EQUITIES MAGAZINE July/August 1998 Issue
"J' Accuse..."
In hatchet jobs in "L'Affaire Dreyfus" Barron's printed above the graphed crash of two Dreyfus Funds that a fondness for underwriters Janssen/Meyers stocks didn't help their performance. Yet these stocks soared over the measured time period and obviously did help, not hurt. Like the original Jew Dreyfus, victimized Peter Janssen has been made into an evil scapegoat by short sellers. Unreported was abusive naked short selling and Avalon's heave prepublication trading before Manual Asensio's bear raid on Janssen's trio of corporate babies.
By Robert J. Flaherty with Milana Barbalat
Barron's has a problem with a story not unlike CNN's recent fiasco in reporting U.S. planes killed American deserters with nerve gas and then failing to prove any nerve gas was dropped.
A highly volatile, unusually vocal short seller Manuel Asensio blamed underwriter, Peter Janssen, head of Janssen/Meyers for selling such horrible stocks to the Dreyfus Aggressive Growth and Dreyful Premier Aggressive Growth Funds that Janssen was linked with their two year collapse.
New York City-based Asensio & Co. regularly turns out Internet press releases, charging developing companies with having no worthwhile technology and their managements with deliberate fraud, doing a cut and paste job replacing the old names with the new targets. Often in the shadows silently striking with heavy shorting was "stealthy" market maker Avalon Research of Boca Raton, Fl, whose CEO explains away the appearance of front running because, "If anything, Asensio copies us". Abusive naked short selling is being overlooked by sleeping SEC and NASD regulators, and recent bear and "toxic convertible" raids make the old StockBuster Feshbachs seem like Boy Scouts.
Asensio repeated Avalon's charge the potential of one Janssen startup identifying jaundice in babies had been overstated. Asensio added that the only reason Dreyfus bought the stock was the now suspended portfolio manager who already owned it would personally benefit.
Swallowing short seller Asensio's unproven arguments hook, line and sinker in his July 6, 1998 story "Wounded Lion," veteran reporter, Bill Alpert attributed the "splinter" in the Dreyfus lion's paw to "stocks from a small New York Firm." His caption over a graph linked Janssen/Meyers stocks with the collapse of the two Dreyfus Funds. Barron's also smeared them as "penny stocks," although all of the ones in question are currently traded on Nasdaq and do not fit the SEC definition of a penny stock. Each meets all of Nasdaq's increased standards for continued trading on that improving premier market.
A tireless optimist and driven would-be-disciple of Sir John Templeton, Janssen is trying to follow the path of Carnegie, the original Rockefeller and Success Magazine co-founder Clement Stone in adapting positive thinking to business. This should lead to success. Great wealth, once achieved, is to be used for philanthropy to make the world better. It's all in the books Janssen reads daily and depends upon to guide his life. See EQUITIES June 1998 on page 15 and April 1995 EQUITIES, "New kid in the Planet."
Janssen is far from perfect. He made the mistake of taking his first job with penny stock bucket shop Blinder Robinson, where EQUITIES was the first magazine in America to reveal their nickname "Blind 'em and Rob 'em." At D. H. Blair eight years ago he was fined and suspended for 30 days. While there Janssen picked up some of the flashy style of his mentor J. Morton Davis, like taking big chunks of equity in the companies he helps. His critics call this greed. He also is considered too pushy selling stocks which are too close to the venture capital stage. On the good side, Janssen has been a wonderful salesman and inspirational leader. He pressures the CEO of each company he backs to adapt the principles of positive thinking and some wonderful things are happening.
But, Barron's painted Peter totally black, the way short seller Asensio describes this man he has never met or spoken to even once. When securities Asensio shorts rise, he habitually throws mud. But just because an underwriter's emerging growth stocks rise does not make him a bad person.
Where was the balance and fairness in Barron's articles? Let us make the contest a little more even and provide testimony crucial for Janssen's defense. He is a much better person and his companies are much more promising than Barron's has let on.
In a N.Y. Society of Security Analysts debate, Equities editor Robert Flaherty served as moderator, really referee, between the frequently shouting Asensio and Edwin Mishkin, SIPIC (Securities Investor Protection Act) trustee of now bankrupt Adler Coleman Clearing Corp.
