Biotech Firm Claims Piper Jaffray
Halted Coverage of It as Payback
Antigenics Says When It Chose Use Rival for IPO,
U.S. Bancorp Unit Decided to Teach It a 'Lesson'
By RANDALL SMITH and GEETA ANAND
Staff Reporters of THE WALL STREET JOURNAL
When competing for new stock business, some securities firms don't get mad -- they get even.
That's what Antigenics Inc., a biotechnology firm with a promising cancer vaccine, asserts in a rare public airing of a fight over whether Wall Street research is tainted. Its adversary: U.S. Bancorp Piper Jaffray, which managed Antigenics' 2000 initial public offering of stock.
The quarrel began after Antigenics decided on Dec. 27 to choose a Piper Jaffray competitor, UBS Warburg, to manage a subsequent $60 million stock offering. Antigenics says it made the decision because it believed the New York bankers of UBS Warburg, a unit of Switzerland's UBS AG, could get the deal done faster and give the company more exposure than Piper, a unit of Minneapolis-based U.S. Bancorp. When Antigenics Chief Executive Garo Armen broke the news to Piper banker Scott Beardsley, he says Mr. Beardsley retorted that a Piper analyst would drop coverage of the company and that Piper would stop making a market in its stock.
"We have to teach our clients a lesson," Mr. Armen says Mr. Beardsley told him. A Piper spokeswoman denies that Mr. Beardsley made those statements, saying Piper bankers don't have the authority to discontinue research coverage. But she declines to provide an account of the discussion, citing confidentiality policies. Mr. Beardsley declines to comment.
In any case, there's no dispute over what happened next. A week later, on Jan. 4, one of Piper's biotech analysts, Peter Ginsberg, dropped coverage of Antigenics after having rated the company a "strong buy" throughout the nearly two years after Piper led Antigenics' $63 million IPO. And the following week, Linda Lifsey, Antigenics' investor-relations chief, says that David Parrot, a Piper investment banker, told her he had "the unfortunate task" of withdrawing an invitation for Antigenics to make a presentation at Piper's health-care conference Jan. 29 at the Pierre Hotel in Manhattan. She says Antigenics was also uninvited from a posh reception at the Museum of Modern Art. Piper declined to make Mr. Parrot available for comment.
The moves were no coincidence. In a Jan. 18 letter to an Antigenics lawyer, Piper's deputy general counsel, Mark Reed, tied the research stoppage to a commitment Antigenics had made in mid-2001 to let Piper manage its next stock issue. By choosing rival UBS Warburg, Mr. Reed said, Antigenics had cost Piper more than $1 million in fees and "taken action contrary to its previous commitments." As a result, Mr. Reed said in the letter, Piper "re-evaluated the utilization of its resources in light of Antigenics' decision and the abrupt change in the nature of their relationship."
Still-Swirling Controversy
The episode represents a twist on the still-swirling controversy over the quality of Wall Street research. In the wake of the Enron Corp. scandal, revelations have poured out about business links between the failed energy company and the Wall Street firms that touted its stock. And just last week, the New York State attorney general's office won a court order forcing Merrill Lynch & Co. to overhaul its research operations after finding that the company's stock ratings were "biased." The attorney general said that Merrill uses its research to win investment-banking business instead of serving the needs of small investors. Merrill, which obtained a stay of the court order, says it is discussing ways of making broader disclosures in its research reports.
Much of the criticism has revolved around ways in which supposedly objective analysts have been used as carrots by their firm's investment-banking colleagues to win corporate-finance business. The Antigenics allegations, by contrast, portray an analyst being used as a stick, a side of the story that rarely surfaces publicly, since most companies don't complain for fear of retaliation.
Piper Jaffray acknowledges it was miffed at Antigenics for not being chosen to lead the stock offering. But the company says it doesn't use its analyst coverage "as a means to coerce investment-banking relationships." In a statement, Piper spokeswoman Erin Freeman said: "The decision to discontinue coverage of Antigenics was an individual, company-specific decision, based on a variety of factors." The firm, she added, "strongly supports analyst independence." Piper, she noted, still makes a market in Antigenics stock. Mr. Ginsberg, the Piper analyst, who two years ago published a report calling Antigenics a "pioneer and leader" in its field, now says only: "We don't comment on companies we don't cover."
Regular research reports from reputable analysts can be vital to the financial health of small and midsize companies such as Antigenics, which need such third-party commentary to help stand out among the approximately 7,500 stocks listed on the three major U.S. stock exchanges. Loss of such coverage sometimes signals problems and can have a negative effect on a fledgling company's shares. Since Dec. 27, Antigenics shares have slumped 25%, compared with a 19% drop in the American Stock Exchange biotech index, even though UBS Warburg started covering the company March 6.
Yanking research coverage could "mean the analyst doesn't think it's a great stock," says John Borzilleri, a senior vice president at the State Street Research and Management unit of MetLife Inc., which doesn't hold Antigenics shares. Money managers who focus on stocks of small, growing companies but lack health-care expertise are particularly sensitive to such analyst shifts. "It would make some investors very nervous," he says.
On Jan. 16, Mr. Armen fired off a complaint to the head of the Securities and Exchange Commission, the top regulator at the National Association of Securities Dealers and to the chairman of a House of Representatives subcommittee that oversees capital markets. In the letter, he charged that Piper had "victimized" Antigenics through "gross abuse of its position as a brokerage firm with a securities analyst covering my company."
"We have reason to believe that the analyst and others affiliated with Piper Jaffray engaged in a systematic, direct effort to persuade investors not to participate" in the UBS Warburg-led offering, he added. Piper's Ms. Freeman says those allegations are "without merit."
