investors were down at least $400 million. “But if you need me to get a trade done, I’ll help get a trade done,” he told the Jefferies executive, saying he would take a minor position if others could be found to take the rest.

“It has to be freely tradable,” Ackman added. He had his own plan: He would sell the stock immediately so that his short position would profit as news of Icahn’s selling was reported.

Icahn Gives the Go Ahead

Icahn’s hoped-for stock sale was never going to be an easy task. He wanted to unload, in one fell swoop, 17 million shares, worth more than $1.1 billion at the time. Add in the fact that the buyer would be acquiring shares of a controversial company that had agreed to be under the eye of the government for the next seven years, and the task was even more daunting. Nonetheless, Jefferies immediately started contacting potential buyers.

The legal technicalities of such a deal between an insider, Icahn, and a short-seller, Ackman, were extra-tricky. After calling his lawyer, Ackman realized he was limited to buying no more than $240 million, or about 20% of Icahn’s stake, to avoid triggering a Hart-Scott-Rodino antitrust filing, which could delay his buying the stock for a month or more. That time frame was outside of Icahn’s window for selling the stake.

An area of the Herbalife corporate office in Los Angeles on May 11, 2016.Damian Dovarganes — AP

Still, Ackman kept talking with Jefferies. The bank was attempting to attract other buyers, and thought a deal would get done in the low $60s per share, not far from where the stock was trading. Jefferies was even willing to take some of the shares itself to get the deal done. Ackman says he was skeptical that Jefferies would find a buyer. Surely, others would guess that Icahn’s exit would cause the stock to drop, and they would not want to buy in before that.

For his part, Icahn had long maintained that he could sell when he wanted to, and not have to take much of a, or any, discount. Icahn “has never had trouble selling large blocks,” says one source close to him. Icahn, this source adds, even maintained that Herbalife’s shares could actually rise when he sold. Without him as an investor, Icahn argued in a sort of circular logic, Herbalife could simply trade on its fundamentals. No more worrying about what would happen if he sold. (Icahn also enlisted UBS bankers for help in marketing the shares.)

Despite the efforts, though, Jefferies couldn’t sell the shares by Aug. 12, the close of Icahn’s selling window. That didn’t end the process, however. Jefferies kept right on beating the bushes for buyers. Icahn apparently believed he could persuade Herbalife to approve his stock sale, and assist him in an official offering.

Finally, on Aug. 25, Jefferies was able to put together a bid. A group of institutional investors were willing to pay $51.50 a share for more than 11 million of Icahn’s Herbalife shares, according to individuals familiar with the situation. Ackman was not part of the group.

That bid would be about 17% less than the near $62 per share Herbalife was trading at—a discount traders say is almost unheard of in such block sales. Icahn would have netted a profit of about $167 million, given that he had paid an average of $37 per share. But that would have also left Icahn holding almost 6 million shares for which he paid a little more than $200 million and vulnerable if the news of his sale did in the end cause Herbalife’s shares to fall. Icahn’s response: no deal.

Ackman Goes on the Attack

On the morning of Aug. 26 the Wall Street Journal published an article detailing Icahn’s attempt to unload his Herbalife stake. The Journal called Icahn’s move “surprising” and the story temporarily sent shares into a tailspin.

Ackman was ready to pounce. Within an hour of the story breaking, Ackman was on CNBC’s Squawk Box confirming some of the details of Icahn’s attempt to sell. He tried to butter up Icahn with praise. “It’s a smart trade, and I’m very happy for Carl to make a profit,” said Ackman, still hoping that his rival might sell.

Ackman speculated that Icahn wanted out because he has already made “a bunch of money” and would no longer have to worry about what happens next at Herbalife. Of course, Ackman didn’t only compliment Icahn; he couldn’t resist a dig or two: “I think he knows this thing is toast.” Listing several other big shareholders who have sold, including Dan Loeb and George Soros, Ackman noted “Carl’s the last man standing, and if he’s gone the whole confidence thing blows up.” As Ackman was talking, the stock was sinking, falling some 8% to $57 early that morning.

Icahn quickly fired back. Within hours, he issued a press release saying not only was he not selling, he had been buying. Starting mid-morning, he had picked up an additional 2.3 million Herbalife shares. “I have never given Jefferies an order to sell any of our Herbalife shares,” Icahn said in the statement.

Icahn also reiterated his support of the company and lambasted an “obsessed” Ackman for daring to trying to figure out what was inside his head. As Icahn put it in an SEC filing, “It amazes me that a guy who hasn’t any knowledge of my internal investment thinking believes he is in a position to go on television to tell the world what I am thinking! Amazing! He has no right to do so, and even worse, I’m sure his unsubstantiated, obsessive comments, especially about Herbalife, have cost investors a great deal of money over the last few years.”

No Exit

When asked about such statements, Ackman tells Fortune: “Icahn owns 21% of a company the FTC has found to be violating the law and ripping off consumers. He has tried to sell and failed. I think the facts speak for themselves.”

Ackman, who has unloaded big blocks through such sales, also says you don’t officially give the sell order until you get a bid you like. “Icahn chose his words very carefully,” says Ackman. Meanwhile, Icahn has continued buying Herbalife shares, adding 306,846 more at an average price of $60.39. With a breakeven price of about $40 per share now, Icahn has a paper gain of around $400 million on his 19.6 million-share stake. Realizing those profits, however, appears as elusive as ever.

And as the stock dipped below $60 again on Tuesday last week, Icahn talked up the stock by saying he had asked the FTC for permission to buy up to 50% of the shares. His comments, made after trading closed, ended up boosting the stock by 4% the next day. Others took a jaundiced view. “I suspect all of this is some kind of giant face-saving ruse,” says Walter Kelley, a former federal judge who is now a partner at law firm Hausfeld, specializing in antitrust litigation.

Some Herbalife bulls, meanwhile, have flipped sides. Hedge fund manager Robert Chapman of Chapman Capital says he recently threw in the towel. Instead of buying shares, he is now betting against them. “The bottom line is you know two things for sure,” says Chapman. “One, Herbalife’s U.S. business is in trouble, and two, Carl Icahn wanted to sell 17 million shares. That is enough for me.”