Asensio defended the actions of naked shorts who illegally depressed and shorted several issues of a small underwriter Sterling Hanover. Secret shorts had spread rumors that negative media would destroy the underwriter and its satellite stocks, already hurt by heavy naked short selling in disgraceful, unreported pre-publication trading. Both the broker and its targeted issues collapsed. Unfortunately, several independent clearing firms also went under, including Adler Coleman, causing thousands of little guy investors unnecessary losses. Its SIPIC trustee blames illegal naked short selling, stock parking and ghost trades for the crash. Shorts weren't playing by the rules.
Angrily, Asensio responded the stocks were so junky they never should have been brought public and would have collapsed anyway. He argued the SIPIC trustee should not have been able to buy in open overdue short positions above the market price. In fact, the trustee reversed $21 milLion in illegal sales by naked short sellers. He often owned over 100% of some stocks. Bears had shorted more shares than existed in some companies.
Under the RICO federal anti-racketeering act, SIPIC Trustee Mishkin filed a 1996 suit for about $250 million against the main players in "the wolf pack" of attacking shorts. Pros used bribes, threats of violence, blackmail and above all naked shorting without borrowing the required shares to cheat the little guys. Prominent among those charged were the Fiero brothers, whose firm still is in the middle of stock collapses involving "toxic convertibles," and the Stock Doc's son at Aspen Partners. If your company isn't sick, wait till the Stock Doc gives the media his diagnosis.
In 1995 the Stock Doc's son Stephen, a huge former football player, was caught by the NASD in attempting to obtain delivery from a company of stock at below market prices by threatening to cause the price to decline below the level necessary for continued Nasdaq listing. On tape he threatened a company CEO, "I am going to do what's called a magic trick. That's where I take your money and turn it into my money. If you want me to serve you up and wrap your fuckin' nuts around your head, I will."
This current Dreyfus situation is deja-phew all over again. Prepublication trading by naked short sellers before Barron's July basts was horrendous. From February 1998 to June 1998, the short position in Chromatics Color Sciences (Nasdaq: CCSI-4 13/32) rose from 1.5 million to 3.7 million shares, up 146%, in Cytoclonal Pharmaceutical (Nasdaq: CYPH-6 1/2) from 148,179 to 490,000 up 230% and in MachroChem (Nasdaq: MCHM-6 7/8) from 620,183 to 2.6 million 317%. Somebody had placed big bets before the public was to get Barron's bad news second hand.
On his Internet website, Asensio ridiculed the idea that short selling had anything to do with the stock declines. What crap! Shorts had everything to do with it. Stock charts on all show skyrocketing shorting spikes and collapsing prices about the same period.
Worse, Nasdaq reports that two of the three stocks are on Nasdaq's fails-to-deliver shares purchased list. This indicates the shareholders of Chromatics, Cytoclonal and also Cytoclonal warrants (CYPHZ-2 5/8) are being victimized by illegal naked short selling. Abusive shorts have been driving their stock prices down by selling shares which do not exist. These shares have not been borrowed and later delivered as the NASD rules state they must be. Many cheated investors who bought these shorted shares have not received delivery for the stock they paid for. Regulatory SEC and NASD watchdogs should wake up and bark!
Financially Raping Commodore
The simultaneous bear raid on all three Janssen/Meyers companies caused severe June plunges in all three stocks, which are down respectively from their highs over 70%, 43% and 52%. Unmentioned in either of the Barron's blasts, or an August Forbes story, which blamed Morty Davis for the Dreyfus Funds drop, was the role of stealthy market maker Avalon, named for the island lost in the mist. No wonder Barron's could not find it. Avalon mainly shorted all three companies. Some major Nasdaq traders do not know much about it.
"Avalon" is headed my Mike Margolies who left Meyer Berman and went to Boca Ratan, Fl," begins gadfly Ray Dirks, founder of the ShortBuster Club. "There is no question Avalon hammers down stock, is somehow involved in naked short selling and is into 'toxic convertibles' big time! They just clobbered my Commodore Applied Technologies. (AMEX:CX 1 7/8) (See EQUITIES July/August 1997) Someone from Scudder Stevens & Clark told me Avalon hit one of their toxic converts too."
