Hey fellows give me a break.. Do these people do any real work, or is there more to this than meets the eye?. The NY Times has sure scooped the street.com with this. Good thing the reporter changed a couple of words. It sure is a beautiful country.
Fund Watch Features: Schonberg's Portfolios at
Dreyfus a Short Seller's Candy Store
By Jesse Eisinger
Staff Reporter
4/15/98 5:03 PM ET
Short sellers have lost a dear and trusted friend. The only wonder is that they had him so long.
On Monday, Dreyfus finally took an overdue step and shunted Michael Schonberg to a deputy role in running two of its disastrously performing aggressive growth mutual funds. Paul LaRocco of Dreyfus unit Founders will take over the lead manager role.
Considering Schonberg's dismal performance over the last two years in the two funds he managed, the move was made none too soon for the protection of Dreyfus investors. The Dreyfus Premier Aggressive Growth fund fell 1.1% this year and 13% in 1997 and is down 16% since he took it over in August 1995. The Dreyfus Aggressive Growth fund performed worse, down 4.2% this year and 15.8% in 1997. It's up 27.1% since its launch in September 1995, but that's overshadowed by the S&P 500's return of 100% in the period.
But the performance doesn't tell the whole story. Schonberg seemed magnetically attracted to companies that other mutual fund managers, even those of aggressive growth mutual funds, would seldom touch and hedge fund managers thought of as short candy. Companies in Schonberg's two funds often wallowed in obscurity, had small market valuations, tight floats, low liquidity and dubious pedigrees. The world of aggressive growth and small-cap funds often doesn't look like that. (See Sidebar.)
Also notable about Schonfeld's portfolio: Many of the stocks boasted only a handful of holders. The concern when a small number of investors take big holdings in a company with a small float is that the price can be artificially moved in a way that isn't representative of the fundamental, underlying value.
The questions generated by Schonberg's stock picks and record are: What was a fund manager for the white-shoe firm of Dreyfus doing in the murky world of obscure I-Banks and story stocks, and how did the fund company let it happen? Dreyfus declined to comment on any aspect of the fund company's oversight procedures, Schonberg's tenure or the plans for thetwo funds. Dreyfus also didn't provide an opportunity for Schonberg to comment. A spokeswoman would only say, "That information is considered proprietary."
Some on Wall Street are less reticent. "His holdings were the scariest s--- I've ever seen in my life," says one New York hedge fund analyst who used to run money at Dreyfus. "I didn't understand his investment style. I don't understand why he would be long these screaming shorts."
Companies backed by lesser-known investment banks with largely retail followings -- such as Hampshire Securities, which has since been bought out by Gruntal, and R.J. Steichen, of Minneapolis -- populate Schonberg's list of holdings. Not only were some of these firms obscure, but they also were not always saintly. According to a source at Gruntal, the New York Stock Exchange and the Securities and Exchange Commission are making inquiries into 1997 Hampshire offerings. Gruntal did not return a call for comment.
But one relationship with an obscure firm stands out in particular. Schonberg was a regular client of Janssen-Meyers, a small New York investment bank headed by Peter Janssen and Bruce Meyers, both formerly of D.H. Blair, a small New York investment bank that's been fined and investigated by regulators numerous times. Janssen himself settled one case with regulators in May 1991 when at Blair, paying a $40,000 fine and enduring a 30-day suspension, for falsifying account information, according to NASD records.
Janssen-Meyers underwrites and holds large positions in microcap stocks, including Chromatics Color Sciences (CCSI:Nasdaq), a New York company that got approval for a light sensor for infant jaundice in July but has yet to launch its product, and Macrochem (MCHM:Nasdaq), a company that has been publicly traded since 1986, has never had significant revenue or any earnings, and which is currently attempting to develop an impotence drug in gel form. One New York hedge fund manager describes Macrochem as a drug delivery company that works on "the flavor-of-the-quarter drug, never having had one marketed product." Macrochem once had a deal with Upjohn to deliver the baldness drug Rogaine with its same technology, but the big drug company walked away in May 1994.
As of February, Schonberg's No. 1 holding in his Aggressive Growth fund was Chromatics Color, which accounted for 7.8% of the fund. His then-No. 4 holding was Macrochem, which accounted for 4.6% of the fund. Schonberg held slightly more than 900,000 shares of CCSI in the Aggressive Growth fund, and 1.08 million shares in his Premier Aggressive fund, an amount equal to about 13.6% of the company's outstanding shares, according to Technimetrics data from Dec. 31. Janssen-Meyers holds about 1.52 million, or 16.6%, of the company, according to a March 30 filing with the SEC.
