Bill Ackman has little to fear from the Herbalife stock-manipulation investigation, say experts - at least for now

Hedge fund manager Bill Ackman has little to fear from a government investigation into Herbalife stock manipulation, say legal experts - at least based on what has been reported about the investigation so far.

To hold Ackman liable for Herbalife stock manipulation, these experts say, prosecutors would have to prove not only that Herbalife's stock was illegally manipulated but that Ackman and his firm, Pershing Square, knew about the illegal acts and sanctioned them.

Investigators are following a standard playbook in the Herbalife investigation, experts say. They are starting with the "little fish" with the aim of working their way up to the "big fish" at the top. But so far, there is no indication that the big fish, Ackman and his colleagues at Pershing, knew what some of the little fish hired by Pershing's consultants were doing, much less colluded with them.

Investigators are reportedly in the early stages of a probe into Ackman's billion dollar short of Herbalife.

A grand jury has subpoenaed people and documents related to Ackman's investment in an effort to determine whether or not to pursue a case.

One of the people who received a subpoena by a grand jury in New York late last month was a Connecticut-based hairstylist named Israel Alvarez, the Hartford Courant reported, citing an unnamed attorney. According to the Courant, Alvarez said he can't discuss the matter.

Typically, in an investigation like this, it starts small and works its way to the top. But unless the people at the top were involved in the manipulation scheme, they can't be held liable for it.

Ackman has loudly, repeatedly, vigorously proclaimed his innocence.

"Market manipulation is when someone intentionally makes false or misleading statements about a company for the purpose of driving down the stock or driving up the stock. I have made only truthful statements backed up by enormous research," Ackman told Bloomberg TV.

Ackman has also said that he has had no contact with the FBI or anyone else involved in an investigation into his bet against Herbalife, a multi-level marketer that sells nutritional shakes and supplements. It's Ackman's belief that the company operates as an illegal "pyramid scheme" that targets lower-income people. He's betting the stock goes to $0.

But, what if Ackman is wrong about Herbalife? What if he made some statements that were inaccurate? What's the worst that could happen? Legal experts told us the following.

At the crux of an investigation into market manipulation is not just whether someone did something that illegally affected a stock's value, but whether anyone else - like a hedge fund manager - colluded with him or her to make that happen.

At this point, details about the investigation remain murky, and a representative in the US Attorney's office in the Southern District of New York would not comment.

Without either proof or irrefutable testimony, it will be to be difficult to move forward with a market manipulation case, experts say. However, looking back at US Attorney Preet Bharara's successful prosecution of Galleon Group founder Raj Rajaratnam, legal experts and sources see parallels between the insider trading case and a market manipulation investigation.

The worst-case scenario for Ackman and Pershing is much more than a headache, although Ackman is likely prepared for this.

The US Attorneys of the Southern District of New York successfully pursued an insider trading case against Rajaratnam, and, separately, SAC Capital traders. A source said Bharara has displayed a tendency to work cases "up," offering less-senior employees deals in exchange for testimony.

Ackman, for his part, recently hired a former US attorney who worked securities cases in New York. He already has a half-dozen lawyers working at Pershing Square, also.

"It's not easy to make a market manipulation case," says one lawyer who asked to remain anonymous, and has previously battled US Attorney Preet Bharara in court. "You're inevitably going to have to have a witness."

Absent of that witness, there is little reason to expect that Bill Ackman or Pershing even has anything to sweat.

In previous interviews, Ackman has stated no one currently or formerly employed by Pershing Square has been subpoenaed in relation to any ongoing investigation. It suggests that, if any government arm is looking into trades, an investigation is only in early innings, and not likely to yield anything any time soon, one legal source said.

Prosecutors combing through evidence chasing a market manipulation case have their work cut out with them - particularly when it comes to short-sellers.

John Coffee, a professor at Columbia Law School, notes that while pump-and-dump schemes are more easily identified, prosecutors would have to prove Ackman (and not just a third party, or employee) willfully aimed to artificially drive the price of Herbalife shares down.

"There has to be some evidence he tried to push the stock beneath what he thought it was worth," Coffee said.

Given that Ackman has repeatedly and publicly said Herbalife stock is headed to $0, that could prove difficult.

If a grand jury investigation really does proceed, it will have to bring forth a charge against someone, anyone - especially if the inquiry really is aimed at Ackman.

Another possibility for an investigation is that it will, instead of going to criminal court, head to civil court after being handed off to the Securities and Exchange Commission. While the US Attorney's Office failed to put Steve Cohen behind bars, they did manage to put a serious dent in his abstract art budget, when the SEC later slapped him for a fine of about $1.8 billion.

One legal source privately chided the SEC for a perceived unwillingness to take a case that appeared to be anything less than "a slam dunk," but Coffee points out that the burden of proof is different when prosecuting a civil case.

"A civil case would be easier [to prove] than a criminal case," Coffee said.

The lawyer who spoke with Business Insider on background said that beginning the probe with a hairdresser signals the investigation is not a "top down case," and instead, aims to flip witnesses against higher-value targets.

Business Insider reached out to Alvarez, the hairdresser, but he did not respond to requests for comment.

"This is the way Preet operates, but it's also the way a lot of prosecutors operate," the source said.