Expert Financial Analysis and Reporting

Key Points:

• I believe that the lawsuit will be allowed to go to discovery before or around mid-year. This will allow access to the trading records and computer algorithms used by market makers to spoof NWBO’s stock.
• This information will dramatically illustrate that Northwest has been the subject of a decade long stock manipulation scheme that has resulted in its penny stock trading status.
• Institutional investors can seldom invest in penny stocks. They also are perplexed as to why NWBO with a drug, DCVax-L, about to be approved for glioblastoma is trading at such a depressed level. Something must be wrong. As details of this scheme become known, I think that their doubts will be resolved and result in many institutional investors becoming excited about investing in the stock.
• Later this year, it is possible that some or all of the seven defendants will want to settle. This could bring in very significant amounts of non-dilutive capital.
• For defendants who elect to or are required to go to jury trial, I think that jurors will have overwhelming sympathy for a tiny company developing an important new drug for a deadly brain cancer that is the victim of huge, greedy Wall Street firms realizing enormous profits through short selling. I can hypothesize their awarding damages in the hundreds of millions of dollars and potentially more than a billion.
• There is a growing awareness that this case is going to be a landmark case in the history of Wall Street that could have negative implications for the way broker dealers around the world have incorporated stock manipulation techniques into their trading practices.
• I also expect approval of DCVax-L for ndGBM and rGBM in the UK this year. This is more important as a catalyst for the stock. Some are expecting approval in 2Q, 2024 and while this is possible, I think it is more likely that we will see a 3Q, 2024 approval. The latter is lightning speed for a regulatory agency.

Overview of the Lawsuit

NWBO has filed a civil lawsuit against seven Wall Street market makers- Citadel, Virtu, Canaccord Genuity, G1 Execution, GTS, Instinet and Lime Trading-in the United States District Court, Southern District of New York. It alleges that illegal spoofing trades were used to induce an artificial decline in NWBO’s stock price which resulted in reduced proceeds from stock offerings. Spoofing is an illegal trading technique employed by market makers to manipulate stock prices. The 2010 Dodd-Frank Act explicitly cites spoofing as an illegal practice. Traders found guilty of spoofing in recent cases have received jail terms and their firms have been penalized. South Korea fined Citadel (the most prominent defendant in this case) for spoofing in January 2023. In addition to the NWBO case, there are two similar spoofing lawsuits under way and it is highly likely that there will be many more to come.

Spoofing involves market makers placing orders, either to buy or sell securities, and canceling them before the orders are ever executed. These are fake or baiting orders meant to fool and manipulate the market, which in the case of NWBO created the illusion of building selling pressure. Spoofing is conducted with high-frequency trading that employs algorithms that can place and cancel orders in milli-seconds. It is all computer driven and extremely difficult to detect. Discovery would allow companies and investors to understand how these algorithms work and how they affect stock prices of targeted companies.

Here is the chronology of the lawsuit:

• December 1, 2022 NWBO filed the lawsuit. It is being represented by the highly respected Cohen Milstein law firm.
• April 10, 2023 NWBO filed the First Amended Complaint
• July 12, 2023 Defendants responded with a Motion to Dismiss (MTD).
• November 14, 2023   Oral arguments from plaintiff and defendants were heard.
• December 29, 2023   Magistrate Judge Stein oversaw this opening phase of the law suit and issued an extensive 85 page Report and Recommendation (R&R) summarizing his findings.
• February 14, 2024   District Judge Woods agreed with and adopted the R&R. The R&R was overall very favorable to NWBO. It concluded that the market makers through spoofing on numerous occasions had purposely manipulated the price of NWBO to cause it to decline. Judge Woods also adopted Judge Stein’s position that NWBO had not sufficiently pled loss causation and on that basis granted the Defendants’ MTD.
• Importantly, the Court allowed leave to amend the complaint on the sole issue of loss causation emphasizing that such an amendment would not be futile. In the R&R, the Court laid out a clear roadmap on how NWBO could successfully address loss causation in which case the MTD would be denied and NWBO could proceed to discovery. This Second Amended Complaint is due on, or before March 15, 2024.

