Piper's Payback: How one CEO, angered by investment bank's behavior, sicced regulators on Piper Jaffray
Dee DePass, Star Tribune
Published April 20, 2003 GARO20
NEW YORK -- It's been 36 years since a Turkish principal slapped 14-year-old Garo Armen for daring to tell his Armenian classmates that they deserved their own nation.
In the sting of that slap, administered half a lifetime and half a world away, lies the unlikely roots of the federal probe that has cost U.S. Bancorp Piper Jaffray nearly $33 million.
Armen, now 50, left Turkey at age 18, fleeing the discrimination against Armenians there that dated to a 1915 pogrom that is considered the 20th century's first genocide. Now the CEO of a U.S. biotech company called Antigenics, the soft-spoken Armen recalls that, "I was a rebel.
"I refused to succumb to some external force of suppressing rights," said Armen, the son of a car parts dealer whose English is still accented by his native land.
His background left Armen at first bristling and then resolved to act when Antigenics became the target of what he says were bullying tactics by Piper Jaffray. Armen's complaints to regulators and the nation's leading financial newspaper roped Piper into a national probe of Wall Street firms.
The investigation culminated with Piper and the other brokerages agreeing to fines and changes in how they fund stock research. The final settlement with securities regulators, expected to be announced this month, could also open the brokerage firms to lawsuits by individual investors claiming that they lost money after buying stocks that analysts' touted.
The financial damage to Piper so far: a $300,000 fine imposed last June and $32.5 million in fines and remedies it agreed to in December. A lawsuit against Piper by Antigenics is pending in a New York court.
Deborah Bortner, the Washington state securities commissioner who investigated Piper as part of the national probe, said it was Armen who turned Piper into a target.
"Antigenics brought Piper to everybody's radar screen. That was the only reason they were added to the list" of companies to investigate. "They manifested some of the behaviors associated with [problem] analyst cases," Bortner said.
Armen said retribution wasn't his goal.
"I don't really feel good about taking anybody down. That's not the driver for me," he said in an interview. "I was thinking of this philosophically and not as a matter of revenge. Revenge is not productive. I grew up thinking that people need to stand up when something is wrong."
On paper, a dispute between Piper and Antigenics looks like a lopsided fight in favor of the Minneapolis brokerage. Piper has nearly 3,000 employees and a parent firm, U.S. Bancorp, with $3.5 billion in 2002 operating net income. Antigenics, which Armen co-founded nine years ago, has 200 employees divided between Boston and New York and about $1.3 million in revenue. The company lost $56 million last year as it continued to seek FDA approval for its cancer vaccine Oncophage, which uses cells from individual patients' tumors to treat their own kidney, colon and skin cancers.
However, Antigenics also has an indefatigable CEO.
Known for e-mailing employees at 1 a.m., he often beats everyone to the office. In the middle of the day, he might be found in shorts, skipping rope or dangling from the ceiling doing chin-ups on gymnast rings hanging from the ceiling of his tidy office 21 stories above the ice-skating rink at Rockefeller Center.
"I don't have time to get to the gym downstairs," he said matter-of-factly. Besides shuttling between New York and Boston for Antigenics he also is chairman of Dublin, Ireland-based Elan Corp., another biotech firm.
The Queens College graduate got his doctorate in physical organic chemistry in 1979 before going on to work as a pharmaceutical stock analyst for E.F. Hutton and Dean Witter in the 1980s and then starting his own money management firm while separately consulting with firms on biotechnology.
After acting as the lead consultant on a merger that wedded Cyanamid's oncology division with Immunex in 1993, Armen was introduced to Pramod Srivastava, a professor at the Mount Sinai School of Medicine who was researching the development of cancer vaccines. Convinced that Srivastava was on to something, Armen invested $300,000 to launch Antigenics. The two subsequently raised millions in private equity, but needed more money to continue clinical trials.
Then, in 1999, Piper underwrote Antigenics' initial public stock offering, raising $72 million.
It's common for biotech firms such as Antigenics to keep burning through cash while they attempt to come up with new, profitable drugs. By the end of 2001, Armen wanted to make a secondary offering of Antigenics stock to raise new cash, and he wanted to move fast because the markets were skittish after the Sept. 11 terrorist attacks.
