TSC doesn't seem to consider the attribution angle at all in this lead story. (The more I think about it the more convinced I am that the attribution angle is the correct one).
Matthew Goldstein
Durus Capital Rattles Biotech
By Matthew Goldstein and Adam Feuerstein
Staff Reporters
07/29/2003 06:37 PM EDT
URL: thestreet.com
Scott Sacane, a little-known hedge fund manager, has "inadvertently" become a big fish in the small-cap biotech pond.
Sacane's Durus Capital Management hedge fund significantly increased its ownership stakes in recent months to become a major shareholder in two small biotech companies, Esperion Therapeutics (ESPR:Nasdaq) and Aksys (AKSY:Nasdaq) .
Durus calls it an accident, but the revelations have fueled speculation that the fund might have bought shares to bid up their prices and improve the fund's performance.
In the case of Aksys, a manufacturer of dialysis machines, Sacane has acquired roughly 70% of the small, Illinois-based company's stock. The fund also claims a 33% ownership stake in Esperion, a manufacturer of drugs that treat cardiovascular disease.
Sacane and his fund say that they acquired the stake by inadvertently purchasing millions of shares in both companies' stock. Sacane made the unusual disclosure in several recent filings with the Securities and Exchange Commission, in which he disavows any intent to gain control of the companies. The "inadvertent" purchases of Aksys date to April and go back as far as last November for Esperion.
Making Waves
Sacane didn't return several telephone calls to his offices in Norwalk, Conn. One of his lawyers also didn't return phone calls.
But some biotech fund managers were skeptical of the explanation that the trades were inadvertent, and they offered an alternative explanation: The fund could have engaged in "extreme" window-dressing. By buying up as much stock as possible, the fund would create artificial demand and drive the stock prices up. By doing this, Durus could have boosted its performance artificially in a way that neither investors nor the SEC would notice. From what is known so far, Durus didn't disclose the trades immediately after they occurred.
Like many biotech shares, Esperion and Aksys did see significant gains that lasted through mid-July. But in the last few days, both stocks have sold off. Shares of Esperion fell $2.50, or 12.6%, to $17.38 on Tuesday. Aksys dropped $2.69, or 24%, to $8.45 on Tuesday.
Representatives of Esperion and Aksys themselves seemed as surprised as anyone by Sacane's big stock purchases.
Last Friday, Aksys said in a news release that it was investigating the matter and considering its options. The company couldn't be reached for comment on Tuesday.
In a Tuesday afternoon conference call, Esperion's CFO Tim Mayleben said the company wasn't aware that Durus' holdings rose to 33% from about 22% in December until this weekend.
While offering assurances, Mayleben acknowledged that there are far more questions than answers right now. Even though he called Sacane a "model shareholder" who communicated regularly with the company, he couldn't explain why the hedge fund manager had inadvertently increased his Esperion stake.
Both companies have responded to the big stock purchase by amending their antitakeover provisions to make it clear that Sacane's group is not deemed an acquirer under the law. Esperion also negotiated restrictions on Durus' ability to sell Esperion shares, essentially locking the hedge fund in for six months, Mayleben said.
But Mayleben said he could not guarantee that the selling restrictions placed on Durus would hold up if Durus' investors started redeeming shares.
Sizable Purchases
The purchases that Sacane dubbed as inadvertent were neither small nor random. The Durus fund, according to the filings, made purchases of stock in the two companies almost every single day for the past several months. And many of the purchases were big ones.
For instance, Durus bought 261,300 shares of Aksys on April 30. It bought another 97,900 shares the next day. It made similar big purchases in shares of Esperion, buying 157,000 shares of the Ann Arbor, Mich., company on June 18, then purchasing 93,359 shares on the following day.
Durus wasn't just buying stock in the two companies, it was selling shares too -- sometimes on the same day it bought them.
Meanwhile, the prices of both thinly traded stocks rose steadily during the four-month stretch Durus accumulated them. During that period, shares of Aksys and Esperion more than doubled in value.
Little Known
Not much is known about Sacane and his Connecticut-based hedge fund, which he started about a year ago. Before then, Sacane was a portfolio manager for Perseus Soros Biopharmaceutical Fund, a $400 million fund that's affiliated with Soros Fund Management. Sacane also used to be a stock analyst with NationsBank, now part of the brokerage division of Bank of America. His current fund is said to have about $400 million in assets.
The disclosures about Sacane come at a sensitive time for Esperion, which has been on the road promoting a 4 million-share stock offering, scheduled to close Thursday night. Tuesday afternoon's conference call was set up by Lehman Brothers, Esperion's lead banker, in an effort to calm nervous potential investors who might be inclined to bolt given the uncertainty over Durus' disclosures.
One institutional investor on the Esperion conference call -- and someone who was mulling over the financing deal -- questioned management's willingness to defend Sacane and his actions.
"Why wasn't [Esperion] management spitting mad?" he asked. "This is not a stock I want to own after hearing what I heard. There is no way Lehman should go ahead with this offering."
Peter |
