Uh, Ed, forget about the certs, we don't need no stinkin borrow: "market makers can legally sell shares short without first borrowing them" Guess you haven't read this yet, eh Eddie?:
" By BILL ALPERT Barron's July 6, 1998 (printed July 2, 1998)
Many have heard how the lion hurt his paw: Two Dreyfus mutual funds
stepped on some sharp-edged, illiquid penny issues. Media and, reportedly,
government investigators are looking at Michael L. Schonberg, who until
April 8 was lead manager of both funds: Premier Aggressive Growth and
Aggressive Growth. The funds were down about 13% and 16%,
respectively, last year, and were off another 15% and 20% in this year's first
half.
Schonberg's resume gave no hint of exotic tastes. He arrived at Dreyfus in
1995, after more than 20 years of picking stocks at other firms, including
UBS Asset Management, where he had been chief investment officer. At
Dreyfus, however, Schonberg started snacking on such stocks as
now-defunct Systems of Excellence, best known for its Nasdaq symbol
"SEXI" and for its promoters, who pled guilty to criminal stock fraud a few
years ago. The Dreyfus funds also downed more than a million shares of
Ultrafem, whose stock ultraflopped from $36 two years ago to a few cents
when Ultrafem filed for Chapter 11 in April.
But why would a manager from Mellon Bank's white-shoe Dreyfus unit
scarf down mounds of stuff that most institutions wouldn't step in? Maybe
part of the puzzle lies with Janssen-Meyers Associates, a small Manhattan
investment banking partnership run by Peter S. Janssen and Bruce Meyers.
The two brokers launched Janssen-Meyers in April of '93, after working
together at D.H. Blair. Both had blots on their histories. In March 1991,
Janssen, then a top salesman at Blair, consented to a $40,000 NASD fine
and a 30-day suspension, for alleged violations including falsifying a
new-account form in his wife's name. That same year, Meyers consented to
a Florida ban on supervisory work after being accused of failing to
adequately oversee a broker who had been disqualified.
The two brought some of Blair's
aggressive sales tactics to
Janssen-Meyers, which got a
warning from the Federal
Election Commission not to use
lists of campaign donors for
finding prospects -- an illegal
practice. Janssen-Meyers, for
its part, denied using FEC data
for business-solicitation
purposes.
Among their firm's investment banking clients is Darby S. Macfarlane, chief
executive of Chromatics Color Sciences International. Chromatics, based in
New York City, hopes to market its Colormate light sensor to monitor the
skin color of infants suffering from dangerous levels of jaundice.
Macfarlane has tried to promote the Colormate technology since the
mid-'Eighties, when she unsuccessfully pitched it as a cosmetics gadget to
Clairol, Hanes, Bloomingdale's and Avon.
Like other Janssen-Meyers clients, Chromatics is still a "development-stage"
outfit. Last year, it lost $5 million, or 40 cents a share. The red ink and lack
of customers didn't stop Chromatics shares from reaching $18 this year.
The largest institutional holder of Chromatics was the Dreyfus Premier
Aggressive Growth fund. In fact, the one million shares the fund bought
sopped up over 5% of its capital. That block was exceeded only by
Janssen-Meyers' own 2.2 million-share holding, according to April filings by
the underwriter.
Another Janssen-Meyers stock in the portfolios managed by Michael
Schonberg was Cytoclonal Pharmaceutics, a Dallas biotech startup trying to
use a fungus to cheaply bio-manufacture the cancer-fighting compound that
Bristol-Myers Squibb sells as Taxol. From 1991 through 1997, Cytoclonal
lost $15 million, while earning nary a sales dollar.
Dreyfus picked up 135,000 Cytoclonal shares, since sold off. Again,
Meyers and Janssen own a commanding 19% chunk of Cytoclonal, whose
shares neared $15 last month.
Schonberg put Dreyfus into nearly 1.5 million shares of another
Janssen-Meyers biotech, MachroChem, of Lexington, Massachusetts. The
firm is trying to deliver an impotence treatment in a gel. The impotence angle
was good enough to push the shares close to $15 last fall. The only
positions bigger than Schonberg's were those of Janssen and Meyers, who
owned over 2.5 million shares, according to April securities filings.
One of the flakiest Janssen-Meyers stocks in Schonberg's portfolio was the CCA Cos.
Brought public
at $5 a year
ago, CCA was
then called
Conserver
Corp and had
the Nasdaq
symbol RIPE.
That's because it claimed a European technology that kept fruit from
spoiling. But two months into public life, RIPE said it was going to build
casinos on Russia's Sakhalin Island and in the former Dutch colony of
Surinam. The Dreyfus Funds had over a million RIPE shares, which almost
reached $9 in February.
In recent months, the shares of these four Janssen-Meyers deals have
tanked, however, falling to half their peak levels. Vocal New York
short-seller Manuel P. Asensio contends that the shares had been supported
by the Dreyfus funds' heavy buying, under Schonberg's hand. The Dreyfus
manager's motivation, Asensio suspects, is that Schonberg had personal
positions in Janssen-Meyers stocks, such as a 30,000-share personal stake
in Chromatics. Such personal trading is not illegal per se, and Dreyfus has
said it believes Schonberg followed its rules. Asensio & Co., the
short-seller's firm, has shorted Chromatics Color Sciences.
Janssen-Meyers general partner Bruce Meyers alleges that market makers
have ganged up to short his firm's stocks, aiming to put Janssen-Meyers and
its banking clients out of business. To Meyers' consternation, market makers
can legally sell shares short without first borrowing them. "They're battling
with me today!" he grouses. "And they are stronger than I am, because they
don't need money to short my stocks."
This selling pressure on Janssen-Meyers issues is Meyers' explanation for
the disturbing appearance of Peter Janssen's notice to sell 50,000 shares of
Cytoclonal just a day before Meyers put out a "strong buy" on the stock.
But the Janssen-Meyers principals have sold into the firm's other buy
recommendations, too, such as the 40,000 shares of MachroChem the pair
have unloaded since the year began.
Schonberg hasn't been speaking to the press. Dreyfus is still reviewing the
Schonberg affair, says spokeswoman Patrice Kozlowski, and won't
comment further. The SEC and the New York Attorney General reportedly
are investigating the relationship of the Dreyfus fund manager and
Janssen-Meyers. Barron's has learned, from people who have seen trading
records, that Janssen-Meyers' sales of its house stocks matched Dreyfus
purchase orders for the same stocks.
Of course, Schonberg wasn't the only institutional fan of Janssen-Meyers
deals. The Perritt MicroCap Opportunities fund, run by Chicago's Gerald
W. Perritt, had 30,000 Cytoclonal shares as of May 1998. Although Perritt
says he sold half his original position at a profit, the Cytoclonal investment
has given him stomach aches. "This is probably the dumbest investment I
ever made in my life," he says. "I'm supposed to be a value investor." |
