Earlier this spring, Sheelah Kolhatkar of The New Yorker shed light on a long-fought battle between a hedge fund manager and the multilevel-marketing giant Herbalife Ltd. (HLF), characterizing the narrative as a “fight over the American Dream.” An increasing number of short-sellers are now joining the hedge fund manager, according to new data.

‘Good for America’

Back in 2011, William Ackman, founder of activist hedge fund Pershing Square Capital Management was approached by Christine Richard of boutique research firm Indago Group about a “short” opportunity in Los Angeles-based Herbalife. Pershing Square has long worked against the criticism of activist hedge funds as taking short-sighted measures such as job cuts and spinoffs to boost the bottom-line numbers and share prices of their portfolio companies. “This is going to to sound goofy,” Ackman told the Times reporter, “but we try to do things that we think are good for America.” The fund manager explained that in doing so, the firm works for the benefit of America but also for an “economic reason,” explaining, “It’s much easier, if you’re an activist, if you’re on the right side of things.”

Pershing Square is involved in short selling, betting that a company’s stock price will go down by borrowing shares and selling them on the open market, with the intention of returning the borrowed shares in the future when the stock price falls. Hoping for a firm’s share price to go down means short sellers are incentivized to expose problems in public companies. Ackman explains how Pershing Square views short selling as a “rare opportunity to profit” while also “providing a public service.” Plus, “it’s more interesting to fight evil than just to play with stock certificates.”

Betting Against Wall Street

Ackman’s interest in short selling didn’t start with Pershing Square. The fund manager made $1 billion by betting against MBIA Inc., calling the company on its high-risk subprime-mortgage debt before its shares crashed from $72 to $3 during the financial crisis of 2008.

In his multiyear crusade against Herbalife, Ackman worked closely beside the same former Bloomberg journalist who helped him expose MBIA: Christine Richard.

When Richard started investigating the multilevel-marketing company back in 2011, the firm reported more than $4 billion in sales generated by a network of individual salespeople rather than retail vendors. The researcher quickly identified what she viewed as an exploitative pyramid scheme, as a frenzy of participants spread false personal testimonies and derived a majority of compensation by recruiting other salespeople. Yet Richard faced a wall, as no specific statute outlaws pyramid schemes, and companies use previous Federal Trade Commission settlements to adjust their businesses in order to remain in the “legal zone.”

“Distributors were put on this treadmill of purchases in order to advance. It was so manipulative,” stated Richard, highlighting the high percentage of distributors coming from low-income, minority groups with no college education.

Waiting on Herbalife’s Catalyst

While Richard believed Herbalife was selling its products, such as its flagship Formula 1 nutrition shake, at an inflated price with implausible claims, she knew the company needed a catalyst to collapse, as multilevel-marketing outfits are hard to crack.

Yet that all changed with Herbalife’s first-quarter earnings in 2012, when founder and president of hedge fund Greenlight Capital, David Einhorn, asked Herbalife President Des Walsh about the percentage of sales the company generated outside of its distribution network. When Walsh was unable to give a number, “because we don’t have visibility to that level,” Herbalife’s stock started dipping. As Ackman assumed Einhorn would spearhead the short, he decided to commit 10% of Pershing Square’s capital, or about $1 billion at the time, to short the stock. Yet Ackman misread Einhorn’s plans to “carry the flag,” as Greenlight’s president completed the short, assuming Herbalife’s share price would rise again.

Herbalife and Trump

The New Yorker's Kolhatkar (Jan. 16, 2017) draws striking parallels between the packaged and simplified “American Dream” promised by Herbalife to its impoverished and desperate distribution network, and that of Donald Trump to the American people. “In the eyes of skeptics, the Herbalife ‘business opportunity’ bore some resemblance to the American economy as a whole,” wrote Kolhatkar. The top 1% of distributors receive almost 90% of financial rewards, while those at the bottom, with an 89% one-year dropout rate, struggle to make their way up the slippery slope. Trump, who has also won the favor of many of the same disenfranchised Americans, advertised his own multilevel marketing pitch for the short-lived Trump Network and as a spokesman for the ACN network, which ultimately faced fraud charges in at least two states.

Thereafter, Pershing Square “went to war” with Herbalife, first presenting in late 2012 at a conference in New York where Ackman pledged to donate his personal profits from the short to charity. While at first Herbalife’s stock dropped from $46 to $26, right where Pershing Square had shorted, the stock began to rise again. Well-known investor and Trump ally Carl Icahn publicly lashed out against Ackman and his firm’s “holier than thou” Herbalife short, ridiculing Ackman as a “crybaby.” Icahn then bought 13% of Herbalife, joined by a wave of investors. The narrative quickly became a campaign by Herbalife and its growing team of lobbyists and advisers against Ackman personally. While Pershing Square has moved ahead spending hundreds of thousands lobbying state senators, meeting with the Securities and Exchange Commission and working with activists, efforts have not been enough to bring about that necessary catalyst.

Despite Charges, Herbalife Remains Afloat

After a volatile past few years, an FTC investigation found Herbalife guilty of engaging in “deceptive and unlawful acts,” demanded the company to restructure and settle on a $200 million fine. Yet despite all this, the media had cast the settlement as a blow to Ackman, as Herbalife’s stock remains strong.

Included in the FTC settlement was a call for Herbalife to greatly transform its business so to curb its systematic manipulation and “rebrand” its distributors as retail customers (in exchange for a $25 product coupon). The New York Times indicated that the central question for Ackman now is whether Herbalife will choose to shrink in the U.S. where FTC orders don’t necessarily apply, deciding instead to build out its business abroad in large markets such as China.

Perhaps Ackman’s strife in taking down Herbalife also mirrors that of Trump’s staunch opponents in barring him from the presidency. As Kolhatkar puts it, “Ackman’s bet was that rational scrutiny would prevail over extravagant hope.” As with politics and business, which are now more convoluted and intertwined than ever, time will tell whether the leaders will maintain their position in light of mounting scrutiny. (See also: Ackman Maintains Short Bet on Herbalife.)

Shorts Are Up

Recently, there have been reports that short positions in Herbalife have increased, and the stock has been down so far in June. Business Insider first reported on the data which was compiled by S3 Partners, a financial analytics firm. The current short interest is at $1.8 billion, an increase of 55% since last year, suggesting that Ackman has gotten company. According to the reports, the short positions have yielded $106 million in mark-to-market profits from June 5-6, as the stock slipped 5.7%, and two-thirds of that belongs to Ackman.