The attack raises two important questions for society. One is: Is he right about Herbalife being a pyramid scheme? That’s important because if he is, all but a handful of companies in the now $34.5 billion MLM industry, affecting 18 million distributors, are almost certainly pyramid schemes as well. ... The second and perhaps bigger question is: What if Ackman is wrong? One man’s dragon slayer is another man’s vigilante. Herbalife has had to spend almost $90 million defending against Ackman’s attack so far, according to its SEC filings, while its executives, employees, and distributors have all been villainized, if not defamed. While activist investing was already controversial, Ackman has taken it into new terrain. Is it sound public policy to have freelance, for-profit billionaire regulators roaming the landscape, no matter how well-intentioned? ... There is no federal statute defining “pyramid scheme.” For years MLM critics have begged the FTC to draw some bright-line rules—but in vain. Such schemes are usually prosecuted by the FTC as an “unfair or deceptive act or practice.” If an MLM or its distributors have merely made some misleading claims, the FTC may fine the company and let it live to see another day. But if the commission finds that an MLM is a pyramid scheme—which is considered inherently deceptive—it must shut it down. ... The best definition of pyramid scheme emerged from a 1975 case in which the FTC shuttered a cosmetics marketer called Koscot Interplanetary. The key feature is that a pyramid scheme pays its distributors rewards “for recruiting other participants into the program … which are unrelated to sale of the product to ultimate users.” ... Few MLMs are so foolish as to do that. Instead, they typically pay a distributor—as Herbalife does—based on the products he orders, and on the products ordered by his first three levels of recruits, i.e., his direct recruits, his recruits’ recruits, and his recruits’ recruits’ recruits. ... While judges and economists have proposed other definitions, most boil down to this: The more genuine a company’s product, and the more genuine the consumer demand for it, the less likely it is that the company is a pyramid scheme.
Xu had consistently produced returns that were truly unbelievable: His worst-performing fund had grown by nearly 800 percent in five years. He had also survived countless corruption investigations, market falls, purges and other scares. Yet even as his legend grew, Xu remained intensely secretive. ... That equilibrium seemed certain to crumble on June 12, when the Chinese stock market began a free-fall. In the span of three weeks, the market lost a third of its value. ... Unlike in the United States, where institutional investors dominate the market, China’s 200 million mom-and-pop investors make roughly 85 percent of all trades. ... “All these small individual investors are called ‘chives’ in the market,” says Hong Yan, a finance professor at the Shanghai Advanced Institute of Finance. “They get cut over and over again, but they come back every time, like little weeds.” ... By the late 1990s, he became the unofficial captain of a group popularly known as the Ningbo Death Squad. The squad made its reputation by manipulating cheap, relatively unknown stocks, which in the Chinese market are not allowed to rise or fall more than 10 percent in a single trading day. To game the system, the squad devised a strategy: Out of nowhere, it would place a gigantic order for a chosen stock. Other traders, seeing the sudden upward movement in price, would flood in, pushing the stock toward its daily 10-percent limit. Once the stock hit the limit on the first day, the momentum became self-perpetuating. Eager traders rushed to buy the stock as soon as the market opened the next day, propelling it toward the 10-percent limit once again. The movement generated its own publicity and easy profits. After a few days, the squad would sell out, and the stock would tumble back to a lower price as other traders followed. ... “Xu Xiang is always trading,” a longtime friend said. “If he’s not trading, he’s thinking about trading.” ... Nearly every one of the experts I spoke with repeated some version of the same rumor: that Xu was less a financial genius than a puppet of even larger powers. Most often, this explanation was deployed in response to a question that had been troubling observers of the Chinese financial world for months: Why hadn’t Xu stopped earlier? Rumors of his illegal methods were an open secret, and he had already built the most successful hedge fund in China, reaping billions of dollars in personal wealth in the process. Why keep going and risk a reckoning?
The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent. ... Few firms are the subject of so much fascination, rumor, or speculation. Everyone has heard of Renaissance; almost no one knows what goes on inside. ... For outsiders, the mystery of mysteries is how Medallion has managed to pump out annualized returns of almost 80 percent a year, before fees. ... Competitors have identified some likely reasons for the fund’s success, though. Renaissance’s computers are some of the world’s most powerful, for one. Its employees have more—and better—data. They’ve found more signals on which to base their predictions and have better models for allocating capital. They also pay close attention to the cost of trades and to how their own trading moves the markets. ... At their core, such models usually fall into one of two camps, trend-following or mean-reversion. ... “You need to build a system that is layered and layered,” Simons said in a 2000 interview with Institutional Investor, explaining some of the philosophy behind the firm and the Medallion model. “And with each new idea, you have to determine: Is this really new, or is this somehow embedded in what we’ve done already?”
Litigation funding has a checkered past. For centuries it was a crime to fund someone else’s lawsuit, under ancient English “champerty and maintenance” laws created to stop noblemen from meddling in each other’s quarrels. ... By the 20th century, legal and accountancy firms started buying and selling insurance and bankruptcy claims informally, but champerty rules remained a barrier to trading in legal claims. Then, during the late 1990s and early 2000s, a string of British and Australian court rulings held that it wasn’t a bad thing for claimants with legitimate grievances to get external financial help, even if the helpers were out to make a profit. ... Although litigation funding remained impossible in some jurisdictions, it spread quickly in others. Early investors in lawsuits were mostly opportunistic hedge funds and wealthy individuals whose involvement was private and confidential. It was a good deal for litigants, who no longer had to worry about spiraling legal costs; for lawyers, who got paid no matter the outcome; and for the funders, who could get back multiple times what they paid for a share of the suit if it succeeded. ... True to the maxim that lawyers make money in good times and bad, litigation funding is impervious to recessions and other economic shocks. Managed well, litigation funds can offer returns that are hard to find anywhere else.
Founded in 2005, the Brooklyn-based online marketplace hosts 1.8 million small merchants who sell vintage and handmade goods and takes a cut of every transaction. Its sellers traffic in the one-off items usually found in antique stores and boutiques: pineapple-motif throw pillows, succulent-shaped jewelry, tote bags with birds on them. The fast-growing market is often mocked as a kind of twee EBay—TweeBay, if you will. But by early 2015 the company was selling close to $2 billion in merchandise a year and generating revenue of $196 million—figures that had more than doubled from two years earlier. ... Benefit corporations are structured so managers and board members have a legal obligation to worry about more than just their fiduciary duty to shareholders. A public-benefit corporation can get sued for wasting shareholder money just like a normal public company can, but it can also be sued for being a poor steward of the environment or for failing to pay a fair wage.