The Man Helping Bill Ackman Investigate Herbalife In China
Forbes/April 1, 2014
By Nathan Vardi
When billionaire hedge fund manager William Ackman hosted a conference call in March to slam Herbalife’s business practices in China, he introduced a man who had previously operated largely in the hedge fund industry’s shadows. “Let me tell you who is here,” Ackman said at the start of a two-hour long call. “From OTG Research Group, OTG standing for on the ground, Aaron Smith-Levin, who is a principal with this boutique firm that assisted us in our work.”
Smith-Levin told investors on the conference call that he had conducted a project in China for Ackman’s Pershing Square hedge fund by sending OTG Research staff members who are citizens of mainland China to visit corporate owned Herbalife stores in Shanghai, Guangzhou and Hefei. Smith-Levin’s Chinese investigators attended Herbalife seminars that often included some 100 people and spoke one-on-one with 12 distributors outside of the stores. The evidence Smith-Levin presented on the conference call did not make Herbalife look good. “At OTG, we do on the ground investigative research for investment funds and we do projects both in the U.S. and internationally,” Smith-Levin said on the call. “We have done research on a number of multi-level marketing companies already, including Nu Skin.”
Working out of Clearwater, Fla., Smith-Levin’s intelligence business is devoted exclusively to catering to the needs of hedge funds thirsty for information about companies in which they have or are considering an investment position. In addition to doing work on multi-level marketing companies like Herbalife, Nu Skin Enterprises and Usana Health Sciences, Smith-Levin’s twitter account shows he has also been engaged in what is going on with online education company K12 and Green Mountain Coffee Roasters, stocks that have been hedge fund battlegrounds. Smith-Levin’s company is one of the more recent corporate intelligence firms to become popular with hedge fund managers. Hedge funds have been working with such firms for years. There are long-established companies that are relatively large and often do work for hedge funds, like Kroll or Business Intelligence Advisors, which employ former government prosecutors or CIA officers. One Israel-based firm that works for hedge funds was founded with the help of a former Mossad chief and is staffed by former members of the Israeli army’s secretive 8200 unit.
But Smith-Levin has no experience working for government spy or law enforcement agencies. Born in Montana, Smith-Levin is 33 and grew up in the Philadelphia area. He never went to college and eventually made his way down to Clearwater, where he worked at a consulting company and then a marketing company called Postcard Mania. Both businesses are associated with members of the Church of Scientology and Smith-Levin’s business title at both companies was executive establishment officer, a designation used by the Church of Scientology. It was through his connection to the Church of Scientology that Smith-Levin met Kurt Feshbach and learned about the hedge fund investigations game.
In 2009, Smith-Levin started working at Feshbach’s Clearwater-based business called Falcon Research. Feschbach was once one of the biggest short sellers on Wall Street. Together with his brothers, Joseph and Matthew, Kurt Feshbach ran a $1 billion hedge fund called Feshbach Partners in the 1980s and early 1990s out of Palo Alto, Calif., that prominently bet against the stocks of companies. In 1990, The New York Times called the Feshbach brothers “the country’s largest short seller.” The hedge fund eventually petered out and now Feshbach performs on-the-ground investigations of companies for other hedge funds. Feshbach, who declined to comment for this article, has long been a prominent member of the Church of Scientology. Smith-Levin said he was no longer involved with the Church of Scientology and declined to discuss it. But he was willing to talk about his work at OTG Research.
Smith-Levin went off on his own and started OTG Research last year. Ackman was one of Smith-Levin’s first big clients. For more than a year, Ackman has been promoting his Pershing Square hedge fund’s large short position against Herbalife, which Ackman has called a pyramid scheme. Before Smith-Levin spoke on the Pershing Square conference call in March, Ackman made sure to tell those listening to the call that Smith-Levin had done the work that led to a Citron Research report that has been credited by some for sparking an investigation of Nu Skin by Chinese regulators. “Quick question for you on Nu Skin, was that work, work that led to the Citron Research report and ultimately the investigation of Nu Skin in China?” Ackman asked Smith-Levin on the call. “Yeah, that is correct,” replied Smith-Levin.
