HEADLINE: BLOWING THE WHISTLE ON A FAMOUS WHISTLE-BLOWER
BYLINE: Gary Weiss, New York
HIGHLIGHT:
Accusations of stock manipulation are dogging star analyst Ray Dirks
BODY:
Whistle-blower. To Raymond L. Dirks, Wall Street's most storied securities
analyst, the whistle-blower holds a special place of honor. No wonder. In 1973,
while much of the Street looked on in derision -- and the Securities &
Business Week, August 1, 1994
Exchange Commission cried foul -- Dirks warned investors of a fraudulent
stock, Equity Funding. In the years to come, Equity Funding went bust and
Dirks was victorious, though it took a long and costly battle all the way to
the U.S. Supreme Court. In the end, Ray Dirks, whistle-blower, was cleared of
spreading inside information.
This new episode of the Dirks saga involves whistle-blowers. But this
time, other people are blowing the whistle -- on Dirks -- and some of their
accusations are as grave as stock manipulation. And this time, it is Dirks who
is trying to discredit his most visible adversary -- even as some of his closest
associates seem to be taking sides against him.
Such is the latest, increasingly curious chapter in the story of the
60-year-old Dirks, one of the Street's most widely quoted stock-pickers.
Today, ever more serious questions are being raised about Dirks, his firm Ray
Dirks Research, and RAS Securities Corp., the Manhattan-based underwriter from
which Dirks is about to part company.
This tale is multifaceted but has a common thread: Ray Dirks's most
beloved stock, OXiGENE. It is the story of his effort to discredit Susie Niess,
a former Dirks analyst who has no love for OXiGENE. And it's the story of
Michael M. LeConey, Dirks's star biotech analyst and OXiGENE's main
Business Week, August 1, 1994
champion, who Niess maintains improperly traded in stocks he recommended through
an account in another person's name. STOCK DIPS. Apparently the SEC is
examining some of the goings-on at RAS. According to sources at RAS, the SEC has
launched an inquiry into trading at RAS of shares of OXiGENE. RAS Chief
Executive Robert A. Schneider declined comment, and Dirks denied knowledge of
the probe. (The SEC would not say if it is conducting an inquiry.) The probe is
said to have begun on July 1, the day an article appeared in BUSINESS WEEK about
Dirks. The article explored accusations that current and former employees had
leveled against him, Dirks Research, and RAS Securities. Some of those
allegations maintained that Dirks had gone overboard in promoting OXiGENE, his
largest holding, and other stocks. The sources maintained that RAS had engaged
in improper trading practices to boost the price of stocks RAS took public. The
allegations were denied by Dirks and Schneider.
In the weeks since then, the accusations have become even more serious.
Among the questions being raised:
-- What explains the decline in OXiGENE stock from June 28 to June 30, just
prior to negative publicity? OXiGENE plummeted 20% prior to a June 29 broadcast
by Dan Dorfman of CNBC, who was downbeat on OXiGENE. Dorfman mentioned
speculation about an impending BUSINESS WEEK story, which appeared on July 1 and
was also negative. According to trading records, a 50,000-share block of
Business Week, August 1, 1994
OXiGENE stock was traded over the counter at 11:44 a.m. on June 28, some two
hours before Niess says she was interviewed by Dorfman, who quoted her in his
broadcast. A RAS source says the shares were bought by a Swedish institution,
but it could not be determined who the seller was or if the timing was related
to the impending negative publicity. Dirks says OXiGENE shares were under
attack by short-sellers who, he adds, have amassed a giant short position.
-- Did Dirks artificially inflate the price of OXiGENE stock in mid-July?
This allegation is stunning because it asserts that Dirks attempted to
manipulate the price of OXiGENE shares after the SEC launched its inquiry on
July 1. According to a source at RAS, in recent weeks Dirks inflated the price
of OXiGENE by buying shares for accounts that did not order the stock, with the
idea of moving the shares to other unwary account-holders when the transaction
was discovered. Such phony orders, or ''wooden tickets,'' would help
artificially sustain the price of the stock. The aim would be to eventually
unload the stock on the open market at a higher price. Dirks denies he wrote
wooden tickets.
