for your reading enjoyment
A Short-Seller Trades Blows
With a Target Who Won't Fold
By CHARLES GASPARINO and ROBERT MCGOUGH
Staff Reporters of THE WALL STREET JOURNAL
At a medical conference on chronic fatigue syndrome in 1998, a big
investor spotted William Carter, head of a company developing a drug as a
treatment for CFS. The investor strode over to shake hands, but it wasn't a
friendly greeting.
His opening line? "I'm Manuel Asensio. You belong in jail."
That's the hardball approach of a Wall Street tough guy who is no ordinary
investor. Mr. Asensio, age 45, is a short-seller. He makes money when
stocks sink. Unlike other shorts, who tend to keep a low profile, however,
Mr. Asensio trumpets his "strong sell" calls on a Web site, and mocks his
targets as "frauds."
His short-selling earned him more than $6 million a year in 1997 and 1998.
Several companies whose stock he successfully attacked were
subsequently delisted. Regulators have viewed him as an ally in the fight
against misleading stock promotions.
In Dr. Carter, however, Mr. Asensio met a formidable adversary. The
62-year-old is chief executive of Hemispherx Biopharma Inc., a
Philadelphia biotechnology firm that has incurred significant losses since
1987. For about 15 years, it has been in and out of clinical trials, seeking a
disease that its main drug, Ampligen, could treat. In September 1998, Mr.
Asensio launched his standard attack on the stock. Dr. Carter retaliated
with a legal and public-relations assault of his own.
The conflict has left both adversaries bloodied financially. It also has
dragged in surprising bystanders, including Oprah Winfrey, Securities and
Exchange Commission Chairman Arthur Levitt and AIDS activist David
Scondras.
Shorts -- and their targets -- often will go to unusual lengths, relying on a
network of allies, to push the price of a stock down -- and up. In this kind
of speculation, short-sellers borrow the shares of the target company from
a broker and sell them, hoping to buy back the shares later at a lower
price, return the shares to the lender, and pocket the difference. While
many shorts have lost money and gone out of business during the bull
market -- scores have shorted pricey Internet and technology stocks that
became even more expensive -- Mr. Asensio has thrived by targeting
companies he believes are misrepresenting their business to investors.
Whether or not Mr. Asensio was right about these companies -- they
typically disputed his charges -- it often turned out that those he targeted
were in bad shape financially. The stocks of companies such as Diana
Corp., ErgoBilt Inc. and Turbodyne Technologies Inc. were delisted after
Mr. Asensio's attacks. Two others, Solv-Ex Corp. and SyQuest
Technology Inc., filed for bankruptcy protection from creditors. (Solv-Ex
has since emerged from bankruptcy.)
Shorts argue that they bring efficiency to the pricing of stocks. Mr.
Asensio, going further, once exulted: "God has given me this power -- it's
the power of good vs. evil." Yet shorts are reviled for profiting from other
investors' misery. They also are accused of spreading innuendo and
falsehoods to torpedo targets.
That, in essence, is Dr. Carter's allegation. A former academic and medical
researcher, he has vigorously pursued a lawsuit filed in 1998 by
Hemispherx against Mr. Asensio in the U.S. District Court for the Eastern
District of Pennsylvania. The lawsuit sought damages over allegations of
illegal short-selling, defamation and interference with business relations.
Mr. Asensio denied the charges, and successfully argued that regulators,
not Hemispherx, could sue over illegal short-selling. He also claimed the
remaining charges weren't in the court's jurisdiction.
Hemispherx also has hired a detective agency to look into Mr. Asensio's
background and has conducted its own PR campaign. Dr. Carter has told
investors that Mr. Asensio's reports were written with a Ouija board. "We
have indisputable evidence" that Mr. Asensio manipulated Hemispherx
stock, Dr. Carter says in an interview.
Mr. Asensio denies the allegation. But the doctor's counterattack blunted
the short-seller's assault, costing him $2 million in legal fees, forcing him to
postpone a planned initial public offering of his holding company,
Asensio.com, and frightening away clients of his Asensio & Co. brokerage
unit. Hemispherx stock "went from $2 to $19 while I've been there," Mr.
Asensio fumed in a deposition taken in April. "No company has ever done
that."
Mr. Asensio's statement refers to low and high points since his attack on
Hemispherx began. More recently, the company's stock price has plunged
about 61% from its peak of $19 on March 2 to $7.50. The stake held by
Dr. Carter, the largest single shareholder, has fallen $37 million during the
past three-and-a-half months.
A Cuban immigrant, Mr. Asensio spent a stretch of his childhood with
relatives in Venezuela, separated from his parents in Cuba. He still recalls
eating rice and ketchup, while classmates ate rice and meat. After he got
an M.B.A. from Harvard in 1982, he worked as a financial adviser helping
to get financing for small, speculative companies -- like many of those that
make his short-selling list now. This experience taught him how "fraudulent
stock promotions" work, he said in an August 1999 deposition. He
became hooked on short-selling after a successful 1996 foray into General
Nutrition Cos., a once-high-flying health-food and vitamin chain.