The Court noted that the First Amended Complaint contained particularized factual allegations evidencing the important indicia or hallmarks of spoofing and concluding that there was more than reasonable evidence of spoofing by the defendants. These were:

• Placing large orders on one side of the market—so-called “baiting orders”—opposite smaller orders on the other side,
• Cancelling the baiting orders after the spoofer’s legitimate smaller orders are filled,
• A very brief passage of time between the placement and cancellation of the baiting orders (usually milliseconds or seconds),
• “Parking” the baiting orders behind smaller legitimate orders placed by other traders to ensure they will not be filled, and
• Conduct that is contradictory to that of ordinary market making behavior

This report is the first in what I plan to be a series of reports that analyze the basis for this lawsuit, its potential outcome and the implications for NWBO and indeed equity trading on Wall Street. In this first report, I am presenting the conclusions that I have reached based on reading the R&R and transcripts of oral arguments made by the plaintiff and defendants. In a series of future reports I will provide supplemental analysis supporting my conclusions.

Disclaimer

I have no background or experience in securities law. In preparing this report, I read the 85 page R&R several times and also the Plaintiff’s and Defendants’ oral arguments on the MTD. My interpretation of these documents is the basis for this report. It is possible that because of my inexperience, I did not understand some arguments that may be counter to my conclusions. Also, judges do not have long experience in watching the equity markets and this could lead them to see situations in a totally different light than me. Finally, I want to make clear that I have an extreme bias. Based on many years of following NWBO and other companies that have been victims of stock manipulation, I am convinced that the defendants in this case are guilty.

Acknowledgement

In preparing this report I conferred with and relied extensively from a lawyer who has posted frequently on social media as hoffmann6383. His posts are widely followed and respected by investors. His thinking has contributed much to this article.

Investment Implications if Motion to Dismiss is Denied

Denial of the Defendant’s MTD would be a major catalyst for NWBO. It would strongly support my contention that NWBO has been the victim of sustained stock manipulation over a decade that has had  a devastating effect on the stock price. Illegal trading tactics have been coordinated with a vicious social media fomenting campaign aimed at casting a dark cloud over the company and its management. This was well described by one short seller as “We will make the company and its management so toxic that no investor will go near it.” It is hard for investors inexperienced with NWBO to accept that a small company like Northwest trading at penny stock levels has successfully developed a dendritic cell cancer vaccine DCVax-L, that likely represents a major breakthrough in the treatment of glioblastoma multiforme and a technology that potentially could address all resectable solid tumors in an entirely novel and potentially paradigm changing way.

MTD denial would allow Cohen Milstein to start discovery. Cohen Milstein could subpoena third parties such as FINRA and the DTCC for trading records, ascertain the identity of hedge funds or other such entities who were engaged in spoofing and fomenting in social media. It should also shed light on whether the social media assault was coordinated with illegal stock trading tactics as I believe. If it becomes broadly accepted that the depressed stock price and tarnished image was the result of a criminal manipulation scheme, it would be a powerful catalyst for the stock. I believe this is highly likely.

The lawsuit itself will take some years if it goes to trial. In a jury trial, it seems highly probable that jurors would have great sympathy for a small company struggling to develop a life saving cancer drug. There would likely be great antipathy for giant hedge funds and market makers whose goal was to profit on short sales. These jurors will have the power to award punitive damages at trial. Punitive damages take into account the behavior of the defendants, the assets of the defendants and what sort of monetary penalty would be sufficient to discourage this type of behavior from ever occurring again. It is very possible that some of the smaller market makers may decide to settle following denial of the MTD to avoid discovery and a jury trial. There could be special motivation to settle for the two defendants that trade solely on behalf of clients. This could lead to very meaningful amounts of non-dilutive capital flowing to the Company to fund commercialization of DCVax-L and greatly expand its clinical development and that of the technology platform.

