PSidivida Could Be A Winner In 2014
Seeking Alpha Analyst Since 2010
In the early 1980s, I was one of the first Wall Street analysts to develop an interest in biotechnology. I made a research call on Genentech before it came public. When Smith Barney brought Amgen public in mid-1983, I was the analyst in charge of coverage and was the first Wall Street analyst to recommend the stock.
In 1991, I joined Hambrecht & Quist as Director of Health Care research and also as biotechnology analyst. I chaired the H&Q health care conference for five years and believe that I played a meaningful role in its creation. It is now known as the JP Morgan conference which plays a pivotal role in today’s biotechnology industry. I am proud of my career and note that I have had meaningful interactions with over 500 biopharma companies in my career.
I am now 78 and financially very comfortable. I am not associated with any biopharma or investment company. I am not dependent on and do not need any external income to live a comfortable life. I have no hidden agenda. While I am retired from a financial standpoint, I have enormous intellectual curiosity and continue to spend significant amounts of time on researching innovative companies and not just limited to biotechnology. I maintain a website called SmithOnStocks. Until early 2022, I used this as a basis for a subscription service for my research. I have ended this subscription service but occasionally write articles. There is no charge for accessing this website and any articles. You should not rely on anything I write on my website for investment advice although you may want to use the information in forming an investment decision. The same goes for any articles or comments that I might make on Seeking Alpha
I want to alert you to NYSE Issue In 1999 in which I made an ethical breach that resulted in a suspension from being a registered representative in the securities industry for a period of time. I believe that this measure was harsh beyond any reasonable measure and totally unwarranted. I have gone to great lengths in this report to give my side of the story and I hope that you will read the in-depth account that I have provided.
This suspension took place over 20 years ago and has long since ended. There has been no restriction from the NYSE for many years on my working as a registered representative if I were to choose to go through the required registration procedures. Still, this NYSE action is like a Scarlett letter that I carry. I would urge you to read the full account of the events that led to this NYSE action and if you do so I believe you will agree that this in no way reflects on my integrity and the way I have always conducted myself, then and now. I strongly believe that the action taken was excessive and I think that if you read my full account you will agree.
People make mistakes. Bill Clinton lied under oath, was impeached and disbarred as a lawyer in Arkansas in connection with the Monica Lewinsky affair. However, society has judged him on the body of work that he has done. Suspensions in the security industry can result from serious infractions in which investors are defrauded or swindled. In the events that led to my suspension no investors lost money and as I explain in this report investors who followed my advice made significant amounts of money. Before you rush to any conclusions, let me tell you my story.
I Am Proud in How I Have Conducted My Career
Before I go into the details of this ethical breach, I want to emphasize that I have had a distinguished career on Wall Street. My record from 1971 when I started on Wall Street until 1999 was unblemished. I came to New York from Indiana with no business connections and no money but through hard work I became a highly regarded Wall Street analyst and was selected to the Institutional Investor All Star team in pharmaceuticals for ten years in a row.
Based on my record as being the top or one of the top analysts at Smith Barney, I was selected to be head of research from 1981 until 1989. I also served on the Board of Directors at Smith Barney. Based on my strong reputation, Hambrecht and Quist approached me in 1989 to head their life sciences research effort and to run the annual H&Q (now JP Morgan) healthcare conference. I was a Managing Director and on the operating committee at H&Q. I left H&Q in the late 1990s because I disliked the bureaucracy that was such an integral part of being head of research. I had made enough money to be financially secure and I wanted to get back into doing what I loved, biotechnology research. I joined Tucker Anthony in 1997 as a biotechnology analyst.
Explaining the Events That Led to the NYSE Issue
Tucker Anthony had a sister firm called Sutro and a decision was made early in 1998 to move health care research from Tucker to Sutro. Tucker was an east coast based firm and Sutro was based in Los Angeles. Sutro leased a New York office to which I moved. It was here that an unfortunate train of events was set in motion that led to the NYSE action that put a stain on what I consider an outstanding career. When I moved from Tucker to Sutro, I maintained my brokerage accounts at Tucker.
I conducted normal trading in this account for some months. Then the research administrative research manager for Sutro contacted me and said that for regulatory purposes I would have to move my account from Tucker to Sutro. After some time spent in looking for a broker to handle my account at Sutro I became frustrated. At that time, I had over $5 million in my brokerage accounts. While I was sophisticated in health care investing which made up 10% of my portfolio, I needed help with other parts of the portfolio. I could find no retail broker at Sutro that I wanted to trust my portfolio to. I asked and received approval to look for a broker outside of Sutro and contacted Schwab about finding an investment advisor there to manage my account.
While this was in process, the research administrative manager at Sutro called again and said that Sutro was probably planning to shut down the New York office and I would have to move to Los Angeles or leave the firm. Moving to Los Angeles was not an option for me as my roots were deep in New York. I informed her that given this choice I would soon be leaving Sutro rather then moving to Los Angeles and began to think about what to do.
