F,
Tnks for the link on the old QGLY story...many similaries with GUMM......didn't realize Anthony was involved on the short side.
M2
Rogue Missives
Friday, January 31, 1997
The Quarrel Over Quigley
by Louis Corrigan (RgeSeymour)
QUIGLEY CORP. (OTC: QGLY) is a bulletin board high-flyer that markets Cold-Eeze, a zinc gluconate-glycine lozenge which advocates claim has an anti-viral effect on the human rhinovirus, the most common cause of colds. The veracity of this claim is something which remains hotly contested to this day, and there has also been more than a little debate over the legitimacy of the company and its associates.
On January third, Rogue reporter Louis Corrigan (RgeSeymour) brought you "Quigley: A Real Cold Cure?", wherein the clinical evidence was examined, and the debate over the efficacy of the product was presented through interviews with many of the principal researchers. One week later, the television show 20/20 presented its own segment on Cold-Eeze, a glowing report which left Quigley bulls cheering.
Their celebration was not destined to last for long, though, as Barron's printed a scathingly bearish view of the company the very next day. The article raised questions about the legitimacy of the company and its associates. A number of other articles have since appeared in various media outlets, most recently in The Washington Post. Today, Rogue brings you an in-depth look at many of the questions raised about the company, the stock, and Quigley's financing efforts. For the story, Rogue contacted Quigley's general counsel, an outspoken market-making bear, Quigley counsultants, and a securities firm that bears say ran nominee accounts for people close to the company. While the verdict is far from being in on Quigley, Rogue presents some interesting accounts of the activity surrounding the company, and answers some lingering questions.
Barronized
For every person who likes to tell a great story, there's often someone else who likes to ruin it, or at least give it a tragic twist. Investors following the saga of highflyer QUIGLEY CORPORATION (OTC Bulletin Board: QGLY, formerly QUIG) were treated to just such a double dose of conflicting media attention three weeks ago. It's worth asking exactly which version of the story sounds right.
On Friday, January 10th, ABC's 20/20 news magazine featured a lengthy segment celebrating the company's Cold-Eeze lozenges as one of the only cold remedies that actually works. Dr. Michael Macknin, the lead author of an important double-blinded trial conducted at the Cleveland Clinic, was shown saying he got goosebumps when he first realized how positive the Clinic's trial results were. After watching this glowing broadcast, investors were no doubt left with goosebumps of their own -- until they checked out the next day's Barron's.
In a two-page article, reporter Bill Alpert wielded the oft-bloody Barron's hatchet. First Alpert chopped up the science supporting the company's claims for Cold-Eeze. Macknin reappeared, this time as a clinician so full of caution that he now seemed nearly to disbelieve his own findings. He said that the clinic's trial was conducted on just 100 patients in the same city during just one month. Who's to say that the researchers didn't just get lucky in finding one virus -- of the more than 200 than can cause a cold -- that was incredibly susceptible to Quigley's zinc gluconate-glycine lozenges?
Then there were lingering questions from cold experts, such as the University of Virginia's Dr. Jack Gwaltney. Had the trial subjects been adequately blinded about whether they were receiving the zinc lozenge or a placebo? Any such bias could completely undermine the trial results. Since Alpert included no response from Macknin about this important concern, a reader was left to think that the clinician had no adequate response to Gwaltney.
Still, Alpert saved the real dirt for last. In the final nine paragraphs, the Barron's piece laid out an astonishing web of people "censured, barred or jailed by securities authorities for stock fraud" who have had, or still have, connections with Quigley Corp. The article ended with the kind of knowing comment Barron's loves to issue: trading in Quigley stock was now under investigation by the Securities and Exchange Commission (SEC), so investors shouldn't expect the stock to "levitate" forever.
Specifically, Alpert reported that Raphael D. Bloom, a disbarred stockbroker convicted in 1989 of stock fraud, had introduced company Chairman and CEO Guy Quigley to a financial consulting and public relations firm called Diversified Corporate Consulting. The "managing member" of Diversified is William A. Calvo, III, a securities lawyer who was disbarred in Florida state court, and later in Federal Court, for his participation in a fraudulent public offering. Diversified, in turn, introduced Guy Quigley to another public-relations firm, Carousel Consulting, run by former stockbroker Joseph Radcliffe who has had a career "at notorious brokerage firms."
In addition, the financial weekly reported that Quigley's Brooklyn-based auditor Nachum Blumenfrucht "was the auditor for the notorious stock promoter Phil Abramo." A key subject in the recent Business Week cover story about the Mob's activities on Wall Street, Abramo is reportedly identified in court documents as a capo in the De-Cavalcante crime family. He has just begun serving a one-year prison sentence for tax evasion. Barron's also reported that Quigley had previously employed the securities lawyer Barbara R. Mittman, who also once worked for Abramo. Mittman practiced law with another now disbarred attorney, Edward Grushko, who conducted work for some of the more spectacular stock swindlers of recent years, including Thomas Quinn and Arnold Kimmes.