-- Did a star biotech analyst, Michael LeConey, engage in improper trading
in stocks that he recommended? Niess, who once was LeConey's assistant, says she
has supplied the SEC with trading records that show LeConey engaged in trades in
1992 and 1993 for an account that he opened for William O'Mahoney Jr., who was
Business Week, August 1, 1994
described in account documents as a 38-year-old man. In fact, LeConey
acknowledges that O'Mahoney is a child, the stepson of his brother. Niess says
the trades included three instances of front-running -- illegal buying of shares
prior to issuance of a favorable research report. And documentation she has
supplied to the SEC appears to bear her out in one instance. According to
internal RAS trading records, LeConey bought 8,500 shares of Premier Anesthesia
Inc. on Sept. 3, 1992, six days before publishing a favorable report on Premier.
The trading records indicate that LeConey bought 5,000 more shares after the
report came out and sold all 13,500 at a profit over the following few weeks.
LeConey vigorously denies that he engaged in front-running. He acknowledges the
Sept. 3 trade but says RAS policy bans trades only within three days of a
research report. Le-Coney maintains the account lost money and that any profits
were to be set aside for his children, not himself. In 1983, LeConey was
dismissed from Merrill Lynch & Co. for setting up a trading account at another
firm. Two years later, he consented to $ 10,000 fines and suspensions by the
National Association of Securities Dealers and the New York Stock Exchange.
LeConey says that front-running was suspected at the time but that regulators
investigated and cleared him.
-- Has Dirks engaged in a smear campaign against a former analyst? Niess,
the former RAS biotech analyst, has maintained that Dirks exaggerated the
merits of OXiGENE, which is developing a product to prolong the lives of
Business Week, August 1, 1994
patients undergoing radiation therapy. Niess, who is setting up her own biotech
stock newsletter, in recent months has faxed letters to money managers
maintaining that OXiGENE's prospects have been exaggerated by RAS because
OXiGENE's drug is based on a cheap, widely used generic medication. Immediately
after Dorfman quoted Niess in his broadcast, Dirks faxed to money managers
copies of internal RAS memos and correspondence from Niess, including a
handwritten letter from Niess to Dirks bitterly complaining about her
neighbors. A handwritten notation from Dirks on one fax calls Niess ''a sick
person mentally'' (above). Dirks admits to writing that. Niess asserts that
Dirks has falsely accused her of mental illness in an effort to keep her from
speaking out about OXiGENE. She also says she has received a letter from OXiGENE
Chairman Richard A. Brown that threatens ''all legal means available to us to
correct the situation, including litigation'' if she doesn't cease what Brown
describes as her ''malicious assault on OXiGENE.'' LITTLE ACCORD. In an
interview, Dirks doggedly maintained that Niess was, in his words,
''paranoid'' -- and he provided BUSINESS WEEK with copies of the correspondence
and memos that he faxed to the money managers. All, he says, support his view
that Niess cannot be believed. But believed about what? Dirks concedes that
her main factual assertion -- that OXiGENE's product is based on a cheap generic
drug -- is true and has not been disputed by the company. But he differs with
her analysis, pointing to a series of favorable research reports written by
LeConey. ''You can believe anything he has to say,'' says Dirks.
Business Week, August 1, 1994
So what does LeConey have to say? He agrees with Dirks about OXiGENE --
and not much else. ''Ray is one of the most maniacal people I have ever met,''
says LeConey. ''He gets focused on things. He likes battles and controversy. The
more you stir the pot, the more excited he gets.'' In recent days, Dirks
Research has asserted in its 900-number stock-tip service that the short
position in OXiGENE is a million shares -- one-fifth of the company's market
capitalization. If true, that would be very bullish because shares borrowed and
then sold by short-sellers eventually have to be replaced. Dirks cites
research on the subject by LeConey, who disavows authorship. ''That's Ray, not
me,'' he says. ''I have no idea what the short position in OXiGENE is.'' JOB
CHANGE. What about the accusations of wooden tickets? Says LeConey: ''I heard
that something like that occurred. I have a habit in there of making no effort
to find out about that kind of stuff, to distance myself.''