I came to the preliminary conclusion that I would start a consulting firm dealing in biotechnology. I also concluded that I would have to carefully manage my investment portfolio. It was here that I made a major mistake that I have regretted ever since. Frustrated that my money was tied up in Tucker and I was unable to trade in my account and unable to find a broker that I trusted, I decided to open an account at Schwab without a broker managing it. I indicated on the account transfer form that I was self-employed based on the assumption that I was going to be leaving Sutro imminently. This was my Bill Clinton moment and turned out to be a major mistake.
I continued to work at Sutro while I was waiting for the New York office to be closed which I thought would be in a matter of days or weeks and during this time, I began to execute trades in my account at Schwab. However, after some weeks the research administrative manager at Sutro called and informed me that based on the response they had gotten from clients and the work that I was doing that the firm had reversed itself and now wanted to keep the office in New York and they were also willing to hire two assistants to aid me. There was also the promise of a significant bonus in the upcoming review that based on my work could amount to several hundreds of thousands of dollars. Not surprisingly, I decided to stay on at Sutro instead of leaving and starting my own firm.
I then looked for and finally found a Sutro broker that I could trust to help manage my portfolio. The brokerage accounts at Schwab were opened in February of 1999 and transferred to Sutro in April 1999. When I moved my accounts to Sutro the compliance department at Sutro saw that there was this hiatus when I had an unauthorized account at another firm. This was reported to NYSE.
NYSE Reviewed My Case and Took No Action for Three Years
Management at Sutro looked very closely at what had occurred and decided that while it was certainly not something they could condone, it was a minor infraction and they thought that given my stellar and unblemished record that NYSE would not take any meaningful action other than a wrist slap. Sutro decided to be pre-emptive in administering the wrist slap and fined me and suspended me for one month. They thought that this would satisfy NYSE based on their interpretation of what had occurred. They wanted me to continue with the firm, paid the sizable bonus I was due and committed to pick up all legal fees.
I then had a deposition with a lawyer from NYSE in early 2000. During a one day interview, he went over all of the details of the accounts that were held at Schwab and all of the trades that occurred in detail. He also looked at all of the reports that I had issued as an analyst during this time to compare to the trading in my account to the issuance of research reports. I then heard nothing more from the NYSE for three years. Sutro concluded as did I that this issue was behind us.
Three years later in mid-2003, I heard from NYSE to my shock that they were re-opening the case. Why after three years was the case being re-opened? In talking to the lawyers at NYSE, I came to understand that this was the result of Elliott Spitzer’s attack on Wall Street research. Remember the famous case of Henry Blodgett who recommended stocks of investment banking clients to clients that he thought were actually sales. NYSE enforcement was under pressure because this unethical practice had been brought to light by Spitzer and they had missed it. They were under pressure to show how tough they could be as enforcers. They reviewed their records and came up with my case which they decided to reopen it in order to show that they were aggressive enforcers.
They went over the same information that had been gathered in early 2000, but came up with an entirely different interpretation. They said that I effected stock transactions shortly before issuance of research reports which I had prepared and this was a violation of Exchange Rule 472.40(2) (iii). They also said that I failed to disclose that I held securities in stocks recommended in a research report. They said that I opened accounts at a member firm that concealed fact of my employment at another member firm; violated Exchange Rule 407(b). They recommended a censure and two and one-half year suspension.
Two Stock Trades at Question
The information on opening an account at another firm is something that I just discussed at length. This was not in dispute. However, NYSE focused on two stock trades that I made and explained the suspension largely on the basis of these two trades. I believe that they were clearly wrong in their conclusions. Let me discuss those trades in detail. The first trade was in Stericycle, a medical waste disposal company. I had been following the company for some time with a neutral rating. In my reports, I noted that the Company wanted to buy the medical waste disposal business of Waste Management and if they were successful, I would immediately go to a strong buy. This acquisition was announced on April 14, 2009 after the close at 4 PM EST. Because it was 1 PM in Los Angeles I held a conference call with Sutro’s traders and the salesforce and told them I was going to a strong buy on the stock.
It was the practice of Sutro to initiate new ideas with a conference call in this manner. The traders and sales force would then go out to the clients with the idea. After this, the analyst would follow-up by publishing a note on First Call (an electronic distribution network) and this was done on April 15 This was then followed up by a written research report on April 16. On April 16, I bought 2500 shares of the stock at a price of $12. This was accepted practice at Sutro for research analysts buying stocks that they recommended. There was no requirement to wait for a period of time to buy the stock.
The analyst was allowed to buy the stock at the same time as other Sutro employees and clients The NYSE judged my conduct on standards that were different from those that were accepted practices at Sutro. By today’s standards, the Sutro practices seem very loose but they were common at the time. This is why Sutro did not view this trade as a breach of conduct and kept me as an analyst.
The NYSE also said that I did not disclose that I owned Stericycle in my written report. However, none of the analysts at Sutro were required at the time to do so. This was also standard operating procedure. Stericycle was a major success for investors. Adjusting for stock splits the stock traded at about $3.00 when I first recommended it. Fifteen years later, the stock is trading at about $119. This was one of my best recommendations ever. I held the Stericycle stock for many years and only sold it recently. The NYSE did not accept that my actions were in line with the practices of Sutro even though I produced a letter to that effect from the research administrative officer. I also argued that a $30,000 investment in a portfolio that amounted to $5 million at the time was de minimus. I argued that the stock was bought and maintained as a long term investment. I argued that it was an excellent money making idea for investors.