Dr. Carter, who graduated from the Duke University School of Medicine
and did postgraduate work at Johns Hopkins University School of
Medicine, is also a fighter. In the late 1970s, he was forced out of his job
as chairman of the department of microbiology at State University of New
York at Buffalo, when he videotaped a student who he believed had
sabotaged his experiments. He was one of the early researchers working
on interferons, chemicals the body uses to bolster the immune system.
Later, Dr. Carter developed Ampligen, a drug he claimed induced
production of interferon in the body.
Since the mid-1980s, Hemispherx had been struggling unsuccessfully to get
approval for Ampligen as a marketable treatment for AIDS, chronic fatigue
syndrome, hepatitis B and various forms of cancer. There were repeated
setbacks, including expressions of concern by the Food and Drug
Administration in October 1991 about what the agency called "serious and
potentially life-threatening reactions" to Ampligen. Since 1998, the drug
has been in the final phase of trials to apply for FDA approval as a
treatment for CFS.
But the shares of the company, which went public in 1995, started to rise
in mid-1998 after word spread that a segment of the "Oprah Winfrey
Show" would discuss Ampligen's effectiveness as a treatment for chronic
fatigue syndrome, a malady that is difficult to diagnose and doesn't respond
to most treatments.
Ms. Winfrey did discuss the syndrome on a July 1998 show, but neither
Ampligen nor Hemispherx was mentioned. Nevertheless, the stock jumped
more than 50%, to as high as $13 a share in September.
An Easy Target
To Mr. Asensio, Hemispherx looked like an easy target. One of his first
steps was to attack Ms. Winfrey. On Sept. 10, 1998, he sent a letter to
Ms. Winfrey, saying he was concerned about "a large, public securities
fraud scheme involving 'the Oprah Winfrey Show.' " Says Ms. Winfrey's
lawyer, Marshall Eisenberg: "He made a series of threats, which of course
were baseless."
Mr. Asensio then turned his attention to Hemispherx. He published three
negative reports about it on his Web site on Sept. 22, 1998, including a
"strong sell recommendation," and said Ampligen "has no medical or
economic value."
The following day, Dr. Carter held an investor conference call to counter
the accusations. He later told investors that patients who had taken
Ampligen have shown "statistical improvement in physical performance and
mental skills." But when the FDA got wind of Dr. Carter's remarks,
officials there warned Hemispherx in a letter: stop promoting Ampligen as a
"safe and effective drug prior to its approval for marketing." Hemispherx
says it believed it was not in violation of the FDA regulation and felt it
needed to defend itself.
Mr. Asensio also benefited from a new front in the war on Hemispherx
when the SEC began examining Hemispherx as part of a "confidential
non-formal order inquiry," according to SEC documents. Mr. Asensio
believes his complaints triggered the probe, and Hemispherx stated in a
later regulatory filing that the SEC's inquiry followed lines laid down by Mr.
Asensio's reports.
Within months, the "inquiry" grew into an "investigation," examining whether
Hemispherx had improperly promoted its drug and misled investors about
the stock. (The SEC declines to comment on the investigation, which is
continuing.)
Before that, in late 1998, Dr. Carter and Hemispherx filed their lawsuit
against Asensio & Co. Mr. Asensio shrugged off the suit; other targets of
his short-selling had sued him without success. But regulators took it
seriously. As Mr. Asensio conceded in later court testimony, the National
Association of Securities Dealers launched a "broad inquiry" into his
short-selling tactics. The NASD declines to comment.
'Questions About Ampligen'
The two adversaries met for the first time at the October 1998 conference
on chronic fatigue syndrome. Someone handed out a questionnaire to
patients at the conference titled: "Questions About Ampligen," including:
"Why ... do a majority of the patients who have taken the drug say that
they had awful side effects?"
Mr. Asensio denies he was the source of the handouts. But he quickly was
confronted by people suffering from CFS, who were irate at Mr. Asensio
when it became known at the conference that he was a short-seller going
after Hemispherx. One woman in a wheelchair followed Mr. Asensio
around the hotel, repeating a line uttered by Charlie Sheen's character from
the movie "Wall Street": "How many yachts can you water-ski behind?"
Mr. Asensio says he tried to reason with her.
Dr. Carter's suit subpoenaed a broad swath of Asensio clients and others.
John Paulson, a hedge-fund manager and old friend of Mr. Asensio's, was
flabbergasted when he received a subpoena demanding that he turn over
all trading documents relating to Mr. Asensio. Mr. Paulson, who soon
stopped doing business with Mr. Asensio, declined to elaborate.
Hemispherx wasn't faring much better. Dr. Carter testified in a deposition
that an equipment-leasing company refused to do business with
Hemispherx: "They had read about the allegations of Asensio, that the
company they might be dealing with ... was run by crooks, and they
decided not to get involved."
