Overview and Investment Perspective
In a hard hitting article, the Washington Post has called for an investigation into potential stock manipulation by short sellers of Northwest Biotherapeutics (OTCQB:NWBO) and other emerging biotechnology companies. The Post suggests that there may be a wide spread criminal conspiracy that has victimized these companies and their investors. The Post also focuses on the prominent role of Adam Feuerstein in this situation. Later in this report, I include the complete text of the Post or it can be accessed at this link.
The Washington Post article follows on the heels of a white paper on July 29, 2014 from the Citizens for Responsibility and Ethics (CREW), an influential Washington blog that requested the Securities and Exchange Commission investigate possible illegal manipulation of stock prices and questioned the role of Adam Feuerstein. Then on August 18, 2014 the New Media Journal published a blog called "When Wall Street Greed Kills". Once again this article zeroed in on the alleged short selling scheme and the potential role of Feuerstein.
Small biotechnology companies and investors have been clamoring for years that short sellers are manipulating the prices of emerging biotechnology stocks. This has largely fallen on deaf ears as the SEC has taken no action. However, it appears that the heat has now been turned up. The Washington Post is one of the most prominent newspapers in America and highly influential in Washington. Its most famous investigational reporting piece was about Watergate and it carries great prestige. Securities regulators, politicians and law enforcement agencies are likely to be prompted by this article. It could also trigger wide spread media investigations.
The most damning evidence against Feuerstein comes from his boss Jim Cramer. In an interview which I include in its entirety later in this report, Cramer describes how he manipulated stocks and broke securities laws when he ran his hedge fund. He recommends that all hedge fund managers do this because it is fun and profitable and they probably won't get caught. Yes, he actually said this. The techniques that Cramer describes are consistent with the articles that Feuerstein writes.
If hedge funds are indeed collaborating in a stock manipulation scheme, they are now faced with the probability of possible SEC and Congressional investigations accompanied by an FBI probe and media digging. For the first time, they could be facing investigations from institutions with subpoena powers. If there is coordinated trading and naked shorting and fomenting by friendly bloggers as has been alleged, it will be discovered. If the Post is correct, we may be in the early days in an intensive Watergate like investigation that could expose a criminal enterprise of vast proportions.
The tag line for this investigation could very well be that a band of rapacious hedge funds are manipulating the prices of small companies trying to develop treatments for cancer, swindling small investors out of hundreds of millions of dollars and blocking treatment of patients from potential cancer drug breakthroughs. This is a compelling story for any politician or regulator and could be especially the case for politicians with enmity to Wall Street such as President Obama and Senator Elizabeth Warren, not to mention Attorney General Eric Holder.
So what are the stock market implications? If indeed there is ultimately shown to be a criminal conspiracy, how bold will the hedge funds be in the interim. Nothing in the past has had any effect on their behavior and perhaps this will also be the case with the Washington Post article. Moreover, there is no objective evidence that I am aware of that comes together to prove a criminal plot. The evidence, however powerful, is circumstantial. If the hedge funds are confident that they are acting legally, nothing will change in their conduct.
However, if there are guilty consciences, we may see a sharp reduction in their shorting activity and possibly some could begin to unwind their short positions. This could create an enormous short squeeze in the case of Northwest Biotherapeutics where there are 8 million legitimate shorts and an estimated 4 million or more naked shorts. The effective public float of the Company after subtracting out management and closely held shares could be about 20 million shares. If the shorts begin to panic, we could see a short squeeze of enormous proportions.
What The Washington Post is Alleging
The Post columnist concludes his article by saying "I have no idea whether Northwest Bio's immunizations work or whether it will become the billion dollar company that Powers says it could be. What I do know is that given the choice between allowing innovative companies to develop promising products that could save thousands of lives, and allowing Wall Street wise guys to use sleazy tactics to manipulate share prices for short-term profit, I'm siding with the companies. Maybe it's time for the Justice Department and the Securities and Exchange Commission to be siding with them as well."
The Post article explains how hedge funds can manipulate and actually control the stock prices of small biotechnology companies through short selling strategies. Short sales are done by borrowing shares from another party that owns the shares. These shares can be sold in the market without the seller ever owning them. The short seller must at some time in the future purchase the shares. While short selling is perfectly legal, some short sellers simply don't bother to borrow the shares. This is naked short selling and it is illegal according to the Washington Post. This can result in overwhelming price pressure on a stock by an unending stream of naked short sells.