In August 2012, Citron Research, which is run by short seller Andrew Left, released a report claiming that “Citron is unraveling the big lies at Nu Skin.” The Citron report claimed that Nu Skin was operating an illegal MLM in China and included details that “operatives” in China had obtained about Nu Skin. Left said in an interview that Smith-Levin was part of a team at Falcon Research that did the work leading to the Citron Report on Nu Skin. Smith-Levin says he was prohibited from mentioning Falcon Research’s role in the report on the Pershing Square conference call because of agreements he had with his previous employer. In January 2014, the Communist Party’s People’s Daily newspaper said that Nu Skin’s practices were like “brainwashing,” leading Chinese regulators to say they were investigating Nu Skin and causing shares of Nu Skin to tumble. Shares of Herbalife also fell at the time. In 2012, Citron Research also released a report criticizing the business practices of another multi-level marketing company, Usana Health Sciences, in China. In that report, Citron said “Citron’s investigators signed up as Usana reps to penetrate the Usana pyramid,” adding that prospective Usana representatives from mainland China travel to Hong Kong, where they are instructed on how to open Hong Kong Bank accounts, using a proxy address, and direct compensation to circumvent China’s anti pyramid scheme law. Left said that Citron’s report on Usana was also based on work done at Falcon Research. “The projects we do are surgical, there is an exact company you are looking at, an exact thesis in mind and your goal is to prove or disprove what is going on here,” said Smith-Levin in an interview. “I have a really good network in China that has done work for me there for quite some time.”
While his company is all about being an on the ground source of information for hedge funds, Smith-Levin has never ventured outside the U.S. except for one quick business trip to Toronto. He says that for international work he relies on local employees and contractors that he trains to perform certain kinds of tasks. One of the biggest requirements is that the people who do the work for him speak English so he can communicate with them. Smith-Levin says he has done this kind of work for hedge funds in the U.S. as well as countries like Russia, Mexico, Canada, Croatia, India and Italy. “I can get it done anywhere,” he says.
For its hedge fund clients, OTG Research might do channel checks and look at retail inventory. In another kind of investigation, it might track down sources through a combination of online and phone work. For example, Smith-Levin says if he is looking at a pharmaceutical company making certain market-demand claims for a drug in late-stage trials, he will direct his staff to contact 50 to 100 doctors who could potentially prescribe the drug. Other projects require Freedom of Information Act requests in an attempt to get government data. When Smith-Levin was investigating K12, which manages online charter schools in some 30 states, he sent research staff to the monthly public board meetings for the schools K12 manages to learn what issues the schools were facing. Smith-Levin’s people tracked down former teachers, students and parents from the schools to learn what was driving enrollment and student retention. He also found ways to track monthly enrollment at schools and applications for new charter schools that were slated to use K12 as the management company. Projects like investigating Herbalife’s operations in China require just straight up field work. “Not many investment funds, or research companies for that matter, have the time, patience, resources or the network to get this kind of work done anywhere in the world,” Smith-Levin says. “There can be a massive amount of logistics involved. Dealing with all of that is part of our niche.”
Still, Ackman’s very public bet against Herbalife made OTG’s work for Pershing Square slightly unusual for Smith-Levin because he knew the details of Ackman’s position in the stock—he is massively short. “It has a potential to bias the research, I have my own checks and balances,” Smith-Levin says. At OTG, Smith-Levin says his firm has no special CIA-like expertise or advantage to getting information. But if an investment fund wants to know what is going on at Chipotle or Lululemon, he will get people into the stores to measure body traffic, inventory or what is happening with discounting. “The trick is not just doing this work, but in doing it at 20 stores across the country simultaneously week after week, month after month. Investors don’t want to deal with that mess,” he says.
They also don’t want to get into trouble. Federal prosecutors and regulators have in recent years brought many insider trading cases against portfolio managers and analysts at hedge funds, as well as third-party consultants. Many of these cases focused on expert-network services that put hedge fund managers together with individuals who work in industries or companies. The information that hedge funds obtained and traded on as a result of these expert-networks has sometimes been deemed material non-public information that cannot be traded on under the law. Corporate intelligence firms have not been involved in the recent barrage of insider-trading cases and Smith-Levin says he works carefully with lawyers and compliance experts before engaging in a new project.
In the case of Herbalife, for example, Smith-Levin said that during OTG Research’s investigation in China his staff audio recorded every introductory seminar they attended and one-on-one meetings conducted with distributors. Smith-Levin said he checked with lawyers familiar with China that such recordings were made in accordance with Chinese law. “We know what legally we can and can’t do, which is why we never speak with anyone who is a current employee, we certainly never speak with a former employee who has some sort of NDA in place,” he says. “We are very well versed on what is material non-public information and what is not and whenever there is a doubt I don’t go flinging data to the portfolio manager. There is very good compliance.”
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