Despite the pressure, Hemispherx stock began to recover. In the wake of
Mr. Asensio's initial attack, the stock tumbled 60% from a peak of
$13.1875 on Sept. 9 to as low as $4.8125 on Sept. 25. But in the spring
of 1999, the stock more than doubled from a low of $4.6875 on Feb. 18,
to a shade over $10 on April 29, before starting to fade again. As a
small-capitalization stock being fought over by bulls and bears, it was
subject to sharp swings.
Resistant Strains
Meanwhile, with his legal bills mounting, it became harder for Mr.
Asensio's firm to continue churning out successful short-selling campaigns.
The last two firms he targeted, Internet registrar Network Solutions Inc.
(now part of VeriSign Inc.) and video-and-telecommunications firm
ParkerVision Inc., proved resistant to his attacks. Mr. Asensio stopped
making new "strong sell" recommendations.
In December 1999, Dr. Carter said new laboratory tests showed
Ampligen might have some benefits for people infected with HIV. In a
news release, Hemispherx said it had presented findings at a meeting in
Boston, sponsored by the AIDS-outreach organization Search for a Cure.
Mr. Asensio again went on the attack. He called David Scondras,
executive director of the organization, demanding details of his ties with Dr.
Carter and Hemispherx. According to Mr. Scondras, Mr. Asensio said
during the call, " 'You are associating yourselves with known scum.' "
Mr. Scondras says he later complained to the New York State attorney
general's office, asking officials there to provide help in getting Mr.
Asensio's "teeth out of our necks." Mr. Scondras said he just suffered from
a heart attack, and that "Mr. Asensio's loud, officious, threatening and
uncalled-for behavior threatens my health."
Mr. Asensio says he didn't yell, and did not threaten Mr. Scondras: "He's
hysterical; I never had problems with David." After some prodding from
Mr. Asensio, Mr. Scondras sent a letter to Hemispherx demanding a
correction to the news release because Hemispherx "did not make a
presentation at the conference." (Dr. Carter attributes it to Mr. Asensio's
"successful intimidation.")
As Mr. Asensio fought to dismiss the suit, Hemispherx on Feb. 17 issued a
news release stating that it had filed an application with the FDA to test
Ampligen as a treatment for HIV. Such applications are routine, but
Hemispherx stock soared to as high as $19 on March 2 from as around $9
at the start of February.
Short-selling is a risky game, as Mr. Asensio discovered with Hemispherx.
While investors who are "long" a stock can lose 100% of their investment,
short-selling magnifies losses because there's potentially no end to just how
high a stock can climb. One big client of Mr. Asensio's, holding 300,000
shares of the stock, lost about $3 million in just one month, he says, when
Hemispherx rose from around $9 a share in early February to around that
$19 mark in early March. The rise forced the client to meet margin calls
along the way to make up for the losses.
Mr. Asensio, squeezed by the soaring stock, lashed out at securities
regulators, his old friends. He called the SEC, demanding to speak with
Chairman Levitt. When an SEC lawyer called him back, an agitated Mr.
Asensio snapped: "There is a widely held view on Wall Street that
Chairman Levitt would prefer there not to be a scandal involving
Hemispherx" and the American Stock Exchange, where Hemispherx
trades. (Mr. Levitt was chairman of the exchange years ago.) The
response from the SEC lawyer: "We'll make a determination based on
what the [SEC's] division of enforcement thinks."
Mr. Asensio continued firing off salvos. In March, he published excerpts
from Mr. Scondras's letter to Dr. Carter on the Asensio.com Internet site.
He blasted the company when its auditor, KPMG LLP, resigned. Shares
of Hemispherx slid as low as $5.25. On Friday, it traded at $7.50.
Legal Wrangling
The two men continue to battle. Hemispherx's lawsuit was dismissed this
month in federal court for jurisdictional reasons; the company's lawyers
have asked the judge to reconsider, and if the dismissal holds, they say
they will bring suit in Pennsylvania state court. Mr. Asensio last month
issued, as the first step in pursuing a countersuit, a summons to Dr. Carter
alleging slander, among other things, in New York state court in
Manhattan.
All the wrangling has taken its toll: Mr. Asensio says he recently has given
up his firm's short position on Hemispherx, though he continues to sell the
stock short on behalf of clients.
A lot of investors must be listening to his advice. As of mid-June, investors
had sold short nearly 3.9 million shares of Hemispherx. Given the stock's
average daily volume, it would take 40 days of normal trading for the short
sellers to close their positions -- a length of time that currently gives
Hemispherx the third-highest "short-interest ratio" on the American Stock
Exchange.
And Mr. Asensio remains obsessed with Dr. Carter -- even on vacation.
This month, Mr. Asensio had his office issue a news release about
Hemispherx while he was climbing Mount McKinley.
As for Dr. Carter, a Hemispherx spokesman says the company plans to
announce Monday that it received FDA approval to conduct another study
involving Ampligen as an AIDS treatment.
Write to Charles Gasparino at charles.gasparino@wsj.com and Robert
McGough at bob.mcgough@wsj.com |