Integral to the naked short selling is the operation of dark pools by brokerage firms. It is widely alleged by small biotech companies and their investors that dark pools don't enforce the requirement for a short seller to deliver borrowed stock within three days of shorting. It is alleged that hedge funds can create an unlimited supply of stock through naked shorting. The compliance officers of the brokerage firm have turned a blind eye to this practice. This could change. The Attorney General of New York is already investigating dark pools for high frequency trading. He can easily expand the investigation to see if they are involved in naked shorting.
The hedge funds use very complex trading strategies that involve trading in dark pools, high frequency trading and sophisticated put and call strategies. They use this technique to walk a stock down. In this technique, a group of hedge funds conspire to systematically take out all bids for stocks for days on end with short selling.
Managements of small companies have described to me on several occasions how these hedge funds can reduce the share price by 0.5% to 1.0% for days in a row. This causes fear and uncertainty for investors who hold the shares when positive announcements are met with stock weakness. As Cramer says, when the truth goes against you, you have to create a new fiction and use the "walking down" stock technique. We have seen this technique employed very successfully against NWBO for the past six months and particularly in last two weeks.
The Post goes on to say that "The shorts tactics, however, extend well beyond the trading room. As the nonprofit advocacy group Citizens for Responsibility and Ethics in Washington (CREW) lays out in a recent white paper, shorts are active in anonymously feeding false and misleading information about their target companies to friendly analysts and bloggers while using social media to attack the intelligence and motives of those who view the company favorably. They enlist plaintiff's law firms to issue press releases soliciting shareholders to sue the target companies for securities fraud."
The Washington Post Cites a Prominent Role Played by Adam Feuerstein
The Washington Post zeroes in on the business practices of Adam Feuerstein who writes for TheStreet.com. The article cites several situations in which Feuerstein's articles and Twitter tweets appear to aid the short selling pressure on the stock. Jim Cramer, the CNBC pundit, is the founder of TheStreet.com for which Feuerstein is the star columnist. In a shocking interview that he gave to Wall Street Confidential' s Aaron Task, he lays out his strategy for manipulating stocks for short selling. You can view this interview by googling Jim Cramer Stock Manipulation or following this link.
Here are some of the key takeaways from the Cramer interview in which he amazingly laid out the process that hedge funds use to manipulate stocks. In it, the host of Mad Money says he regularly manipulated the market when he ran his hedge fund. He calls it "a fun game and it's a lucrative game." He urges all hedge fund managers do the same. He also says behaving illegally is okay because the SEC doesn't understand it anyway. I would urge you to listen to the entire interview, but here are some other key quotes:
· On falsely creating the impression a stock is under pressure due to fundamental problems when that is not the case (what he calls "fomenting"): "You can't foment. That's a violation... But you do it anyway because the SEC doesn't understand it." He adds, "When you have six days and your company may be in doubt because you are down, I think it is really important to foment."
· On being balanced and truthful: "What's important when you are in that hedge fund mode is to not be doing anything that is remotely truthful, because the truth is so against your view - it is important to create a new truth to develop a fiction," Cramer advises that you can't take any chances that the truth will prevail if you are positioned wrongly.
Neither Cramer nor Feuerstein would speak to the Post reporter about the article. This is noteworthy as both are quick to attack companies for lack of transparency.
Examples of Feurstein Articles Impacting Stocks
The Washington Post cited several cases in in which Feuerstein articles appeared to be following the blueprint laid out by Cramer to create a fiction when the truth goes against the short seller. I have chosen to elaborate on two situations among several he pointed out. Again, I would urge you to read the entire Washington Post article later in this report.
On March 10, 2014, Northwest announced that the German equivalent of the FDA, the Paul Ehrlich Institute or PEI, had granted approval for the company's key drug DCVax-L to be prescribed by all physicians in Germany to treat all kinds of brain tumors. In addition, it was announced that the German health care system would reimburse the drug. Prior to the announcement, the stock was trading at $7.85. Based on this dramatic news, the stock went on to hit an intraday high of nearly $10.00 on March 11th as the full impact of the announcement hit home. It looked like it was going to go much higher.