Mr. Armen said in a Jan. 21 memo to his lawyer that two institutional investors pulled or reduced orders for stock in the UBS Warburg-led offering. "On Jan. 11 in the afternoon we were informed that a Minneapolis account" had pulled an order for 700,000 shares, Mr. Armen said in the memo. Another account in New York slashed its order to 100,000 shares from 400,000 shares at the last minute after expressing enthusiasm for the deal, his memo says.
When Mr. Armen called the investor who pulled the 700,000-share order to ask about the change of plans, he says the investor listed a number of reasons, including that he had heard Antigenics had "fallen behind" in some of its programs. When Mr. Armen suggested that Piper might have been the source of his reservations, "he did not deny it," Mr. Armen says.
Mr. Armen declined to name the accounts. People on Wall Street identified the investors as Peregrine Capital in Minneapolis, a unit of Wells Fargo & Co., and Fred Alger Management Inc. in New York.
Mr. Armen provided the two investors' names to regulators at the NASD because he suspects they may have received negative information from Piper. He says he received two calls from lawyers for NASD's regulatory unit following up on his complaint letter. The NASD declined to comment.
Paul von Kuster, the Peregrine portfolio manager, confirms that he had initially submitted a 700,000-share order. But he says he later added a "price ceiling" of about $13.50 a share that resulted in his not participating in the $15-a-share deal. He says he had learned only midway through the offering that Mr. Ginsberg had dropped coverage of the company. Mr. von Kuster says he spoke with Mr. Ginsberg around that time but won't say what they discussed.
He says he considers Mr. Ginsberg "a very good analyst [who] does a very good job," but he adds that he "didn't need Peter Ginsberg" to help him make a decision on Antigenics stock.
Alger eventually bought 100,000 Antigenics shares that remained unsold the morning after the offering, according to a person familiar with the company. Alger's biotech analyst Theresa McRoberts says she didn't talk to anyone at Piper about the offering, and she never submitted a formal order for 400,000 shares.
Antigenics ultimately completed the offering by selling four million shares at $15 each, raising $60 million.
No Stranger
Mr. Armen, 49 years old, isn't a stranger to the world of analysts. He worked as a health-care analyst at E.F. Hutton & Co. (now part of Citigroup Inc.) and as an analyst and investment banker at Dean Witter Reynolds (now part of Morgan Stanley). He called dropping coverage "a disservice to Piper's investing clients" who bought the stock in the IPO. Now, he added, "they would be telling the clients to go elsewhere" for analysis.
Mr. Armen has demanded in a letter to Piper that it pay his company $20 million for allegedly badmouthing Antigenics during the offering, which he says reduced its proceeds 25% by driving down the stock price. Piper calls the allegations "simply untrue," denies badmouthing Antigenics, and says the stock price suffered a greater decline before Mr. Ginsberg dropped coverage, because of the flood of new shares to be issued. The fact that Mr. Ginsberg dropped coverage after the market closed on a Friday afternoon, adds Piper's Ms. Freeman, is evidence that Piper didn't intend to harm Antigenics.
This argument doesn't sway some investors. Such a halt in coverage deprives investors -- particularly individuals who lack the resources of institutional investors -- of information they may need, says William Droms, a professor at Georgetown University business school who specializes in investing. "People who bought the IPO who were used to getting information from Piper, now they don't have information about the stock," said Mr. Droms. "It's obvious there is a problem when coverage is dropped." Mr. Droms is also president of Droms Strauss Advisers Inc., which manages $65 million and doesn't own Antigenics stock.
Samuel Isaly, managing partner of OrbiMed Advisers LLC, a money manager specializing in biotechnology and pharmaceuticals stocks, says he isn't surprised at all that Piper dropped coverage of Antigenics after the biotechnology firm stopped doing business with the investment bank.
"It's the dirty little secret that if you lose the banking business, the reason for covering that company disappears," he said. He estimates that about half of biotechnology companies are covered by just one analyst -- the one from the firm that raised money for that company.
Antigenics isn't the only biotech company whose coverage Piper's Mr. Ginsberg dropped after the company picked a rival to lead a securities offering. In the fall of 1999, Emisphere Technologies Inc., a Hawthorne, N.Y., biotechnology firm, chose Hambrecht & Quist (now a unit of J.P. Morgan Chase & Co.) to manage a $22 million stock issue. At the time, Emisphere was covered by analysts at three banks, including H&Q and Piper.
When Emisphere CEO Michael Goldberg offered Piper a lesser role in the deal, he says Mr. Ginsberg, the same Piper biotech analyst, was furious and threatened to drop coverage of his stock if he chose H&Q.
"He said: 'We're only interested in being your banker if we're in the lead,' " Dr. Goldberg says of his conversation with Mr. Ginsberg. "Peter Ginsberg said not only would they not participate in the offering, but if you tell us we're not the lead manager, we'll drop coverage immediately."
Dr. Goldberg says he told Mr. Ginsberg he was going with H&Q as the lead manager of its offering, and "five minutes later, there was a note out on First Call saying they had dropped coverage." Until then, Piper had had a "buy" on the stock. "We were shocked," Dr. Goldberg said. "We were upset, we were very disturbed that the firm had made the decision."
Piper's spokeswoman, Ms. Freeman, says Mr. Ginsberg denies making the statement, noting that "decisions to participate in corporate financing transactions are made by investment bankers, not analysts." Piper doesn't dispute that Mr. Ginsberg dropped coverage after being told Emisphere had snubbed Piper and chosen another firm. The firm says coverage was dropped for "a variety of business considerations."
Write to Randall Smith at randall.smith@wsj.com and Geeta Anand at geeta.anand@wsj.com
Updated April 16, 2002 1:06 a.m. EDT |