"I didn't want to wait until the end of January or February. And I was right. The markets closed on us by the end of January," Armen said. "The next biotech deal to be done wasn't until six months later."
In a memo to the National Association of Securities Dealers dated Jan. 24, 2002, Armen said he offered Piper the chance to be the lead securities firm in Antigenics' secondary offering, only to be told that Piper could not meet his strict deadline of early January 2002.
On Dec. 26, UBS Warburg, whose glowing red sign is visible from Antigenics' offices, contacted Armen to say its staff would work through through the holiday season to close the offering Jan. 11.
With the UBS offer in hand Armen asked Piper officials to act as co-lead underwriter Dec. 27. The response surprised him.
Piper investment banker "Scott [Beardsley] said to me in a very arrogant tone, 'You either give us [all] the business or I will instruct my analyst to drop coverage of your firm.' He was threatening me. I told him this was appalling," Armen said. "I am heated up now just talking about this."
Piper officials declined to comment for this story, saying they are in a regulatory "quiet period" before the spinoff of Piper as a separate company later this year.
When Armen's allegations came out last year, Piper issued a statement saying it "does not view or use analyst coverage as a means to coerce investment-banking relationships. Initiating and discontinuing coverage of companies is commonplace within our industry. The decision to discontinue coverage of Antigenics was an individual, company-specific decision."
Piper spokeswoman Erin Freeman has said Antigenics' suit is "without merit and we intend to defend ourselves vigorously."
On Jan. 2, 2002, UBS Warburg announced the offering, solo. Armen said he was visiting institutional investors on a roadshow Jan. 4 in Boston when he received a phone call from Piper stock analyst Peter Ginsberg.
Court documents filed in connection with Antigenics' suit against Piper say Ginsberg told Armen that Piper was dropping coverage of the company to "send a message to clients that they cannot be allowed to do this to Piper Jaffray."
Ginsberg would later dispute Armen's account.
"My investment opinions are not driven by the existence, or lack of, a corporate finance relationship. I have not taken retaliatory action or otherwise attempted to damage Antigenics in any way," Ginsberg said in a prepared statement last April.
Piper had for two years rated Antigenics a "strong buy." After Piper halted coverage several investors backed out of orders to buy 1.1 million shares in the secondary offering. Antigenics raised about $62 million, not the $80 million planned.
Armen said he placed phone calls to Piper CEO Andrew Duff and Piper investment banking head Tom Schnettler but got little result.
"Andrew Duff said he found himself caught in the middle between me and his staff. But there is no such thing as being caught in the middle. You have to make a decision," Armen said.
Antigenics' lawyers advised Armen to drop the matter. Instead, he took his story to the Wall Street Journal, filed a complaint with the National Association of Securities Dealers (NASD) and persuaded his board of directors to sue Piper.
"I said I can either do nothing or do something because then maybe [Piper] will come to their senses," he said.
In an industry first, the NASD fined Piper $250,000 and Beardsley $50,000 in June for dropping Antigenics stock coverage, though Piper did not admit wrongdoing.
The Securities and Exchange Commission and other regulators took notice, including Piper in their industrywide investigation of stock research. By December, Piper joined Citigroup, Credit Suisse, Merrill Lynch and seven others in agreeing to settle for a total of $1.4 billion. Piper's share was $25 million in fines and $7.5 million in contributions toward a new pool to pay for independent stock research.
Antigenics' suit accuses Piper, Ginsberg and Beardsley of making threats, sabotage, economic injury and defamation.
Some observers saw nothing remarkable in Piper's behavior, even if Armen's accusations are true. They said it was common practice for investment banks to offer stock coverage to attract business clients and to drop or withhold coverage if a business chose another brokerage.
Armen, the former stock analyst, doesn't buy it.
"I don't accept that this is the way it is and you have to live with it," he said.
"I knew the workings of Wall Street and I knew that [Piper's dealings] shouldn't have been this way."
While the court case moves forward, Armen focuses on the future of Antigenics' cancer drug, his other business interests and his recently founded charity, the Children of Armenia Fund. The charity is removing landmines, seeking to improve children's health and providing counseling services in the former Soviet republic.
"I am for the little guy," Armen said.
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