Needing more expansion money very fast, Commodore agreed to a Regulation S offshore "toxic convertible." Here stock is not convertible for the debt at a fixed price but at what the recent stock price has been, in this case with a floor of 2, when the offshore buyers convert. Quickly Avalon and other shorts hammered down the price 75% from 8 to 2 so the offshore players were able to convert into many more shares. "The telltale giveaway that shorts and convertible owners were linked is that, once the stock fell to the 2 minimum conversion price, shorts didn't try to push it lower," explains the man who exposed the Equity Funding Fraud, see page 40. Naturally no one warned the CEO of Commodore abusive shorts were poised to pounce and destabilize the common shares as soon as the convertible deal was signed. In addition to institutions, 'Joe Six Pack Investors' were hurt. I feel badly for them.
"Yes," sums up Ray Dirks, "I know of Avalon--unfortunately."
The attack on Janssen's stocks has been ruthless. The Wall Street Journal reports a Chromatics bull has received death threats on the internet. An anonymous short seller, Mr. Pink, published this big bull's home address where his children live and then suggested on the internet he be sent a package. This would mean a bomb and the frightened bull Alan Davidson worries about the safety of his children. These tactics are despicable, even for abusive short sellers.
Asensio turned out a damning press release, "Dreyfus fund manager engaged in fraudulent activities." The Dreyfus manager owned Chromatics Color Sciences before he went to work for Dreyfus and bought it for his funds only to benefit himself, claimed mind reader Asensio.
There is nothing illegal in fund portfolio managers trading in stocks. Many have and some still do. However, more and more funds are adopting policies to avoid this because of the conflict of interest.
In a follow up piece on July 13, 1998 "Fallout from L'Affaire Dreyfus" Barron's again featured Asensio's allegations against Janssen. However, they appear to amount to a little more than Janssen selling emerging growth stocks to Dreyfus Funds that specialize in that niche. As for the fact that Dreyfus Funds were the worst performers in that category, Janssen can hardly be blamed.
Barron's claimed that these three Janssen/Meyer stocks were responsible for the problems of the two Dreyfus Funds. IMPOSSIBLE! The three stocks went up until Avalon and Asensio began to drive them down. Leaks of the first upcoming July Barron's article hurt too. Then the trio naturally started their slide. Savage naked short selling still depresses two of these stocks today.
"We are being smeared by short sellers who what to kill our underwriting firm because they have shorted our stocks," says an emotional Janssen. "These low lifes didn't care about the truth, who gets hurt or anything except making a quick killing. Now after the Barron's article i am being investigated by New York State to see if I paid off the Dreyfus portfolio manager to buy our stocks, which is the lie the shorts spread. The investigation will show I am innocent."
Time will tell.
At Barron's writer Bill Alpert was about as apologetic as a hangman who executed someone for the wrong crime, but figured the victim probably had it coming anyway. "O.K.," concedes Alpert cheerfully. "Maybe at a certain date Janssen/Meyers stocks may have been ahead. On second thought maybe Janssen/Meyers stocks didn't make up that much of Dreyfus Funds assets.
"But be fair to me too," Alpert says. "I'm not taking dictation from short sellers. Maybe it's good for readers this happened. By any objective valuation yardsticks these (development stage) stocks had reached such extreme valuations they were at risk. Please quote me as believing that the trio were accidents waiting to happen."
Meantime, Janssen has plenty of company on the gallows. In early August everything was coming up roses for a company that Asensio had shorted. So he took a lot of the same verbage he had earlier used in a previous press release to attack AbleTelecom Holding Corp. (Nasdaq: ABTE 6 31/32) and did a cut and paste job adding the name Turbodyne Technologies (Nasdaq: TRBO 6 7/8), which fell 36% that day. "Just as we are on the brink of some very good news, Asensio wrote we had no valuable technology when we do," protested upset IR lady Meredith Lefforge. "Worse, he wrote he believed management was out to defraud investors. Defraud!" He charges about 21 companies with fraud, but Barron's didn't report that Asensio had been charged with fraud himself.