Feuerstein hastily jumped into action writing a blog that claimed that the German decision was meaningless. He said that it was a smokescreen to draw attention away from a fatal flaw in the phase 3 trial of DCVax-L. He claimed that an interim efficacy analysis had shown the drug to be ineffective and this meant that the trial was doomed to failure. Later, Feuerstein was sharply rebuked by the chairman of the independent Data Monitoring Committee that is monitoring the trial and the only people allowed to see data while the trial is in progress. The Chairman of the committee said that no efficacy analysis was ever performed and there was obviously no adverse data as Feuerstein had suggested. However, this rebuke came several months after the Feuerstein article and by that time the damage had been done. Within a few days of Feuerstein publishing his terribly flawed article, the stock had dropped below the price prevailing prior to the announcement. Feuerstein never retracted the article nor admitted that he had been indisputably wrong.
The Post cited another example that started with the announcement on June 20th of some highly encouraging data from a phase 1 trial of Northwest's second drug DCVax Direct. This caused the stock to trade from $7.18 before the article was published to $9.35 some days afterwards. Again, Feuerstein came out with a negative and factually incorrect article that said that the release of the data before the completion of the phase 1 trial was unethical. This is incorrect. The data in this phase 1 trial was unblinded and companies frequently release interim data on unblinded trials. There is nothing unusual or unethical about this.
The prestigious cancer hospital M.D. Anderson is conducting this trial. Feuerstein somehow got in contact with a physician, Dr. Buzbar, at M.D. Anderson who was not involved in the trial and Feuerstein claimed that this doctor agreed that the release of interim data was unethical. Feuerstein claimed that this was proof of a rift between M.D. Anderson and the Company. However, it turns out that Buzbar released interim data on an ongoing trial in 2009 in which he was involved. More importantly, two M.D. Anderson physicians who were involved in the trial appeared recently on a National Geographic documentary that discussed part of these interim results. The Feuerstein article was once again clearly incorrect. Of course, he has not corrected it.
Curiously, two hours after the Feuerstein article was published a law firm published a notification that it was soliciting investors for a class action suit against Northwest for securities law violations citing the Feuerstein article (now shown to be baseless) as evidence. This was followed by lawsuits from four other law firms. The combination of the article and the lawsuits stopped the rally in the stock cold in its tracks and within a week of the Feuerstein article, the stock price was $7.18, which was below where it sold before the positive announcement. The stock has continued south since then.
These are two of the more striking examples of Feuerstein articles having an effect on the stock of Northwest Biotherapeutics. However, there are other examples of such an effect in most if not all of the other 18 negative articles he has written since March.
The activities of the stock manipulation scheme are more expansive that just tiny Northwest. Inovio (NYSEMKT:INO) is another target of Feuerstein which is heavily shorted. They announced unexpected positive phase 2 results and the stock rallied from $11.14 on July 22 to $13.10 on July 23. The Feuerstein came out with a negative blog. Inovio management felt compelled to respond on July 23 to perceived inaccuracies in the Feuerstein account. Nevertheless, the stock then got walked down to $8.68 on August 12; this was sharply lower than the price before the positive phase 2 data was announced.
I was talking with the CEO of a cancer company that has been the subject of some vicious attacks by bloggers. He said that every time the Company had a positive news release, a blogger issued an attack article and there was heavy shorting. He felt that the stock was being criminally manipulated. I asked him why he didn't fight back and he said that his board and he just didn't want to take on the hedge funds. Unfortunately, this is the rule rather than the exception as managements believe they will be severely attacked if they try to fight back. They have a good point. Northwest has fought back and it has been brutalized by Feuerstein and other bloggers sympathetic to hedge funds and the stock has been extensively shorted.
Citizens for Responsibility and Ethics Also Alleges Abusive Trading by Hedge Funds
On July 29, 2014, the Citizens for Responsibility and Ethics in Washington (CREW) requested the Securities and Exchange Commission (SEC) investigate possible illegal manipulation of the stock price of Northwest Biotherapeutics and other companies. The link to the full report is as follows:
CREW stated that blog posts by the well-known biotech stock analyst and senior columnist for TheStreet.com Adam Feuerstein seem designed to cause the price of the company's stock to fall at times when short sellers were financially overexposed. CREW has asked the SEC and the U.S. Attorney for the Southern District of New York to conduct a full investigation of the timing of Mr. Feuerstein's posts and their relationship to short seller financial interests.