There are significant implications in this case for Wall Street as a whole. Citadel’s lawyers stated in Court filings that the alleged spoofing was “bedrock market-making activity” that happens in virtually every stock in every trading venue across the country. Citadel has argued that their alleged spoofing was just normal market making; it may be for them but this is not acceptable behavior. Spoofing is illegal and traders have been sentenced to jail in recent spoofing cases involving commodities. This manipulation scheme is very widespread and is important to the bottom line of most Wall Street firms including household name investment banks. It is employed not only against stocks, but all types of traded securities and commodities. Beyond the blow to profits, the reputational impact could be tectonic if their actions become known. It also could be a springboard to criminal investigations by government agencies and politicians and could pave the way for lawsuits by other companies and class action suits by investors. This promises to be a monumental story that will build and build in coming years. It is much bigger than Northwest.

Background on How Stock Manipulation Has Impacted Northwest Biotherapeutics

NWBO is alleging and I concur that the Company has been the subject of a long running stock manipulation scheme. Unrelenting assaults have had a devastating, cumulative effect on the stock price and affected its ability to raise capital to fund critical research on its extremely promising oncology drug, DCVax-L and its unique technology platform. At no time was this scheme clearer than on May 10, 2022 when the Company reported unblinded results for the first time of its pivotal phase 3 trial of DCVax-L in glioblastoma multiforme (GBM) at the New York Academy of Sciences. The results were stunningly positive and the distinguished presenter stated that he believed that DCVax-L was a therapeutic breakthrough. The primary endpoint of median overall survival in newly diagnosed GBM was achieved with a stunningly positive p<0.002 and the secondary endpoint of median overall survival in recurrent GBM showed p<0.001. In newly diagnosed GBM patients treated with DCVax-L, the five year survival rate was 13.7% which is dramatically better than the 5.7% expected with current Standard of Care (SOC). Adding very meaningfully to the reward/risk ratio for DCVax-L, side effects in the trial were minimal and mostly treatable with Tylenol and an antihistamine. Most oncology drugs have life threatening side effects.

One would have thought that the extraordinarily positive news would have led to a substantial price increase but astonishingly, the stock price dropped 79% from the closing price of $1.80 on May 9, 2022 to an intraday low of $0.38 on May 10 and the closing price of $0.75 was down 59% from that prior day closing price resulting in a market capitalization loss of $1.5 billion. Here are some details:

May 9 Closing Price

• Closed at $1.82

May 10 Prices

• 9:30 am    Opened at $1.71
• 11:10 am   Price was $1.24 as the presentation began
• 11:40 am   By the end of the presentation the price was $0.75.
• 12:40 pm  Low price of the day was $0.38
• 4:00 pm    Stock closed at $0.75

In the trading of Northwest on May 10, 2022 the seven market makers named in the lawsuit are alleged to have engaged in over 100 spoofing episodes. Thirteen of 29 spoofing incidents by Citadel occurred prior to the data being presented publicly and Citadel executed 24 of their 29 spoofing incidents prior to the presentation being completed. I do not want to leave the impression that the spoofing that was done on May 10, 2022 is the only thing at issue. The lawsuit alleges that over the nearly five year period of December 5, 2017 through August 1, 2022, defendants engaged in 2,849 spoofing incidents occurring on 395 of 1,171 trading days, or nearly 34% of the trading days over this five year period. NWBO claims that the market manipulation directly impacted the price of shares sold to investors, causing NWBO significant losses as the stock was sold at artificially depressed prices. I also want to emphasize that spoofing is only one element of the manipulation scheme. It also employs illegal naked shorting, social media fomenting, frivolous lawsuits, and a number of other tactics with the collective goal of driving down the stock price. This scheme has been embellished and honed over the last twenty years.

