John,
MCHM, Macrochem, is mention (unfavorably) in the article below. THE story is about Michael Schonberg, but mentions MCHM, CCSI, Janssen/Meyers, D.H. BLair, and a few other keywords shorts should keep and eye out for. The fact that MCHM is mention with the characters below makes it a good short, fundamentals and cash flow aside.
forbes.com
IN APRIL, citing poor performance, DreyfusCorp., a subsidiary of Mellon Bank, demoted the manager of two of its funds, Michael Schonberg, 47.
In a powerful bull market, last year Schonberg's Aggressive Growth was down 15.8% and Premier Aggressive Growth down 13%, putting both near the fund industry's bottom. So far this year they're doing even worse. As a consequence of lousy performance and redemptions, the fund assets fell by roughly half, to $340 million, between the spring of 1996 and this March. Dreyfus says Schonberg is on a paid leave of absence.
Schonberg was not just a bad manager. He accepted cheap stock or warrants in two companies whose shares he later bought for his funds.
In the shadow of the Schonberg debacle, FORBES has learned, looms the controversial figure of penny stock king J. Morton Davis of New York-based D.H. Blair & Co., Inc. and D.H. Blair Investment Banking Corp. Stocks involving Davis or his former Blair associates at times constituted up to 15% of the assets of Schonberg's funds. Some of those stocks went up after Schonberg bought them, but most ultimately fizzled.
Morty Davis, 69, is a Brooklyn-born Harvard Business School graduate who is worth several hundred million dollars. He got rich by raising money in the private and public markets for companies that tonier firms wouldn't touch. Since that kind of paper is hard to sell, Davis demanded and got top dollar from the outfits he served, collecting big fees and getting hunks of equity in those companies.
Davis operated on two levels: in the retail market, through such boiler room tactics as cold calling; in the institutional market, through selling stock to performance-hungry money managers like Schonberg. Some of his initial public offerings-Enzo Biochem, Genetic Systems and TIE/Communications, for example-were great successes over time, but many others cost investors big money.
Davis has so far avoided the fate that befell such penny stock pirates as Robert Brennan and the late Meyer Blinder, but Davis has been feeling the heat lately. In 1997 D.H. Blair agreed to pay $4.4 million in fines and restitutions as part of a settlement with NASD; in the settlement, Blair neither admitted nor denied that it overcharged customers who invested in the IPOs it underwrote. Currently Blair is reportedly being investigated for sales practice violations and more by the Securities & Exchange Commission, federal prosecutors and a task force of state securities regulators.
Amidst this pressure, last year Blair's retail arm was unloaded. Its brokers and accounts were acquired by Barington Capital Group, a New York-based penny stock firm run by a former Blair executive, James Mitarotonda. Dreyfus manager Schonberg was certainly aware of Blair's reputation for underwriting shoddy merchandise. Yet he bought for his Dreyfus portfolios such Davis-connected stocks as Advanced Photonix, a doggy maker of electronic/optic products. For his part, Davis says he never heard of Schonberg and doesn't know why he bought the stocks.
Schonberg also had significant dealings with Janssen/Meyers Associates, L.P., a small New York-based brokerage run by Peter Janssen, 39, and Bruce Meyers, 47, two ex-D.H. Blair executives. It was Janssen/Meyers that in 1994 managed a private placement deal through which Schonberg got cheap shares of the biotech startup Chromatics Color Sciences International, later a major holding of his Dreyfus funds.
And it was Janssen/Meyers that in June 1997 took public, at $5 a share, CCA Cos., which owns the rights to a food preservation product and wants to put up a hotel/casino complex on the Siberian island of Sakhalin.
At the public offering Schonberg bought almost 10% of CCA's shares for his Dreyfus funds. Later, at higher prices, he quintupled the number of shares Dreyfus owned. After reaching $11.63 last fall, the stock sank to a recent $2.75. The Dreyfus funds rode the stock all the way down.
Another Davis associate doing business with Schonberg was Davis' son-in-law, Lindsay Rosenwald, 43, an M.D. turned financier. Rosenwald, once director of corporate finance at Blair, opened his own venture capital shop in the early 1990s.
Rosenwald specializes in biotech. Here are some of the biotech startups in which Rosenwald was a big holder and Schonberg a big buyer for his Dreyfus funds: Atlantic Pharmaceuticals, Avigen, BioCryst Pharmaceuticals, Boston Life Sciences, Pacific Pharmaceuticals and Vimrx Pharmaceuticals. None has a market cap over $100 million. None has ever earned a penny. Schonberg's former funds took losses in a couple, made a bit of money in one and were bagged big in three.
Rosenwald claims Schonberg was just another client. He says Schonberg rejected most of the deals he showed him. "Never was there anything other than the prospect of making money for the investor," Rosenwald insists.
Maybe so. But these and others were dicey stocks-and the circle of Davis connections apparently didn't raise warning flags at Dreyfus.
Davis operated on two levels: in the retail market, through such boiler room tactics as cold calling; in the institutional market, through selling stock to performance-hungry money managers like Schonberg.
Take tiny, moneylosing Macrochem Corp. Macrochem is developing a treatment for male impotence. D.H. Blair completed a private placement of securities for Macrochem in 1993. During the first quarter of 1996 Schonberg bought 1,265,000 shares for the Dreyfus fund In February 1996 Davis owned stock and warrants in Macrochem amounting to nearly 1.7 million shares. Then, in less than two months-around the time Schonberg was buying the stock-Davis sold 975,000 shares at roughly between $5.50 and $7 each. Converting warrants cost Davis $1.3 million; selling the stock got him $5.8 million.
Janssen, who by then had left Blair and taken Macrochem with him as an investment banking client, says he persuaded Davis to sell the shares so Schonberg and a few other big investors wouldn't have to drive up the price to get the shares they wanted. Yet the heavy buying by Schonberg and company drove up the price anyway, by as much as 50% over a couple of months.
Last summer Macrochem stock took off, more than doubling by October, to a high of $14.75. During the run-up, insiders-among them Janssen and Meyers-sold a load of stock after exercising options and discount warrants that were due to expire last year.
But when these insiders were selling, Schonberg wasn't. He sat tight. According to an informed source, it wasn't until May and June, after he was demoted, that his former funds finally bailed out of most of their Macrochem stock, getting about $9 to $12 for the shares. Off the peak, but better late than never: Since June the stock has dropped to a recent $6.81.
The SEC and the New York State Attorney General's office are probing deeper into the Schonberg affair. As they do, we suspect that they'll find more footprints of Davis and the others. |