This schizophrenic one-two media punch left investors reeling. On the one hand, the 20/20 segment strongly suggested that cold sufferers would be better off if retailers simply cleared away the palliatives that now dominate the cold remedy market and instead filled the shelves with Cold-Eeze. If Quigley could just increase its manufacturing, virtually any earnings target seemed possible.
The Barron's report, though, was enough to leave a reasonable investor leery of getting anywhere near Quigley. At any moment, it seemed, the SEC could halt trading in the stock. Six weeks down the road, Quigley holders might find themselves happy to cash out at a fraction of what they paid for the stock.
Anticipation of the favorable 20/20 coverage, in combination with short covering, had pushed Quigley's share price from $18 to an intraday high of $37 in the days prior to the broadcast. At that Friday's close, around $30 a share, Quigley had a market capitalization of over $250 million, based on the number of outstanding shares plus currently exercisable stock purchase warrants and options. Even for a company experiencing rapid growth, this was an astonishing figure, since Quigley had merely $1 million in sales for fiscal 1996 and had estimated its first quarter 1997 earnings would come in at $1.8 million, on $3.9 million in sales.
In the days immediately following these conflicting high-profile reports, the stock whipsawed wildly, losing half its value on a drop to the mid-teens before recovering to the mid-20s and then dropping once again. But after a roller coaster ride and a recent 2-for-1 stock split, Quigley recovered to levels seen just prior to being Barronized. Though the stock has drifted lower in recent days, it's still trading about where it did before anticipation of the ABC broadcast sent the stock soaring.
As aficionados of the efficient market theory suggest, share prices always discount the available news about a company. What Quigley's share price is telling us, then, is that market participants are not much worried by the web of intrigue fed to Alpert by the short-sellers who had gotten caught in the squeeze. Uncertainty about the SEC investigation may be weighing on the shares, though some would find that preposterous.
Still, the market doesn't seem to believe that company officials will be implicated if the SEC uncovers trading violations or other criminal actions. Indeed, the company has argued that it's under organized attack from someone, presumably the shorts, perhaps even some market makers, who have undoubtedly lost millions as Quigley's stock has made its improbable ascent from $0.65 a share last April.
In a press release dated January 14th, Guy Quigley said that the "clearly biased and inaccurate portrayal of the company, its management, its medical studies, and its patented Cold-Eeze product" in Barron's was the culmination of a series of attempts to hurt the company and its stockholders. These included "an onslaught of false, misleading and malicious information disseminated through Internet services such as America Online and through anonymous faxes and phone calls to major customers of the Company." The latter claimed that Quigley would be unable to meet its orders.
Quigley officials also said that the Bloomberg News Service picked up two phony press releases sent from a Staples store in New York City on fake Quigley stationery. The first one, sent on December 31st, erroneously claimed that the company's then Chief Financial Officer Eric Kaytes was resigning. (Kaytes was recently "promoted" to Vice President in charge of Management Information Systems. The company named George Longo as the new CFO. Longo has previously worked for KPMG Peat Marwick and Rhone-Poulenc Rorer, Inc., where he handled SEC, IRS, and general accounting issues.)
The other fake press release, on the day of the 20/20 broadcast, indicated that Quigley had made a $10 million "Reg S" private placement of shares to offshore investors at $6.50 a share. An offering at such a deep discount to the market price would have worked as well as a pin would in bursting a bubble.
Quigley General Counsel Thomas F.J. MacAniff told Rogue that the company asked the SEC before Christmas to investigate these criminal disruptions of the firm's business activities. Contrary to the rumored conspiracies, he said that Diversified Corporate Consulting was actually the first party to request that the SEC get involved. "Now that's a classic, isn't it? A conspirator complains to the SEC," MacAniff quipped. He believes that Barron's and other financial media have failed to report this because "it doesn't fit" the story they want to print.
On the other hand, the company's critics, some of whom admit they have lost money shorting the stock, continue to fire away. Some suggest that company officials have been party to a well organized stock rig. They point to Quigley's 1-for-10 reverse stock split of January 1996 as a classic maneuver used to "box" a stock so that it can be controlled by a handful of traders. These critics highlight other factors they say are consistent with a stock manipulation, such as Quigley Corp.'s issuance of millions of new shares and warrants; the professional status of the company's now former auditor Blumenfrucht; or trading conducted for individual accounts held by members of the Bloom and Quigley families and, until recently, managed by the same broker at a small firm called Empire Securities.