The NYSE dismissed all of these arguments and maintained that I traded ahead of my recommendation. The second trade that the NYSE emphasized was a trade in Schering Plough. On April 18, the stock had traded down by 5%. I had an accumulate rating on the stock essentially telling investors to buy the stock for the long term, but connoting less emphasis than a buy. In the morning call to traders and salesmen, I alerted them to the price weakness, but told them there was no change in the fundamental outlook and there was no change in my price target.
I was not intending to issue a report, but the research administrative manager told me that the price drop in Schering Plough based on my price target indicated 25% upside that was the accepted criteria for a buy recommendation. Hence, I needed to put out a report in which I upgraded my opinion from accumulate to buy. I bought the stock on April 20 at the same time as the written report was issued. I previously owned 500 shares and this increased my position to 1000 shares for a total investment of about $35,000 which again was within a $5 million portfolio.
The NYSE again accused me of the same things as in the Stericycle situation. They said that I traded ahead of my recommendation and did not disclose that I owned the stock. My responses were the same as for Stericycle and were once again rejected.
Was The NYSE Action Justified?
I think that the NYSE action was out of all proportion to what actually transpired. I think the enforcement officers applied new standards in overturning the prior decision to take no action on this case that had been in effect for three years. They were under pressure to make a big splash in the Elliot Spitzer era to show how tough they were. My recommendations were solid recommendations and indeed the Stericycle recommendation was outstanding. I fully recognize that my decision to open the brokerage account at Schwab prior to resigning from Sutro was an ethical breach on my part even if I was planning to resign from Sutro. When I decided to stay with Sutro, I transferred my accounts immediately.
I strongly and absolutely maintain that my trading in Schering-Plough and Stericycle was in accordance with policies in place at Sutro at the time. By today’s standards these seem loose, but this was common industry practice at the time. The NYSE review was conducted by a mediator and it was he that determined the punishment. He had spent his entire career as an enforcement officer for the NYSE. He was also friends with the NYSE lawyers on my case and sent out to lunch with them during the hearing. He was the judge, jury and executioner of my fate.
As I look back, I question his objectivity and motives. In writing his opinion, he did not acknowledge documents from Sutro that showed that my stock trading disclosures were in-line with their internal procedures. I had no opportunity to review or correct his opinion in the opinion he wrote. In a country in which, guilt or innocence is established by one’s peers, mine was determined by a hanging judge with no experience in the securities business and an apparent pre-determined view on my actions.
For the last two years, I have been publishing content (some 222 articles) on both Seeking Alpha and my website that has been free to all comers. I have 2,200+ followers on Seeking Alpha so that I hope that some of you have found my articles informative. I think that if you have read my articles you will see that there is a tremendous amount of effort that goes into creating them. It sometimes takes me a month(s) to prepare an article. Also, I have spent many thousands of dollars on creating my SmithOnStocks.com website.
I have spent a lot of money as well as blood sweat and tears in building the SmithOnStocks brand without any return so far. Seeking Alpha does not pay me for the reports I write because they also appear on my website. I am now seeking a return on my investment. In the last month, I have begun to offer premium content on my website to paid subscribers. The cost is $24.99 for one month and $149.99 for a year. I have just published on my website a new premium content report on pSivida (PSDV). It goes into a detailed discussion on the potential for unanticipated catalysts that could make PSDV a very good stock in 2014 as opposed to a consensus view that its outlook is pretty dull.
What does this mean for my writing on Seeking Alpha? I probably will write as many articles as before, but not in the same depth. You may have noticed that my articles can run to 30 pages while most of the bloggers on Seeking Alpha write much shorter two to three page reports. I will probably write reports in the future that are shorter. The major difference will likely be that in my premium content there will be a greater degree of discussion on the investment outlook and much more in-depth background material for those doing their own due diligence. I also will continue to engage in brouhahas with other writers like Adam Feurstein who is the dark side of the force of biotechnology bloggers.
I view Seeking Alpha as an invaluable platform for investors, but there is no way to justify the effort that I put into writing articles for which I receive no return. Over the last two years, I have seen a constant turnover of top authors in healthcare on Seeking Alpha as they take their product elsewhere in order to receive some compensation. None of the top ranked authors of two years ago when I began to publish on Seeking Alpha is still active. I think that my strategy will allow me to continue to be a top Seeking Alpha publisher while allowing me to put food on the table.
I would obviously welcome new subscribers to my website. As I said, a full year subscription is $149.99. I think that one good idea a year justifies that investment and I hope to have many more than that. Perhaps PSDV is such an idea. For those of you who are unsure about a full year subscription, I suggest that you spring for a one month subscription at $29.99 (the same as a good bottle of wine) to get an idea of my in-depth thinking on pSivida, where I have identified two important catalysts for the stock in 2014 that could produce a significant upside surprise and lead to significant upside. I hope that each of you will consider becoming a paid subscriber.
Disclosure: I am long PSDV.
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