On two different days EQUITIES informed Asensio's office we were closing this story and offered to interview him. Asensio had not replied as we went to press. EQUITIES wanted to ask him about the "fraud and deceit" default judgment of $248,250 against him on the day the market crashed 22.6% on October 1987 when Asensio worked at D.H. Blair spinoff, now defunct Steinberg & Lyman. (Incidentally, while Barron's highlighted Peter Janssen's eight-year-old $40,000 fine, it skipped Asensio's 1994 $7,500 one for violating the rules of fair play.) "President Steinberg testified Asensio had gone beyond the brokerage firm's bounds," said an anonymous source. "Instead of selling securities for a client, Asensio claimed it was too late to get a sale in, when in fact he sold to a related party, turned it over and made a huge profit. After he plea bargained on conference calls, which included an attorney for the State of Florida, Asensio claimed that he wasn't aware of the jury trial even though he had been served with papers. Later he discovered that the process server's license had expired and successfully reversed the jury's guilty verdict. The upset client appealed, assigned his interest to a company Asensio destroyed in a bear raid and the case is still ongoing, pressed by a lady lawyer known as Bulldog Bluth."
Avalon CEO Michael Margolies, whom the NASD fined $31,931 for churning, unauthorized use of options and failure to maintain the stop limit of 20% margin on shorts, admits to the early shorting, but explains that Asensio copied and Avalon written report to short soaring Chromatics. Shorting Cytoclonal and MacroChem were also covered via internal memos for Avalon's sales force to pitch to institutional and high net worth customers.
While on March 23 Barron's Bill Alpert did feature Margolies as "Our Man in Boca," "On the recent stories they never called us," says Margolies. "We called potential buyers of Chromatics' product and they all laughed and said they would not buy it."
As for the naked short selling, Margolies argues, since his firm takes no proprietary short positions for itself, then the blame for any fails to deliver borrowed shares can't be Avalon's. His clearing company or his clients would be at fault. Incredulously, crusader Ray Dirks responds, "If you tell your clients to short something and they do it, you have no part in what happens? Bullshit!"
Asensio does have his defenders. Most shorts operate secretly in the shadows. He dares go public and is now a public figure. "His targets may not all be frauds, but most have been over-promoted, often on the Internet to gullible investors." says a trusted EQUITIES source. "He has a very good track record and it's on his website. Asensio was right and early on energy hype Solv-Ex. I think he will also be proven right on Turbodyne, which I have visited. After I left their headquarters I wanted to scrub myself all over with a Brillo pad. If Manuel gets extreme sometimes, is he really any worse than the raging bulls he goes after?"
An old Wall Streeter who refused to be quoted by name for fear of being attacked says, "Manuel, whom I once worked with, is part analyst and part character assassin."
"He uses guilt by association," adds straight-arrow PR man Richard Wool of stuffy Hill & Knowlton. On June 12 on his website Asensio headlined, "Chromatics' stock fraud exposed." On June 26, the Harvard MBA added, "Former Bre-X consultant promotes Chromatics' stock."
All it amounted to was Chromatics had hired the same IR firm as the fraud Bre-X. It was large staid old Hill & Knowlton, whose clients have included Gillette and P&G. Additionally, Asensio's fraud charges described many perfectly legal, but very complex transactions, which most of Wall Street engages in. In reverse mergers in private placements, the NASD permits charging unconscionable fees and taking big chunks of stock, and Janssen/Meyers has. It may be immoral, but it's not illegal. Peter Janssen adds, "Asensio's definition of fraud is when a stock he shorted goes up."
Entrepreneurs often put everything they own into making their ventures work. Naturally from time to time, some must sell shares. Insider trading and fraud is how Asensio describes it. Asensio also charges fraud because money manager Michael Schonberg had earlier purchased 30,000 share in May 1996 and after he joined Dreyfus bought 1.8 million shares of Chromatics. Contrary to the impression Asensio spread, Schonberg's buy looked smart until Avalon and naked short sellers crushed the price. All three Janssen/Meyers startups are legitimate entrepreneurial efforts, not stock promotions. The CEO's have spent a combined 29 years at them trying to build something from nothing.
Following Barron's charges, Janssen's reputation is at a low. What pains Janssen most is the attack not on himself, but on the companies he is helping to build. This driven man treats them like his children.