This Lawsuit is Different from Earlier Ones

I believe that Wall Street market makers in collusion with hedge funds have been engaged for decades in this stock manipulation scheme. This has done great damage to many stocks, especially emerging growth companies like Northwest, and caused painful losses to their investors. Numerous companies and investors have tried to sue on what appears to be clear and blatant manipulation of their stocks, but almost all have failed. The failure can be attributed to the roadblock that is the Depository Trust and Clearing Corporation (DTCC) which is responsible for clearing and settling 99.9% of US stock trades. In order to successfully plead a lawsuit, plaintiffs must show loss causation, i.e. that stock price manipulations by defendants’ trading actions must be directly tied to losses incurred by either a company or its investors. To do so, a Company or investors must have access to trading data of market makers. Without such data, Motions to Dismiss by defendant market makers are almost always granted. However, the DTCC owns and blocks access to critical stock trading data needed to successfully plead a case so that plaintiffs cannot access the data needed to defeat an MTD; this is the ultimate Catch-22. For the record, DTCC is a private company owned by Wall Street firms including Citadel and Virtu which are prominent defendants in this lawsuit; high level executives of Citadel and Virtu sit on DTCC’s board of directors.

NWBO developed a unique approach to obtain comprehensive trading information that enabled it to gain access to this critical data. This allowed the documentation of the illegal trading by the defendants that captured the initial sample of 2,849 spoofing episodes cited in the Amended Complaint without discovery. This was critical to the lawsuit. The 2,849 was just a sample. Discovery is likely to substantially increase this number substantially.

Where The Lawsuit Stands

In considering whether the NWBO lawsuit was sufficiently strong to survive the Motion to Dismiss and go forward to discovery, Magistrate Judge Stein relied on four issues to guide the conclusions on spoofing in his Report and Recommendation. Each of these four had to be successfully pled in order to dismiss the MTD. These issues were as follows:

• Manipulation Practices that are intended to mislead investors by  artificially affecting market activity. The intent is to purposefully undertake to dupe investors into transacting in ways they otherwise would not. This is the intent of spoofing.
• Scienter Intent to knowingly deceive, manipulate, or defraud” by artificially  affecting the market price of securities, i.e. marker makers clearly knew that what they were doing was illegal.
• Reliance That the trading data relied upon by NWBO obtained from OTC and Global Link is an accurate measure of the market value of NWBO stock. Does this data accurately reflect the stock price behavior?
• Loss causation The issue of loss causation is what has torpedoed almost all prior lawsuits. The R&R explained that NWBO had to show that the spoofing schemes drove down the price for NWBO when they were selling shares; there are two ways of showing this. The first is temporal proximity that requires NWBO to demonstrate that it sold shares so close in time to  defendants’ spoofing as to permit the court to infer as a matter of common sense that the market prices were artificially low when plaintiff issued shares. A second way is for NWBO to plead a protracted effect which requires showing that the effects of the spoofing lasted for a protracted period so as to justify an inference that the market price was still artificially low at a longer time than is the case with temporal proximity, perhaps days or months or years. If either of these conditions are met, loss causation is established.

 R&R Findings

The R&R found that NWBO had successfully pled manipulation and scienter so that there are sufficient reasons to conclude that Citadel and the other market makers had purposely and with motive manipulated NWBO’s stock price through spoofing. The R&R also ruled in NWBO’s favor on reliance. On loss causation, the R&R concluded that the First Amended Complaint was not sufficiently pled. Specifically, it stated that NWBO would need to clarify and better explain the formula used to show the effect on the stock price from the time of spoofing to the closing price. On this basis the R&R recommended that the Defendants’ Motion to Dismiss be granted, but  with the condition that Plaintiff had the right to replead this one issue in a Second Amended Complaint. The R& R provided a road map by which NWBO could cure the deficiencies articulated with respect to loss causation that would enable it to survive the MTD based on the Second Amended Complaint.

The R&R found that NWBO’s arguments supported a common-sense inference that in 30 different instances of spoofing, NWBO’s stock price remained artificially depressed at the close of trading on the dates in question. These were days on which the Company executed financings that were priced off of the closing price. Curiously, the R&R made a seemingly arbitrary judgment that spoofing had to occur within one hour of the close in order to affect the closing price. Beyond one hour the R&R assumed that the effect had dissipated and the price had returned to a normal level. Based on this line of thinking the R&R only considered 30 spoofing episodes that were conducted one hour or less before the close on a day in which stock was sold to investors for pleading loss causation. This ruled out consideration of numerous other spoofing episodes.

