Investor Says He Bought Stock and Didn't Know It
By FLOYD NORRIS [NYT]
July 30, 2003
How can anyone invest tens of millions of dollars, over a period of months, by mistake? And how can that person fail to notice that he owns three-quarters of the stock in one public company, and a third of the stock in another?
Those are the questions that investors have for Scott R. Sacane, a Connecticut money manager who has disclosed such purchases in recent days. The purchases left funds he manages owning a 33 percent stake of Esperion Therapeutics and 78.5 percent of Aksys Ltd.
Mr. Sacane conceded in his filings that he should have disclosed his holdings much earlier. In April, he had promised to stop buying Aksys shares.
For investors, the bad news is that large portions of the shares in each company are held by an investor who said he did not intend to buy them, creating a potential overhang of shares whose sale could devastate the share prices. They have fallen sharply since news of his holdings came out in recent days.
In filings with the Securities and Exchange Commission, Mr. Sacane, who runs Duras Capital Management of Norwalk, Conn., said he had acquired the shares inadvertently.
The filings did not offer much in the way of additional information on how the errors occurred. But they made clear that they had happened over an extended period.
"It's unbelievable," said William C. Dow, the chief executive of Aksys, adding that Mr. Sacane told him that three layers of software had somehow failed, leaving him ignorant of the purchases.
"He just wanted to assure us there was a breakdown of his internal controls," Mr. Dow said, adding that he found it hard to believe that no one at Duras had noticed what was happening.
Mr. Sacane told Aksys, a maker of a machine for home kidney treatment, of his continued purchases on Thursday after the stock market closed. He told Esperion, which is developing products for the treatment of cardiovascular disease, of a similar error on Friday, according to his S.E.C. filings.
In both cases, Mr. Sacane's purchases blew through limits established by poison pills that the companies had issued. The pills, known formally as shareholder rights plans, threaten dire consequences to shareholders who acquire too many shares without the consent of the board. Esperion has twice cut deals with Mr. Sacane to keep the pill from taking effect, the first last November and the second one yesterday, according to Mr. Sacane's filings.
Aksys, which cut a deal with Mr. Sacane in April, the first time he exceeded the poison pill threshold, is trying to decide what action to take. Conceivably it could issue new shares to all investors except for Mr. Sacane, thereby diluting his stake. That is what the pill threatens.
Mr. Sacane filed his S.E.C. disclosure of his purchases of Esperion yesterday, several days after he told the company of the error. The share price hit a record of $21.17 on Friday. Yesterday, with the news out, it fell $2.50, or 12.6 percent, to $17.38.
It is not clear why the information given to the company on Thursday was not immediately released to the public by Esperion or Mr. Sacane. But in the interim the company negotiated its new deal with Mr. Sacane, which restricts his votes on the stock and limits his ability to sell shares quickly. He could be limited to selling as little as 1 percent of the outstanding shares in any three-month period, although sales could be higher if volume is strong. The agreement will remain in effect until Mr. Sacane's stake is down to 20 percent from its current level of 33 percent.
Neither Mr. Sacane, a former Wall Street analyst, nor his lawyer returned telephone calls yesterday afternoon. Officials of Esperion also did not return calls.
At Aksys, the news of Mr. Sacane's latest purchases was released by the company on Friday, and confirmed by him in an S.E.C. filing on Monday. Since Thursday, the share price has fallen 43 percent, to $8.49, from $15.01.
After Mr. Sacane first told Aksys of his inadvertent purchases of the company's stock, he signed an agreement on April 11 promising to reduce his stake, then at 19.5 percent of the company, to less then 15 percent within two years, and not to buy any shares until the stake had fallen to that level. That promise was disclosed by the company when it filed its annual proxy on April 15.
But on April 14, Mr. Sacane resumed his buying, inadvertently, he says. Over the next three weeks, he bought 1.1 million shares, about a quarter of the total Nasdaq volume for the stock. The buying continued until Thursday, the day he told Aksys of the purchases.
Before joining Duras Capital Management, Mr. Sacane achieved some prominence as a Wall Street analyst, where he worked for Montgomery Securities and, before that, for Furman Selz. The funds he now runs appears to be aimed at institutional investors, Mr. Dow said.
Those investors could face significant losses. While Mr. Sacane was primarily buying stock in recent months, he was also selling shares, sometimes both buying and selling on the same day. John C. Coffee Jr., a securities law professor at Columbia University, notes that anyone who owns more than 10 percent of a company becomes subject to a provision of the law requiring that profits on sales within six months of purchases be turned over to the company.
Mr. Sacane could also face S.E.C. action over his failure to make timely disclosures of his action. His latest filing on Aksys, made Monday, states that it should have been filed last September.
Professor Coffee added that it was possible that some people who bought the stocks could sue Mr. Sacane and his funds, claiming that he had manipulated the market with his undisclosed purchases. "The people who are hurt are the ones that bought at the top of the market," Professor Coffee said. "They will want someone to sue, and he is the likely one."
Neither company is large by Wall Street standards, but Esperion is worth more than $500 million and Aksys more than $200 million, even after recent declines. Unsurprisingly, given the purchases, both stocks have done well this year. Even after the declines, Esperion is up 144 percent in 2003, and Aksys has risen 60 percent. |