The company's critics also make a series of diverse arguments about the legitimacy of the science supporting the Cold-Eeze product, the security afforded by the company's patents, and the company's ability to produce the kind of sales that it has recently reported.
The more one listens to both sides, the more it becomes clear that there are more than two sides to the story. It's even possible to imagine that Quigley may have been set up as a stock rig by parties who never imagined Cold-Eeze might really work or perhaps didn't really care if it did as long as the story sold. It's also possible to imagine that Quigley Corp. is simply under attack by desperate short-sellers who have simply lucked out in finding a cast of shady, but in this case honest, characters connected to the company.
In failing to address the overall accuracy of these diverse accusations, and thus the credibility of the short story overall, the Barron's article presents a potentially misleading perspective. There is, for example, no way for Alpert to know what the SEC investigation will uncover or whether it will implicate Quigley officials in securities violations or harm Quigley's stock. Indeed, there are few better examples of offline hype.
On the other hand, Quigley Corp. does have some past and present relationships that should give investors serious pause. "If someone wants to accuse us of being naive and/or stupid, I can understand that criticism," General Counsel MacAniff said.
But investors' real worry is that company officials may be guilty of more than poor judgment or inadequate due diligence when choosing business associates. A related concern is that Quigley has been issuing stock, stock warrants, and stock options at a torrid pace. Even if these activities are not part of a stock rig, as the company's critics suggest, they do mean that Quigley insiders and certain undisclosed investors have generated some rather astonishing paper profits as the stock has risen, even as other shareholders have seen the value of their shares diluted.
The Short Story
"I've got to be honest with you, I've never seen a manipulation work this well."
-- Anthony Elgindy on Quigley
To take Anthony Elgindy at his word is to believe that you're talking to one of the last honest men on Wall Street. As president of Key West Securities (KEYZ), a Fort Worth, Texas firm that makes a market in Quigley, Elgindy says that he's seen his share of conflict and has risen to the occasion to do the right thing -- even when it's meant facing down the Mob or losing money on a position while he made others aware a fraud was afoot.
In Gary Weiss's Business Week story on the Mob, for example, Elgindy was mentioned as the one market maker who refused to cease trading in First Colonial Ventures when threatened by parties who had physically assaulted other market makers in an effort to "persuade" them to back off. Elgindy told Rogue that he has served as an expert witness on securities fraud and is currently a federal witness and informant on three ongoing cases. He said he's been sued "maybe 20 or 30 times" for slander but never lost a case, even beating Bear Stearns.
"I really stress the accuracy of the information above all else. If you can't put your phone number and your name to it, then don't bother writing about it," he said.
Elgindy is one the most vocal critics of Quigley Corp. His posts on The Motley Fool message boards using names such as "Stock Dung" and "DntWstMyTm" have been merciless. He's also believed to be one of the main sources providing information to Jonathan Levy, the chief investigator in the SEC's regional office in Miami and the man leading the probe into trading in Quigley's stock. Elgindy is also the only trader willing to be quoted on the matter.
In a phone interview the day the Barron's story broke, Elgindy said that he had turned over to the FBI and the SEC over 30 tapes his firm had made in accordance with federal protocol allowing traders to tape phone conversations. He said these tapes included threats and trash talk from, among others, Jerry Rosen, a former associate of Carousel Consulting's Joe Radcliffe and currently a trader at J. Alexander Securities, the most bullish market maker in Quigley.
"I know some market makers who are involved in Quigley who have received dead fish in the mail," Elgindy said. "The message is, get out of the stock... Whatever you can imagine, it's absolutely there [on the tapes], from 'You're going to die' to 'Your family is going to die' to 'Your cattle are going to die.' "
Elgindy said he's concerned for his safety, but he's also full of casual bravado. "Mob guys really look out of place among the cattle and the fields [of Texas]. They pull up in their Cadillac, I don't know, they just don't blend in. There might be four Italian guys in the whole state."
In Elgindy's view, "Quigley was a rig from the very beginning. It most definitely was... If you know anything about stock fraud, what they will do is that they'll do a reverse split. They take over a company that's got nothing."
The reverse split reduces the number of shares outstanding so that a company can then be less conspicuous in issuing new shares and reducing the stake of the old stockowners. Elgindy believes that's what happened with Quigley. "They issued new shares, brand new shares to themselves. Then they issued themselves a series of options. Then they issued stock to offshore entities. Then they issued stock to their brothers, their families, their wives... You have a situation that's set up to benefit the insiders."
