This morning an article appeared on Seeking Alpha entitled, "Forget The Sideshow Distractions And Focus On Galena's Pipeline". It is my belief that this article dangerously downplays the current dire situation, and further propagates misinformation about the company's lead clinical candidate, NeuVax.
I'd like to make two brief points about the article in question before discussing the legal risks facing Galena Biopharma (NASDAQ:GALE) moving forward.
Point #1: Insider sales that correspond to misleading SEC filings and stock promotion is a very serious matter, not a "sideshow" as the author claims. The author obviously wants investors to forget this point by downplaying what's going on behind the scenes at Galena.
Let me be frank: Lawsuits have already been filed against Galena and those involved could be facing penalties as well. Here is an excerpt from a recent news article that underscores this point nicely:
"Oregon has some of the toughest shareholder protection laws in the country, said Portland securities lawyer Terry Scannell. If the firm did mislead investors, it could face legal difficulties - and so could anyone who assisted in portraying the company in an unwarrantedly positive way."
And if you still think this issue is a sideshow not worth concerning yourself over, perhaps you need to read this:
"The lawsuit against Galena Biopharma, filed by the Portland law firm Stoll Berne in Multnomah County's circuit court, appears to be the first legal complaint filed following publicity over the marketing campaign as well as a stock sell-off by insiders and executives that garnered millions in profits after the stock tripled in value over the course of several months.
Filed on behalf of a shareholder of the firm, Glen Fagin, the suit is a "shareholder derivative" action that sues corporate insiders for damages to the company, said Steve Larson, a Stoll Berne lawyer representing Fagin. The New York firm Harwood Feffer joined in the suit, which essentially demands the insiders pay damages using the profits made by selling stock."
Seven law firms across the country do not file suit for no good reason. They obviously see the potential for a major judgment that could force Galena to dilute shareholders (more on this below).
Point #2: The author reiterates the falsehood that NeuVax met its primary endpoint in a Phase 2 trial. This is demonstrably false, as shown by my article yesterday. Moreover, Galena's statistical analysis on the matter mysteriously changes over time without explanation.
Ladies and gentlemen, a change in p-value, without a corresponding change in the data inputted into the analysis, is a statistical impossibility, and will certainly be fodder for another lawsuit should NeuVax fail its current trial. Moreover, Galena's management hasn't rebutted any of these points, speaking to their authenticity. So, it's terribly misguided and misleading to pen an article now stating that NeuVax is efficacious and met its primary endpoint, after the facts have been thoroughly vetted in the public domain.
I think a more apt question to consider today is the following. What are the risks of holding going forward?
If we suspend disbelief about the trial prospects of NeuVax and focus solely on the current lawsuits facing Galena, we can lay out a fairly straightforward risk assessment.
Assessing Galena's risk exposure to a class action fraud lawsuit
According to recent surveys, securities fraud cases against U.S. based life science companies end with a favorable outcome for the plaintiff about 30% of the time. Settlements stemming from these suits are large, however, especially for small-cap companies like Galena. Specifically, recent settlements have ranged from $16 to $85 million. As Galena tends to have around $50 million-ish in cash and cash equivalents of late, an award within that range would thus necessitate a large secondary offering. Investors would therefore be paying, quite literally, for the mistakes of management, if the worst comes to pass.
On the flip side, these types of lawsuits were dismissed around 27% of the time, with most dismissals resulting from vague or conclusory allegations, thereby failing to meet the detailed pleading requirements of the private Securities litigation Reform Act (pSlRA).
A law firm with intimate knowledge of these types of suits gives this specific advice to potential clients in the life sciences field:
"Develop and publish an insider trading policy to minimize the risk of inside trades during periods that might help class action lawyers later develop a theory. Class action lawyers aggressively monitor trades by insiders to develop allegations that a company's executives knew "the truth" and unloaded their shares before it was disclosed to the public and the stock plummeted."
Put another way, companies should avoid behavior that even appears unseemly in terms of insider trading because that's all it takes for a good trial lawyer to convince a jury.
Ok, so we know that this global risk is 30% of a settlement, and that a potential settlement would be in the multi-millions.
The question now is: could a specific complaint be filed, and could a strong case be made to convince a jury that insiders "knew" the truth before unloading their shares?
Regarding the specific complaint, I have no doubt. Galena, by its own admission, hired DreamTeam to promote the stock, and the public unveiling of this relationship caused the stock to crash. That's pretty cut and dry. Galena's insiders may claim otherwise, but the facts are against them.
Could a trial lawyer sell this story to a jury? The pure coincidence between the timing of the sales and the cessation of DreamTeam's efforts would make this an easy story to sell. Remember, you have to put yourself in the shoes of average folks that have no stake in Galena, and only hear an avalanche of news reports about insiders enriching themselves at the expense of mom and pop investors-much like themselves. Not exactly a hard story to sell.
While an investor initiated lawsuit is bad enough, the elephant in the room is a potential SEC investigation. As I believe was made clear in my last article, Galena's SEC filings do not jive with the published scientific record and misrepresent the facts on multiple occasions.
More to the point, however, I have little doubt that these perfectly timed insider sales have caught the SEC's attention by now. This story reminds me of Dendreon's former CEO Mitchell Gold, who sold his shares just prior to Provenge's market problems became public knowledge. And the SEC subsequetly launched a civil probe into his sales.
In sum, Galena is facing an uphill battle on the investor lawsuit front, and could be the subject of an SEC investigation as well. Articles that exclude these significant risks and paint a bucolic picture of NeuVax are doing a disservice to the investing community. Always consider the risks in any investment, and be weary of investing pieces that fail to clearly outline a company's risk profile. So, with that in mind, you have to ask yourself what specific value driver in Galena's arsenal outweighs these risks?
And I'll leave you to it.