Ackman Says Icahn Fight Over $4.5 Million Preceded $1 Billion Herbalife Loss

In Ackman's telling, he had finally won. After years chasing Carl Icahn, the veteran investor, through the courts over $4.5 million, the phone rang. On the line was Icahn with praise: Bill, congratulations.

Ackman, the hedge fund manager who runs Pershing Square, answered with what he later described as some fairly strong words. He said Icahn did not like that.

In Ackman's account, that exchange connects a modest property deal to a far larger loss years later. A disagreement over $4.5 million, stretched across six or seven years of appeals, was followed by a $1 billion loss on a bet against Herbalife, a nutritional products company.

The start was a 1998 sale. Ackman said he sold Icahn a stake in a real estate business called Hallward Realty Partners. The price was set well above recent trading levels, but Ackman believed the underlying assets were worth still more.

As part of the sale, Ackman said he received what Icahn called schmuck insurance. If Icahn sold or transferred the stake within three years at a premium, Ackman would receive half of Icahn's profit above a 10 percent return. Ackman said the paper was short, eight pages, with a formula and a detailed definition of a sale or transfer, because Icahn was known for this kind of fight.

Ackman said Icahn then bid for the whole company and lost. Another buyer bought it, and Ackman said Icahn sold his stake within two years. By Ackman's calculation, that sale triggered a $4.5 million payment. He said Icahn refused to pay, so he sued and won.

The win did not end the fight, Ackman said. He said Icahn would wait until day 179 of a 180-day appeal period and then appeal. He appealed again after losing, and Ackman said the fight went as far as the nation's highest court. Ackman said the process lasted six or seven years, with interest building at 9 percent under their agreement.

When the appeals finally failed, Ackman said, Icahn called to congratulate him. Ackman answered sharply. Ackman said the debt carried 9 percent interest, so the delay increased what was owed.

Then, Ackman said, Icahn sat and waited for his chance. That chance came when Pershing Square sold Herbalife shares short. In a short sale, an investor borrows shares and sells them, hoping to buy them back later at a lower price and keep the difference. The bet loses money if the price rises instead.

Ackman said Icahn, without studying the business, took the other side and moved to squeeze the short sellers by pushing the price up. It worked, Ackman said, very effectively. Ackman later confirmed the result: a $1 billion loss.

Ackman presents the two events as linked. In his telling, a $4.5 million court fight was followed by a loss more than 200 times as large.