Schonberg's two funds held 1.45 million shares of Macrochem as of Sept. 30, or about 8.3% of the company's outstanding shares. Peter Janssen holds 1.55 million, or 7%, according to an April 1 SEC filing, and Bruce Meyers held 1.05 million, or 4.8%, according to recent SEC filings.
Also notable is that Dreyfus' positions dwarf that of the next biggest institutional holders. Morgan Stanley Dean Witter is the next biggest institutional holder of CCSI, with 232,000 shares as of December. Reliance Financial is next on Machrochem, with 250,000 as of December. Both companies are short favorites: CCSI has an outstanding short position of 1.92 million shares and average daily volume of 275,700. Anything over five times average daily volume is considered a large short position. Given that, Macrochem has a less-sizeable short position of 908,571 and average daily volume of 212,200.
"He's been a client of my partner's," says Bruce Meyers, of Janssen-Meyers. (Peter Janssen is vacationing in Alabama and not available to comment, said Meyers.) Meyers says Schonberg has participated on all of Janssen-Meyers' deals except a private-placement for Pharmos (PARS:Nasdaq). Schonberg's funds participated in all the other Janssen-Meyers-backed companies, according to Meyers, including Cytoclonal Pharmaceutics (CYPH:Nasdaq) and CCA Cos. (RIPE:Nasdaq), which is involved in food preservation and investing in Russian casinos. (Hey, the synergies are there, baby!) CYPH and RIPE don't have huge short followings: The positions are 104,725 and 67,310 shares, respectively.
What's more, Meyers says that Schonberg and Dreyfus aren't the typical Janssen-Meyers clients. "Mostly, they are high-net-worth individuals," he says. "I'd say our institutional business is a small percentage of our overall business." In a subsequent interview, Meyers says his firm's business is "maybe 10%, maybe 15%" of its overall business and that other institutional clients have included the Kaufmann Fund and Perrit Capital Management.
Are the aggressive growth and small-cap fund managers of the likes of Scudder, Fidelity and PBHG frequent clients? "Not really," says Meyers. "If they are clients, it's more like on a deal-by-deal basis." So Schonberg was exceptional? "I would say so. I think he was aggressive. One of the more aggressive guys on the Street."
Says Meyers: "Don't forget. We've had huge, huge winners. If his performance was not that good, look at his other companies. If he stayed with our deals, he would have been a superstar! He didn't do enough deals with Janssen-Meyers!"
Meyers adds: "We have a clean firm. And there is no heavy relationship between us and Mr. Schonberg."
Meyers' point is well-taken. Schonberg's ties to Janssen-Meyers and Hampshire Securities and other obscure banks wouldn't raise eyebrows if the portfolio prospector regularly found gems among the rubble and confounded the shorts. And so far, Chromatics and Macrochem have performed spectacularly. In the last 12 months, CCSI had leapt about 320%, while Macrochem is up about 60%.
But Schonberg's stock sense too often led him to companies that went the way of Skylab. Take, for example, the company most short sellers invoke when they hear the name Schonberg: Ultrafem (UFEM:Nasdaq). Ultrafem aimed to sell a miniature tampon that would cap the cervix. But the company's sales were disappointing and losses got out of control: The company filed for Chapter 11 on April 1. The stock has fallen from a high of 36 in May 1996 to its current 1/16. In January 1997, the hapless Gene Marcial of Business Week quoted a bullish Schonberg as saying, "We think the product will be successful and will produce revenue and profits much sooner than expected." As of December, Dreyfus owned 1.13 million shares of Ultrafem. Ultrafem has an outstanding short position of 896,241 as of March.
One bankruptcy is a lot for a fund to take, but Schonberg is 2-for-2 in the last two months. His funds were big holders of Oncor (ONC:AMEX), which was brought public in 1987 by D.H. Blair, and Oncormed (ONM:AMEX), a spinoff of Oncor. On March 27, Oncor's shares fell 55% to its low in the 1990s of 1 3/4, when its accountants expressed doubt that the company could continue because of its rapidly diminishing cash reserves. Oops. Oncor has a short position of 485,630.
Other big Schonberg stocks have gone south of late. Complete Management (CMI:NYSE), a health-care company that some short sellers believe has a weak balance sheet, has fallen from a historic high of 20 1/8 late last year to its current 7 3/4. Dreyfus is the top institutional holder with 1.16 million shares of the company and short sellers have 1.99 million shares.
Now it remains for the two funds' new lead manager, Paul LaRocco, to deal with Schonberg's mess. Short-sellers speculate that LaRocco will likely start selling many of the two fund's holdings, albeit as slowly as he can so that the prices don't crater. What's more, observers think that Dreyfus will attempt to bring in capital to the two funds in an attempt to soften the inevitable blow to the funds' performance that such sales will inflict. For holders of CCSI and Macrochem, that probably means: Look out below. |