Critically, the R&R laid out a clear path for NWBO to meet the temporal proximity theory. The R&R instructed the company to give a clearer demonstration of the formula that it used to price security sales relative to closing prices in those 30 instances. The R&R said that there was very good reason to believe that NWBO could submit an amended complaint adequately explaining how the sales prices were  “formulaically derived” from the relevant closing prices and that would establish loss causation on the basis of temporal proximity.

The R&R did not find that NWBO had adequately pled loss causation due to protracted effect beyond one hour of spoofing which the R&R defined as the appropriate time frame to establish temporal proximity. This reemphasizes that the R&R seemed to not understand that spoofing episodes can have a lasting effect, not only on the day in which spoofing occurs but that repeated spoofings could have a lasting negative effect on stock prices. From my viewpoint of watching the impact on NWBO and other small companies, the major reason for spoofing is to create continual pressure on the stock price over months and years.

Northwest believes that the R&R was in error on its assumption that the effects of spoofing last an hour or less. This is not supported by any prior precedent or expert analysis. (From my layman’s standpoint, this principal defies logic.) The R&R also failed to take into consideration the Milgrom report which was an expert analysis of the long term and cumulative effect of stock manipulation on stock prices. It was cited by NWBO, but apparently the Court overlooked or was unable to find the report and therefore did not consider that report in the R&R. The crucial finding of the Milgrom report was that trading activity intended to cause a decline in a stock price can have a lasting effect far beyond the day it occurs and certainly beyond one hour. The author of the report is a distinguished professor at Stanford, an acknowledged expert on the effect of securities manipulation on prices and a recipient of the Nobel prize in economics. I believe that a careful reading of the Milgrom report suggests a very high probability that that NWBO can successfully plead loss causation not only on the basis of temporal proximity, but also protracted effect.

Where Do We Go from Here?

As previously argued, the R&R gave NWBO a roadmap to survive the MTD. NWBO will need to file a Second Amended Complaint, will go through another round of MTD filings/briefings and then I believe Judge Woods will deny the MTD and the case will proceed to discovery. hoffmann6833 has estimated an approximate timeline to resolve as follows. Please note that hoffman6833 has made some slight changes to his timeline that add about a month from what I initially published. His estimates seem ultra conservative from my layman's standpoint given that the Court will only focus on loss causation. There will be no re-arguing of manipulation, scienter or reliance. However, I acknowledge that the law sometimes moves at glacial speed. I think that the denial of the MTD could come around or before mid-year.

 

• March 15, 2024   NWBO will file a Second Amended Complaint on, or before, this date.
• April 29, 2024    Defendants will request to file a MTD. Defendants will be given 45 days to file their MTD and Joint Memorandum of Law in Support of Motion to Dismiss the Second Amended Complaint
• June 13, 2024    NWBO will be given 45 days to file their Memorandum of Law in Opposition to Defendants’ Motion to Dismiss the Second Amended Complaint
• July 13, 2024   Defendants will be given 30 days to file their Joint Reply Memorandum of Law in Support of Motion to Second Amended Complaint
• August 13, 2024   It could possibly take a month for the Judge to rule. The Court is not likely to conduct oral arguments although Defendants might try to request such.

Other Comparable Spoofing Cases

As an interesting side note, Cohen Milstein is pursuing a second spoofing lawsuit and is awaiting a decision from the Court on the MTD. Keep an eye on this case which is a mirror of NWBO's case; it is Phunware, Inc. v. UBS Sec. LLC, No. 1:23-cv-06426 (S.D.N.Y.). It will be interesting to see if the Court in this case grants or denies the MTD. In another spoofing lawsuit Harrington vs. Oppenheimer, the case survived an MTD and has gone to discovery. Judge Schofield in this case agreed with the pleading on loss causation on the basis of both temporal proximity and protracted effect.

 

 

 

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