Expert Financial Analysis and Reporting

Who Is Richard Pearson?

On July 7, I was the subject of a vicious and libelous article that was published on Seeking Alpha by a person named Richard Pearson. As a way of introduction to Pearson, let’s look at his disclosure on his Seeking Alpha articles. He says,

“The author (Pearson) currently holds a short interest in (virtually all companies he writes on) and has provided fundamental and/or technical research to investors who hold a short positions (i.e. hedge funds). The author may choose to transact in securities of one or more companies mentioned within this article within the next 72 hours.”

One purpose of a disclosure statement is to identify a potential conflict of interest. So why is Mr. Pearson flagging his relationship with hedge funds who are by his own admission short stocks on which he is writing articles that recommend short selling? The disclosure fails to address this.

Pearson has made a number of charges against me, all of which I strongly deny, but the most serious is that I received money from the social media company MDM to write on their clients. MDM totally denies it. I totally deny this and explain in this note why it is ludicrous to even suggest that this could be the case.

Pearson offers no evidence to support this extremely serious charge. Perhaps most importantly, Adam Feurstein was aware of this information several months ago and after careful examination concluded that I was not writing articles on MDM clients in return for payment. Feuerstein and I are fierce adversaries on NWBO so that his springing to my defense says a lot about the charges Pearson has leveled. (It also says a lot about Adam but that is for another day). I include his comments later in this report

Pearson has made a name for himself by exposing that some Seeking Alpha writers were paid to write articles on companies. In this case, he had hard evidence in the form of e-mails that admitted cash transactions. He has no such evidence in this case because very simply there is none.

I have asked Seeking Alpha to have Pearson produce evidence of any wrongdoing on my part. If he is unable to produce this evidence I have asked that his article be deleted and an apology issued to me. There will be no evidence produced. Other than his own straw man theories and speculations, he offers no evidence for any of his charges. They are all the speculation and conjecture of a person who by his own admission is short the stock and is working with hedge funds that are short the stock. He and his colleagues are clearly trying to discredit me to the benefit of their short positions in Northwest Biotherapeutics (NWBO). In the strongest possible terms I deny all of his allegations.

Let’s Take A Hard Look at Pearson; He Appears to Have Problems with His Disclosures

Mr. Pearson states that he previously was an investment banker but does not indicate that he is currently employed in that capacity. He operates a web site but it is not a subscription service and it has no advertising on it so that this does not appear to be a source of income. On his website, he describes himself as an activist investor and does not indicate any other form of employment.

In his Seeking Alpha profile, Pearson gives the impression that as an investment banker, he was jetting back and forth between China and the US presumably to close huge deals. I have a question for Pearson. Investment banking is one of the highest paying professions in the world. Why would Pearson leave this job to write articles on Seeking Alpha? And his writing on Seeking Alpha is not just a casual exercise for him. The volume and extent of his writing indicates that this is probably all that he is doing. I look forward to hearing the saga of his transformation.

So Mr. Pearson appears to have no source of income from investment banking or his website or any other source and any revenues from Seeking Alpha are trivial, probably on the order of $1,000 per month. The obvious question to ask is whether the “fundamental and/or technical research” that he provides to hedge funds results in payments to him from hedge funds. Is this his principal source of income? If so, this should be clearly disclosed.

I have asked Pearson the following questions.

1.  Do you receive cash compensation from the hedge funds? If the answer is yes, this is a clear disclosure requirement.

2. If you are being paid cash compensation by hedge funds there is a prima facie presumption you are being paid directly or indirectly to write articles on companies in which hedge funds have existing short positions. You have disclosed that you are writing on companies in which hedge funds have short positions.

3. If you are receiving cash, what is the amount and how important is it to your income? I cannot detect any other sources of income. If the money received from hedge funds is your primary source of income, this calls into even more serious question the fairness and objectivity of your articles. This should be disclosed.

4. If you do receive compensation, is this compensation tied directly or indirectly to writing articles on Seeking Alpha? I am curious as to how the answer to this question could be other than yes. This would be a reason for barring you from publishing on Seeking Alpha.

5. Do you rely on the hedge funds for your content? This is a form of non-cash compensation? Your background gives no indication that you have any experience or expertise in biotechnology. Yet, you have burst onto the scene with a large number of articles that are quite sophisticated albeit heavily slanted to encourage readers to short the stock. I don’t see how one person can be that prolific nor could a person like you with virtually no background could write them. Even if you write the articles, is it the case that much of the content comes from hedge funds. This should be disclosed.