Ray Dirks is doing a bit of distancing of his own. He is severing his
connections with RAS Securities over the next few weeks. Why? Says Schneider:
''I asked Mr. Dirks to leave five months ago. We have philosophical
differences. Let's say I'm more conservative than he is. '' No way, says
Dirks. He maintains that he is pulling out because of a dispute over
allocation of profits and because the firm is inadequately capitalized. Is that
true? No way, says Schneider. Did Schneider order Dirks to cease his faxes to
money managers regarding Niess? Schneider says yes; Dirks says no. And even
Business Week, August 1, 1994
though Schneider says that he has ''shut down'' the 900-number stock-tip
service, it is alive and well -- though in recent days has said it has no
connection with RAS. The two men agree on one thing -- that a dispute over
wooden tickets was not a factor in the split, as claimed by sources at RAS.
As Ray Dirks faces a move to another, as yet unknown securities firm, he
is, as usual, calm and unflappable. He only seems irritated -- slightly -- when
comparisons are made between the Ray Dirks of 1973 and the Susie Niess of
1994. Ridiculous, he says. Why? ''Because she's wrong,'' says Dirks.
But then again, that's what they used to say about Dirks in the days when
he was blowing the whistle.
URL: businessweek.com
GRAPHIC: Photograph: NIESS GAVE THE SEC RECORDS IMPLICATING A DIRKS ANALYST
IN ALLEGED IMPROPER TRADING ; Photograph: SMEAR CAMPAIGN?
Ray Dirks has claimed to money managers that Niess is ''a sick person
mentally'' and thus has no credibility in her analysis of OXiGENE. The note
below was part of a multipage fax to a money manager. Niess denies charges of
mental illness and maintains Dirks is trying to keep her from speaking out on
OXiGENE. ; Illustration: Graph: THE STRANGE MOVES IN OXIGENE STOCK
LEVEL 1 - 3 OF 4 STORIES
Copyright 1994 McGraw-Hill, Inc.
Business Week
<=1> View Related Topics
July 11, 1994
SECTION: FINANCE; Number 3380; Pg. 128
LENGTH: 1662 words
HEADLINE: A DARK SIDE TO RAY DIRKS?
BYLINE: Gary Weiss in New York
HIGHLIGHT:
Former co-workers are raising thorny questions
BODY:
Raymond L. Dirks is arguably Wall Street's most famous securities analyst.
During his colorful career, the 60-year-old Dirks has been an analyst,
dealmaker, whistleblower, and ''short-buster.'' His warnings about the Equity
Business Week, July 11, 1994
Funding scandal in 1973 led to a long battle with the Securities & Exchange
Commission -- and ultimate vindication before the U.S. Supreme Court. Dirks's
most recent triumph was his early advocacy of Conseco Inc. -- the obscure
insurance company likely to take over Kemper Corp.
Championing Conseco, which brought him into conflict with short-sellers who
doubted the stock's virtues, was Ray Dirks at his best: a smart, often
courageous stock-picker. His views about Conseco and other stocks -- mostly of
small companies -- are frequently aired in the financial press, including
BUSINESS WEEK. But there is another side to Dirks that is apparently not so
favorable. In recent weeks, more than a dozen analysts, traders, and brokers
have parted company with Dirks's firm -- some voluntarily, some not. These
former Dirks associates are raising troubling questions about the Dirks
stock picks widely promoted in the media, in advertisements, and in research
published by Dirks and his boutique, Ray Dirks Research. Some also question
the trading practices of Dirks's employer, RAS Securities Corp., a Manhattan
underwriter of new issues with a mainly institutional clientele. Ray Dirks
Research is a division of RAS.
Speaking to BUSINESS WEEK on condition of anonymity, former employees have
maintained that Dirks and Dirks Research aggressively pitch stocks in which he
and RAS have substantial unpublicized positions. And unlike Conseco, not all
Business Week, July 11, 1994
of Dirks's stock picks have turned out to be enduring successes. Many have
tumbled in recent months (chart) -- something RAS sources attribute to investor
backlash once RAS's lofty predictions failed to materialize. Among the RAS
initial public offerings to fall sharply are Clinicorp, Standish Care,
Nationsmart, National Wireless Holdings, Greenwich Air Services, Penn America
Group, and Dynagen. RAS sources say one RAS-underwritten biotech company that
climbed until recently, OXiGENE, was misleadingly promoted by Dirks as a
direct result of his ownership of the stock. That is vigorously denied by
Dirks and RAS Chief Executive Officer Robert A. Schneider (the RAS in RAS
Securities). MERE VICTIMS. The allegations go beyond aggressive stock-pitching.
