WSJ: "Insiders at Sunrise Technologies International decided they
had a choice when the company was the subject of two highly critical
"sell" recommendations last month: mount a counterattack or adopt
a "porcupine defense," balling up in a corner and waiting for
the storm to pass.
The Fremont company chose to take an unusually aggressive approach,
launching a campaign that escalated last week when it filed defamation
suits against the two firms that had issued the negative research
reports. In a world where "sell" recommendations are rare, such
legal actions are even rarer.
Sunrise, which makes a laser to treat vision problems, alleges
that Sturza's Institutional Research of New York and Avalon Research
Group of Boca Raton, Fla., made "false and misleading statements"
in an attempt to drive down the stock price for the benefit of
short sellers. (A short seller borrows stock and then sells it,
betting that its price will decline and the borrowed shares can
be bought back at a lower cost.)
Some of the issues raised in the reports aren't new, but they
came at a particularly critical time. Tomorrow, Sunrise is scheduled
to go before a Food and Drug Administration panel, seeking preliminary
approval to market its laser to treat farsightedness. Avalon's
report gave the company a 50-50 chance of winning. Sturza's put
the odds at 70-30 -- against the company.
Sunrise responded to the reports with a news release and a
letter to shareholders challenging them. The firm also says it
complained to the Securities and Exchange Commission, made retraction
demands, and, finally, filed defamation lawsuits in U.S. District
Court in San Francisco. Sunrise first sought a temporary restraining
order to stop the firms from writing about it and to block distribution
of their reports, but a judge denied the request.
The company's reaction may have made its employees and backers
feel better and calmed investors' nerves. But others say it also
may have drawn increased attention to the reports and contributed
to the stock's volatility over the past six weeks, when its price
has ranged from $8.75 to $20.375. Others say Sunrise may end up
alienating securities analysts in general.
After declining for a week after the reports came out, Sunrise
began rebounding, closing as high as $19.50 last week. It fell
about $1.50 Friday, after TheStreet.com, an investor Web site,
posted articles about Sunrise and some of the concerns. Shares
settled at $17 yesterday.
A lawsuit in such cases "happens roughly never," says Boris
Feldman, a securities lawyer at Wilson Sonsini Goodrich & Rosati
in Palo Alto, who isn't involved in the dispute. "Every week,
when a client comes to me and says, `We want to sue the shorts,'
I say a couple of things. First, I say, `Why do you want to bring
a lawsuit in which the other side's highest objective is to prove
bad things about you? ...Two, if you do this, even if you win,
you will be perceived as an enemy of the analyst community. And
three, if you really believe in the efficiency of capital markets
... they can't keep you down."'
A defamation claim can be difficult to prove, Mr. Feldman notes,
as a plaintiff would have to establish that the report contained
"knowing, material falsehoods," rather than opinion. "I think
you {would} see the analyst profession rise up as a whole against
this type of lawsuit because, basically, they are in the opinion
business." Having said that, he adds, an exception can be made
in a "really egregious case."
Sunrise Chief Executive Russell Trenary says he thinks this,
indeed, was a case that justifies the decision to go on the offensive.
Both reports raised numerous concerns about the company and
its technology. The biggest claims: The treatment has significant
"regression," with much of the vision improvement being lost over
time; the potential market isn't large enough to generate much
profit; and the stock ownership among some of the doctors conducting
clinical trials could pose conflicts of interest.
The suits counter that the reports are filled with inaccuracies,
rely on incomplete or old data and misrepresent facts. Mr. Trenary
says, to his knowledge, no one from Avalon ever talked with anyone
at Sunrise or to any of the doctors involved in the clinical trials.
Ed Coughlan, Sunrise's investor-relations officer, says he spoke
to someone at Sturza's once, for about 15 minutes, shortly before
its report was released.
Mr. Coughlan says both reports came out during a period when
short interest in the stock increased significantly. Between mid-May
and mid-June, short interest rose 35%, to about 10% of shares
outstanding.
Mike Margolies, Avalon's president, didn't return calls seeking
comment about the case. Mr. Margolies founded the research and
brokerage firm about three years ago. In an interview with Barron's
last year, he said the firm supplied research to 100 clients,
including hedge funds, mutual funds and wealthy individuals. Avalon's
12-page report on Sunrise carried a "sell/sell short" recommendation.
Sturza's, a research firm that focuses on medical technology
in a newsletter and through reports for institutional clients,
reiterated its conclusions about Sunrise in a follow-up report
last week. It included rebuttals to Sunrise's retraction demand.
Physician Stephen Sabba, the Sturza analyst who did the report,
says in an interview that he talked to the company early on in
his research and again at the end, and relied on Sunrise resources
for much of his data. The report, he says, doesn't advocate shorting
the stock; it recommends selling it.
"We're just saying this stock is overvalued and this is why,"
Dr. Sabba says. "What you do with that information is up to you
entirely."
Evan Sturza, president of the firm, wouldn't say whether his
company has or had a short position in Sunrise in the hedge fund
it also manages. His company makes money by selling its research,
says Mr. Sturza, who declined to say how many clients he has.
"We don't have a vested interest to get them to trade," he says.
"At the end of the day, we need to be right. We need to make recommendations
and ultimately be correct."
Mr. Sturza's firm has received complaints in the past, but
none, he says, has been as pointed as the one from Sunrise. "This
company is setting a new precedent in our history as probably
the most hard-core response we've ever seen," he says. "And I'm
sure they're not done."
David Harmon, publisher of Market Scope, a vision-care-industry
newsletter, says Sunrise might have been better off if it had
ignored the Sturza report, which came out a day ahead of the Avalon
piece.
"The report really didn't have any visibility until Sunrise
made a big deal about it," says Mr. Harmon. He cited another case,
about the same time, where a company ignored a negative report
and it ultimately had little impact. "I think that says something
about it -- if you have a small voice in the wilderness, if you
think it's inaccurate, sometimes it's better to ignore it than
to make a big deal about it."
But others say some sort of response is necessary when a company
disagrees with, or disputes, an analyst's report.
"There are no secrets in today's world," given the Internet
and other information sources, says Ian Mitroff, a business professor
at the University of Southern California who has written extensively
about crisis management. The keys, he says, include being truthful
and unambiguous in the response.
Michael Sitrick, head of Sitrick & Co., a Los Angeles investor-relations
firm, also advocates a response, but the level depends on a lot
of factors, including, in the case of a securities analysis, how
widely it was distributed.
"If it's small, it's not going to have much of an impact,"
Mr. Sitrick says. In that kind of case, he says, he might recommend
that the company write a letter to the analyst, pointing out areas
in dispute, and also post it on the company's Web site.
"One of the things you have to watch out for in dealing with
a crisis is not creating a crisis in your reaction," he says.
"How you react is also indicative of how big you believe the problem
is."
The National Investor Relations Institute, an industry trade
group in Vienna, Va., has standards of practice for dealing with
analysts, but they don't appear to extend to a situation that
has reached the pitch of the Sunrise battle -- perhaps because
sell-side analysts tend to work closely with the companies they
cover.
If a company disagrees with an analyst, the institute says,
it shouldn't blackball him or her. And if it has "a legitimate,
serious and objective difference of opinion" it should contact
the analyst's employer, explain its position and possibly request
that someone else be assigned to cover the company.
Mr. Coughlan, Sunrise's investor-relations manager, says the
"thought of trying to talk them out of {their positions} was not
an option that we thought was really worth our time. ... We discussed
all the options available to us, and I think we did a very good
job of understanding the implications of each of those." |