"Each of these developmental companies is pioneering to do something important in medicine," Janssen explains. "They will survive this bear raid because each has lots of cash, token debt, patents, and dedicated management. These are not shlocky penny stocks, but real companies trying to make a difference in the world."
Forward with Flaherty
Being still developmental stage companies, none of the three has significant revenues or naturally any profits or p/es. However, instead of looking Backward with Barron's, let us look Forward with Flaherty.
Two of the three startups have deals with a giant company and expect future revenues, and Chromatics hopes for a deal soon.
Cytoclonal Pharmaceutics has a patent for microbial fermentation for the pictatoxol, generic version of Taxol TM, from the endangered Pacific Yew Tree. This is Bristol-Meyer Squibb's largest selling drug at 1997 sales of $940 million. In June Cytoclonal announced a potential $50 million deal with Bristol-Meyer, taking into account R&D and upfront license payments, possible milestone payments and minimum annual royalty payments. It also received a Lung Cancer Marker patent. CEO, Dr. Arthur Bolton, is a Yale Ph D with black eyes which bore into you. A trim black belt, Bolton seems more driven than Janssen.
MacroChem has patented technology for the transdermal delivery of existing pharmaceutical drugs including Topiglan, a transdermal gel for Male Erectile Dysfunction. Since only a gel is involved, heart patients and others who cannot use Viagra because of their medications or the blindness side effect, might use this product. Even friendly analysts worry, if the drug is so hot, why a big company hasn't signed on to it.
In July MacroChem CEO Alvin Karloff announced a new deal with American Home Products for another undisclosed transdermal penetration related product. He claims the agreement includes licensing fees, milestone payments, the purchase of some MacroChem stock and royalties. "Our objective is not contract revenues but licensing," he says. "I can't go into it, but it should be significant."
In 1985 Mrs. Darbey Simpson Macfarlane watched from an intensive care unit while her own premature two-pound baby was continually debilitated from painful heel pricks for blood tests, increasing the risk of infection. Mrs. Macfarlane and her husband, who is a vice president of Chromatics, determined to come up with a non-invasive pain-free device to test for and diagnose jaundice in newborns by analyzing their skin color.
Chromatics has a patented FDA approved medical device for the non-intrusive diagnosis and monitoring of chromogenic diseases one of which is Bilirubin Jaundice, which undetected can lead to brain damage or death. Asensio has labeled her effort a "fraud," just a stock promotion whose price will plunge under $1.
"Come on," says H&K's Dick Wool, who states he would resign the account if he thought it was phoney. "Chromatics' device has been tested thoroughly. Darbey has displayed it at major conferences, including Amsterdam, New Orleans, even China. No one besides Asensio and Avalon Research said it doesn't work and babies would still have to take a blood stick test.
"None of the charges Asensio is spreading are true, and the front running before his misstatements has been a disgrace," the IR man continues. "On June 11 we issued a very long press release refuting every charge, Chromatics Color Sciences Responds to False Allegations. if you ever met Darbey Macfarlane, you would meet a great person, who is totally obsessed with helping babies. She hasn't made a lot of money to date. The allegations about insider trading are bogus. Chromatics has three of the top people in the world who know about color science and the medical science of jaundice. All are working on this, Dr. Ian Holzman, Chief of Newborn Medicine, at Mt. Sinai Hospital, a doctor at Rensselaer Polytech and a professor at a hospital in Michigan (Dr. Jeffrey Maisels. Clinical Professor of Pediatrics, Wayne State University). One believes the painless non-invasive test would be a wonderful happening for babies all over the world."
All of the above trashed trio of development stage companies are highly speculative but clearly legitimate efforts to build a viable business. Some may fail, but all have dedicated long-time CEOs. Then why the bitter personal attacks? It's the nasty times in which we live. All stocks in this amazing bull market are overvalued, especially blue chips. So if Asensio merely pointed out a company he or Avalon has shorted is overpriced, he'd cause yawns. Panic comes from attacking the character of associated people.
And if an innocent man gets hurt, so what? Blaming a scapegoat has been going on since the first "L'Affaire Dreyfus." EQUITIES thinks abusive naked short sellers should be exposed and barred for life from the security business. In contrast Peter Janssen, who wants to make our world a better place, should be encouraged, not defamed, for his public venture capital efforts. "J'Accuse..." |