CREW said "When several drug companies repeatedly see big stock price dips due to a negative articles published at critical moments - especially when those dips benefit the financial interests of short sellers - it should raise serious questions at the SEC. Given the suspicious timing of Mr. Feuerstein's articles, which include misinformation and innuendo, there should be an inquiry into whether there was a deliberate effort to manipulate the market for profit. CREW cited Northwest Biotherapeutics and Mannkind (NASDAQ:MNKD) as examples." CREW Said "Maybe it's just a coincidence that Mr. Feuerstein's unduly negative articles appear at critical moments for these companies, but it certainly merits an investigation."
The New Media Journal Article Entitled "When Wall Street Greed Kills"
On August 18 the blog New Media Journal joined the fray when it also published a similarly negative blog to that of CREW. Here is the link to the full article.
The article stated "People with a cursory understanding of market manipulation understand the tactic of "short and distort." This is a type of securities fraud in which market manipulators short sell a stock and then spread negative rumors about the company in an attempt to drive down stock prices. Sometimes this fraud is originated by a company's competitors. Other times it is fueled exclusively by greed. And while a successful short and distort campaign may glean hefty rewards for those who perpetrate the crime, the fiscal malfeasance is often fatal for the company that is attacked."
"One of the most notable names that keeps surfacing in what appears to be a concerted effort to exploit the destruction of a biotech company for personal profit is Adam Feuerstein, a senior columnist for TheStreet.com, whose formal education ends at the bachelor's level in political science. He has bounced around the financial analysis circles in areas such as software and technology, and even commercial real estate, before landing in one of his favorite niches, biotech. So, the question begs to be asked. Why would a senior columnist for a financial website tread the fine line of fraud and criminality so openly and brazenly?"
The Washington Post Article in Its Entirety
The title of the article was "Northwest Biotherapeutics Stock Woes Highlight the Harm of Short Sales. It was written by Steven Pearlstein. The entirety of the article is as follows:
The small biotech firm, with an innovative new vaccine treatment for brain, prostate and other cancers, had just received an initial green light from British regulators to offer its drug to doctors and patients even before its definitive Phase III trial is completed in the United States. The approval was the first under a new program designed to speed the process of getting promising treatments to market, and it follows a similar decision by Germany in March. Both European regulators cited independent analyses of results from earlier brain cancer trials showing that Northwest Bio's immune therapy doubled the average of 17 months of extra life now provided by the standard treatment of chemotherapy and radiation.
But as it happens, Northwest Bio's stock, after a brief upward spike, ended the week down 11 percent below where it was the day before the news from Britain crossed the ticker. And therein lies an eye-opening tale of how hedge funds and their Wall Street allies stifle innovation and damage the economy in their relentless pursuit of short-term trading profits.
I'm talking, of course, about the "shorts" - investors who actively bet against companies by borrowing shares of their stock and selling them in the hope that the price will go down and they can buy them back at a lower price before returning the shares to their rightful owner. In theory, short-selling enhances the efficiency of markets by bringing in fresh information and capital. In reality, it has contributed to turning financial markets into a giant casino which is easily rigged for the benefit of insiders.
Biotech stocks are particularly vulnerable to manipulation by the shorts. They tend to be small, with low share prices and relatively few shares actively traded. And because of the high risk involved - relatively few biotech companies ever succeed - share prices tend to be volatile, easily moved by rumors and news of regulatory action.
These characteristics make it easy for a handful of hedge funds to anonymously drive down the price by selling borrowed shares into the market at the same time, creating a self-fulfilling momentum that scares off other investors. Even when they can't get ahold of enough borrowed shares, they might sell the shares anyway and simply fail to deliver them three days later when they are due. That's known as a "naked" short, and it's illegal.
The shorts' tactics, however, extend well beyond the trading room. As the nonprofit advocacy group Citizens for Responsibility and Ethics in Washington (CREW) lays out in a recent white paper, shorts are active in anonymously feeding false and misleading information about their target companies to friendly analysts and bloggers while using social media to attack the intelligence and motives of those who view the company favorably. They enlist plaintiffs law firms to issue press releases soliciting shareholders to sue the target companies for securities fraud. And they pepper regulators with threatening letters and fillings demanding that they investigate their targets or deny them product approvals.