One former high RAS official says the brokerage routinely boosted prices by
placing orders at the close of trading on the American Stock Exchange, thus
inflating closing prices. Also, this former official says, RAS last year owned
more than 10% of the outstanding shares of one of its underwritings, Standish
Care Co., without disclosing to investors as required by Securities & Exchange
Commission rules. Schneider denies RAS ever engaged in either practice.
Dirks and Schneider maintain they are not perpetrators of wrongdoing, but
victims. In separate interviews, they acknowledged that rumors of impropriety
and financial trouble were dogging the firm. The financial rumors are ironic for
Dirks because of his troubled stewardship of a leading IPO firm of the early
1980s, John Muir & Co. At the time, Dirks publicly conceded that he was a
Business Week, July 11, 1994
lax administrator at Muir, which was forced into liquidation.
But Schneider maintains that RAS is profitable and has ample capital,
although he says he was forced to withdraw $ 2 million -- almost two-thirds of
the firm's capital -- to pay taxes in April. He and Dirks say the anti-RAS
stories circulating on Wall Street are lies spread by dissatisfied ex-employees
who have a grudge against the company.
Who is telling the truth: Dirks and Schneider or their former co-workers?
One clue may be found in the Dirks campaign for the stock of OXiGENE, a
biotechnology company RAS brought public last August. Until recent days, when
its shares plummeted 20%, OXiGENE had recorded a 1994 gain of nearly 60%, while
other biotech issues were slaughtered. OXiGENE's popularity can be summed up in
one word: Sensamide. ''OXiGENE's product, Sensamide, appears to hinder the
ability of cancer cells to repair themselves after radiation therapy and
chemotherapy,'' Dirks enthused in ads bearing his photo in Barron's and
Investor's Business Daily. Dirks, who says OXiGENE is his largest
stockholding, also has been beating the drum for the company in his 900-number
phone service. Dirks Research has issued glowing reports bearing such titles
as ''Sensamide -- A Potential Major Advance in Cancer Therapy.''
Business Week, July 11, 1994
OXiGENE officials say the RAS research and ads, though showy, are perfectly
truthful. CEO Richard A. Brown says the early clinical trials on two dozen
patients -- together with previous tests on animals -- show that Sensamide
prolongs the lives of cancer patients undergoing therapy. According to a company
press release on May 19, reporting on the first phase of clinical tests,
Sensamide was ''developed in collaboration with OXiGENE's president and
co-founder, Ronald Pero,'' a professor at the University of Lund in Sweden.
But neither the Dirks ads nor the OXiGENE press release note that, as the
company has long acknowledged, Sensamide is in fact a concentrated version ofpen
sive generic drug that has long been administered to cancer patients to
curtail nausea. Brown and Pero observe that Sensamide is different because it's
administered through intramuscular injection, requiring a concentrated dose, and
because its acidity is neutralized. That, they say, reduces the side effects
caused by the more acidic generic drug -- though that has only been shown in
tests involving rats. FEVERED SELL-OFF. Although Sensamide is protected by a
patent, critics within RAS maintain that many doctors would use the generic
instead of Sensamide to boost the effectiveness of radiation therapy. But
company officials say doing so would risk malpractice suits. Still, a recent
company-financed report by consultants Prescription Capital Inc. notes that
hospital cost-consciousness ''must be considered a risk for any drug, whether
reformulated or not, that is based on the active ingredient of a widely
Business Week, July 11, 1994
available generic.'' The consultant adds, however, that the neutralized form of
Sensamide may diminish that risk. One RAS biotech analyst's negative assessment
of Sensamide -- and hyping of the stock by RAS -- was vented within RAS by,
among other things, a scathing critique of one of RAS's research reports.