Thoroughly skeptical of the Cold-Eeze product, Elgindy said that Quigley's stock has risen mainly through skilled promotion and manipulation by market makers such as Rosen. He said that when the SEC gets all the trading records together, "they'll see there's a big giant circle where all the shares are changing hands among the same people all day long." That is, he believes that a covey of market makers working together pushed the stock higher, through coordinated efforts to push up the bid. "There is no real market [for Quigley]. J. Alexander and Jerry Rosen dominate the market... And when you have a rigged market, the stock needs to be pulled."
Elgindy clearly thinks that Quigley officials have participated in the alleged rig. For example, he claimed that someone with the company actually sent the phony press releases to Bloomberg. "Jerry Rosen was calling market makers [on January 10th] and telling them that there was going to be a false press release on Quigley, and the company's upset -- before the press release even came out."
He said that these false press releases serve two purposes. They allow Quigley to "blame it on the shorts, to play victim" while also trapping the shorts. "They like to send out information which would cause people to get more short because they know they got the stock logged.... Everybody who's in this stock who's short is just holding their breath."
At the time, Elgindy said he had no position in Quigley. "When an investigation is initiated, I usually try to flatten out. I don't want there to be a conflict. I don't want to impugn or detract from my credibility." He also makes no secret of what his position had been. "I was short the stock, and I lost the money."
Though American brokerage houses do not allow individuals to short stocks traded on the OTC Bulletin Board, anyone willing to put up a 200% cash reserve can do so through Canadian firms. Still, the largest short-sellers of Quigley are likely the market makers themselves making very active bets against the stock. Indeed, market makers in these stocks, and even stocks listed on Nasdaq's Small Cap market, do not have to follow the normal Nasdaq rules requiring traders to short only on an uptick. They also do not have to settle a short position within the otherwise typical 10-day period. That is, these traders can establish naked short positions and hold them indefinitely, or until shareholders call for physical delivery of shares, which puts pressure on the clearing firms to produce the stock certificates.
As Elgindy and others attest, many markets makers have been forced by their clearing firms to cover their short positions in Quigley. One trader said that on January 8th, a day the stock soared, total forced buy-ins hit 150,000 to 250,000 shares. Knight Securities (NITE), M.H. Meyerson (MHMY), and Key West were all said to have been bought-in that day. As Barron's suggested, the bullish market makers knew there were forced buy-ins coming, so they simply moved their bids out of the way, allowing the stock to soar. The huge swings in price during this period suggest the shorts were being squeezed in waves, and Quigley shares simply traded much lower again after each wave.
For his part, Elgindy denied that his firm was ever bought in. He also said that the short sellers involved in Quigley have deep pockets and that "they're not going to go anywhere." In fact, he said many simply re-established their positions after being bought in.
If Elgindy's conspiracy theory is wrong, he'll obviously be involved in some serious litigation down the road. For someone who says he prides himself on his credibility and accuracy, though, Elgindy offers some rather dubious arguments.
For example, on January 2nd, Quigley Corp. announced preliminary results for the first quarter of fiscal '97, which ended December 31st. Revenues were $3.9 million with "anticipated net earnings" of $1.8 million. Elgindy and other critics or short sellers don't see how a company with merely $370,000 at the end of September could even produce such sales. Moreover, they note that while the company registered fiscal '96 sales of $1.05 million, $607,000 of that figure showed up as receivables, meaning the company wasn't getting payed in a timely fashion.
"They don't have a credit line; no one is financing the receivables," Elgindy said. "I don't see any kind of financing activity. How is this stuff being manufactured and sent out without money?" Indeed, he wondered if the lozenges actually were being sent out, and if so, where, since retailers didn't seem to have the product.
Elgindy said that he has made monthly phone calls to George Eby, the holder of a method patent for the use of zinc gluconate as a cold remedy. Quigley Corp. gave Eby 60,000 shares plus a royalty of 3% of gross sales for the rights to his patent. Elgindy said that each month, he asks Eby about the size of his royalty check. For October, the check was about $5,000; for November, about $15,000.
Elgindy argues, then, that total Quigley sales for the first two months of the fiscal first quarter were around $660,000. That meant Quigley must have sold $3.24 million worth of lozenges in the final month of the quarter. "Yet the company in the same breath says, in January, they're not going to be able to send out more than a million and a half because they don't have the capacity to do more," Elgindy said. "So they had the capacity to do about $3 million in December, but they lost it in January?"
It's a creative theory based on an insightful research angle. Unfortunately, the theory seems to fall apart due to several inaccuracies. For one thing, Quigley's press release of January 2nd actually indicated that the company "was implementing its previously announced plan to increase manufacturing to approximately $1.5 million per week." The 10-KSB doe |
