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 does say that for November and December, the company was manufacturing and shipping product "at the rate of approximately $500,000 per week." But Elgindy's other assumption is wrong too.
The 10-KSB states that Eby receives his royalty "on all gross sales (subsequent to the Registrant receiving payment upon such gross sales)." Considering the high level of receivables at the end of fiscal '96 and the inevitable lag in cutting checks to Eby, it's not at all clear that Eby's royalty figures, even if accurate, can tell an investor anything timely about Quigley's sales.
Elgindy and other critics also claim that transfer records confirm that the all-important Cleveland Clinic trial was sponsored and payed for by Quigley Corp. "Everybody was compensated through the issue of shares," he said.
Quigley's MacAniff denied that charge. "We paid them nothing for the study," he said last week. The company is "contributing" to the cost of the new Clinic study of children in the Cleveland area, but all Quigley provided for the first study was the lozenges.
In an earlier interview in December, Dr. Michael Macknin, the lead author of the Cleveland trial, said that the Clinic received no compensation from Quigley for the first study. "I'd have had them pay for the first study if I'd thought it was going to work. We ended up financing the whole thing." Macknin said that for the current children's study, Quigley was paying 10% of his salary, but that money was going into a research fund at the clinic, not directly to him.
On the other hand, public filings disclosed this past Thursday indicated that Macknin had filed to sell 9,000 shares of Quigley. Macknin's office referred all questions to the Clinic's media office, which did not respond to Rogue's inquiry. Friday's Washington Post reported that Macknin said he bought the stock from the company at market value after his paper had been completed but before it had been published in the Annals of Internal Medicine. Counsel for Macknin and for the Clinic cleared the purchase.
Though the issue raises certain ethical questions and is sure to further cloud the trial results, attorneys questioned by the Post said Macknin's purchase and sale does not constitute insider trading. Moreover, since the study was already completed, it's difficult to argue that his decision to purchase Quigley shares influenced his paper's findings -- though the company's critics will surely make that case.
On the other hand, an unconfirmed report circulating on the message boards said that Macknin had told Bloomberg News that in March of 1996, Quigley Corp. gave him options to purchase 10,000 shares at $1 a share. If this proves true, it would raise some more serious questions about the researcher's integrity and the company's honesty in addressing the issue of compensation.
Keep IN mind .DR Macknin,, lied and was found to have made over $300,000 in QGLY, The product does in fact not work, Jerry Rosen was found guilty of manipulation of Qgly shares and I was Vindicated 100%...BTW the stock is now a wee drill bit |