In recent days OXiGENE shares have been unceremoniously dumped. A negative
item on OXiGENE was broadcast by CNBC's Dan Dorfman midday on June 29 -- but
most of the fevered selling occurred well before he got on the air. In a spate
of ferocious trading in which one-eighth of the outstanding shares changed
hands, 293,00 shares traded on June 28 and 321,000 traded until noon on June 29.
OXiGENE fell from 10 3/8 on June 27 to 8 5/16 on June 29, when the trading was
halted shortly before noon. What's going on? ''There are rumors about the
article you are about to write being negative for OXiGENE,'' OXiGENE executive
vice-president Dr. Yuval Binur told BUSINESS WEEK.
To be sure, careful buyers of the stock would be aware of the market risks
of Sensamide. The same goes for the investors Dirks persuaded to buy the
preferred stock of IVF America Inc., which Dirks promoted in March as having a
current yield of 17%, tax-free. True? Yes -- if you never sell the stock. But
the dividend is not tax-free for investors when the proceeds from the sale of
the stock, together with accumulated dividends, exceed the purchase price. So if
an investor sold IVF America preferred stock after a year, the stock price
Business Week, July 11, 1994
would need to fall by 17% in order for the interest to be nontaxable -- a caveat
not mentioned in the advertisement. ''A technicality,'' Dirks says
dismissively. ''When you do industry reports on 20, 30, 40 companies, you make
mistakes -- not that I'm saying this was a mistake.''
Dirks may put his name on reports -- but it does not appear on the firm's
corporate filings with the SEC. Schneider and Dirks acknowledge that, as head
of Ray Dirks Research -- all of whose employees work at RAS -- Dirks
functions as head of research at RAS. According to Dirks, 70 of the 90 RAS
employees report to him at Ray Dirks Research, which, he says, generates 80%
of RAS's revenues. Yet Dirks is registered with the National Association of
Securities Dealers, which regulates brokerages, merely as a ''registered
representative'' -- a stockbroker -- and not as an officer of the firm. Is that
is a violation of NASD rules? Not according to Dirks and Schneider. ''I don't
need a partner,'' says Schneider, when asked to explain why Dirks is not
registered with the NASD as a top manager. But NASD vice-president Frank F.
McAuliffe says research directors are required to register as officers and
principals.
Despite backbiting from his former associates, the rumpled, cordial Dirks
is serene. In a lengthy interview, Dirks attributed the downturn in the
various stocks underwritten by RAS -- and promoted by Dirks Research -- as
Business Week, July 11, 1994
just a sign of the malaise among small stocks and new issues. ''We run a clean
shop,'' says Dirk. ''You try to do the best you can do, but occasionally you
run into people who will knock you.''
And how. Among the current RAS employees who are less than enthusiastic is,
well, Schneider. Asked to characterize Dirks's performance as head of
research, Schneider says it ''certainly is adequate -- neither the best nor the
worst.'' Does Dirks Research produce 80% of the firm's revenues? ''That's not
accurate,'' says Schneider. ''It's probably 40% to 50%.''
A detail? Irrelevant? Perhaps. But stock research is an agglomeration of
small, seemingly irrelevent details. In his eagerness to promote stocks and rake
in profits, Dirks seems to have forgotten the old saw that God is in the
details -- omitted at his peril.
URL: businessweek.com
GRAPHIC: Photograph: ''WE RUN A CLEAN SHOP ...BUT OCCASIONALLY, YOU RUN INTO
PEOPLE WHO WILL KNOCK YOU'' (TOP TO BOTTOM) PHOTOGRAPH BY CHRIS WADE;
Illustration: Graph: RAS SECURITIES: HOW THREE IPOs HAVE FARED GRAPHICS BY RAY
VELLA/BW ; Photograph: THE DIRKS PITCH FOR IVF'S 17% YIELD DOESN'T MENTION
IT'S TAX-FREE ONLY UNDER SOME CIRCUMSTANCES. AND AN RAS REPORT SHOWS AN
ANALYST'S MISGIVINGS ABOUT ITS CLAIMS FOR OXiGENE'S SENSAMIDE |