Such tactics make it difficult and expensive for biotech firms to raise the large amounts of capital they need to conduct drug trials and build production facilities. They were all used in recent years to cripple Dendreon, another company that is a pioneer in the use of immune therapy for cancer treatment, which was so weakened by the shorts that it has failed to recover even after receiving its much-delayed FDA approval. And now they are after Northwest Bio.
As you can see from the accompanying chart, anytime the price of the company's shares began to rise this year, it was hit with another wave of short sales that drove the price back down. By the end of last week, the total number of borrowed shares was reported to be about 8.5 million, or about 30 percent of the shares not held by company executives or entities they control. That level of short interest is unusual. It's also suspicious - so much so that at one point this summer, shareholders could earn a 34 percent return by lending their stock to the shorts just for one month. Based on filings by brokerage firms, Northwest Bio estimates that, in addition to the 8.5 million reported short shares, there are as many as 4 million short "phantom" shares created by the "naked" transactions.
In late July, CREW's executive director, Melanie Sloan, asked the Securities and Exchange Commission to investigate market manipulation of Northwest Bio's stock. (Sloan told me her organization has never been contacted by the company and has no connection to its executives, investors or directors.)
In her letter, Sloan called particular attention to Adam Feuerstein, a biotech reporter whose relentlessly negative blog posts for thestreet.com this year have not only been filled with exaggeration, mischaracterization and half-truths, but curiously have also coincided with the spikes in short trading.
On March 11, for example, the day that German regulators announced their approval and Northwest Bio's stock broke through $10, Feuerstein was quick to weigh in with a story that the company had withheld the news for two weeks to use it to divert attention from the fact that it had failed to deliver an interim report on the results of its Phase III trial back in the United States. As the chairman of the independent committee overseeing the trial later pointed out, there was no interim study and, by protocol, the company would have been prevented from seeing it even if there were one. As for that delay in getting out the good news, the company's perfectly reasonable explanation was that it needed time to have the German notification translated into English and checked by the Germans.
The next month, on April 3, the headline on Feuerstein's post was that Northwest Bio acknowledged that the FDA might throw out results of its Phase III study. It sounds pretty ominous. But all that really happened was that the company, in its annual report filed with the SEC, included that possibility in the long list of risks that investors should take into consideration, just as any company in the midst of a Phase III trial would have to do.
Or consider Feuerstein's posts in May and June concerning a presentation by Northwest Bio's chief executive, Linda Powers, at the big annual cancer research conference, in which she described how one patient had responded to the company's therapy.
In both columns, Feuerstein expressed outrage that a drug company would exploit the suffering of patients for commercial gain (imagine that!) by selectively releasing results from a Phase I/II trial. He quoted Dr. Aman Buzbar, the head of clinical research at MD Anderson Cancer Center, the lead hospital for the Northwest Bios trial, criticizing the company for taking the "unusual and inappropriate" step of releasing such information. If Buzbar had first checked with his colleagues, however, he would have found that two of them had recently appeared in a National Geographic documentary focused on just such interim results from a pancreatic cancer patient. And, as CREW noted in its letter to the SEC, Buzbar himself made positive comments at a 1999 conference about a breast cancer drug he was testing that was still in clinical trials.
Then last week Feuerstein declared that the approval by London was really a "non-news event" because only one other company had applied for a similar approval since the program was launched in April. It was all just a smokescreen, he explained, to divert attention from the unfavorable terms on which Northwest Bio had recently raised another $27 million from investors in a hostile funding environment - a hostile funding environment, we should note, that Feuerstein himself had helped to create.
Feuerstein declined to speak to me last week, but his editor said she was sticking by her "dynamic" reporter. When I asked whether Feuerstein had been in contact with the shorts, she would only say that he was in touch with a wide range of investors. Using thestreet.com's journalistic standards, the headline on that might be: "Biotech reporter concedes he may be exchanging information with shorts."
I have no idea whether Northwest Bio's immunizations work or whether it will become the billion dollar company that Powers says it could be. What I do know is that given the choice between allowing innovative companies to develop promising products that could save thousands of lives, or allowing Wall Street wise guys to use sleazy tactics to manipulate share prices for short-term profit, I'm siding with the companies. Maybe it's time for the Justice Department and the Securities and Exchange Commission to be siding with them as well.
Disclosure: The author is long NWBO.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.