You make another disclosure that is complete but curious. It says that the author may choose to transact in securities of one or more companies mentioned within this article within the next 72 hours. This would allow you to cover your short immediately upon publishing his article or in the hours following. This disclosure would cover him in the event that he is to use a nasty phrase “pumping and dumping”.

I know that Pearson has made a reputation for himself by exposing writers that were paid to write articles on Seeking Alpha on companies by investment relations firms. It is ironic that it may be the case that Mr. Pearson is being paid for writing articles on Seeking Alpha by hedge funds. I eagerly await his explanation.

I Expected This Article

The Pearson article was not unexpected by me. I have been threatened repeatedly by hedge funds that if I did not stop writing on Northwest Biotherapeutics, they would put together an article like this that would destroy me. They did not intimidate me. Now all of the issues that they threatened me with appear in Pearson’s article. Isn’t that strange?

The question is what is the motive of hedge funds to destroy my reputation?  I believe that the answer is that some hedge funds have enormous short positions in NWBO. There are currently about 6 or 7 million shares that are legitimately short. However, I have heard from traders that there are as many as 7 to 9 million naked shorts. Short sellers are legally required to borrow stock from someone who owns the stock within three days. However, there are techniques that allow hedge funds to illegally trade among themselves in dark pools to create these naked shorts which are not backed by borrowing of securities. In theory, any number of naked shorts can be created.

The short sellers are in a precarious position. There is virtually no stock left to borrow. If NWBO’s stock price were to start climbing, there could be an enormous short squeeze if the bears were required to cover their legitimate shorts and illegitimate naked shorts. They obviously want to knock the stock price down. Silencing me and promoting Pearson would certainly be something that would be very much in their interest.

Pearson Makes Wild Unsubstantiated Charges

Pearson weaves together scenarios based on many innuendos, half-truths and distortions. He basically alleges that: (1) I am manipulating Northwest Biotherapeutics and a host of other companies, (2) my articles materially misrepresent the technology of NWBO and (3) I have been paid to write articles by the investor relations firm MDM.

Pearson said that he had written an e-mail to me asking about the issues he raised, but I never received such an e-mail. He implies that I was evasive or defensive. Perhaps before I call Pearson a lier, he can produce evidence of this e-mail. It is obvious that I am not shy in defending my good name. Pearson put together this article without speaking with me or informing me of its contents. In regard to MDM, they unequivocally denied that they paid me to write articles. I unequivocally deny this also.

What Does Pearson Think Is My Motive

I think that the first thing that Pearson would want to do, as the super sleuth that he portrays himself to be, would be to establish motive. Pearson doesn’t discuss what my motive might be for getting money to write on companies. This is because there is none.

I operate a subscriber based website so that investors only subscribe if they believe that I do quality research that helps them to make money. I have invested over $25,000 in this website. Why would I write obvious shill articles for a price of $250 per article that he admits is the going rate? If this were my intention, I would never have gone through the blood, sweat and tears of building my website. I would just have published on Seeking Alpha.

I would also point out that I am 70 years old. Over the course of my career I have done well enough that I can retire. However, I am a very competitive person and the SmithOnStocks website is my last hurrah. I believe that investors will increasingly turn away from Wall Street research to unbiased research provided by third parties and my intent is to provide Wall Street quality research without the bias toward investment banking clients. I believe that this business model has huge potential.

Pearson’s Analysis of Northwest Biotherapeutics is Superficial

Pearson claims that his article was about Northwest. However, less than 5% of the article pertains to issues on the Company. The real intent of the article was to defame me.

He appears to be a firm believer that any immunotherapy effects seen with DCVax Direct were the result of the syringe being injected into the tumor and releasing saline implying that the dendritic cell precursors that are also injected have no effect. In 2011, the Nobel Prize was awarded for the discovery that dendritic cells play an integral role in activating the innate and adaptive immune systems. Perhaps Pearson is angling for a Nobel Prize for his discovery of immunotherapy effects through the use of syringes and saline. I think this contention is absurd.

Pearson makes a few other references to issues that surround NWBO and my comments. These have previously been thoroughly discussed on Seeking Alpha. Some think my interpretations are right, others think they are wrong, but there is no question that they have been thoroughly vetted. Pearson is the first person to label them outright lies and fabrications intended to manipulate the stock of NWBO. I have over 2400 followers on Seeking Alpha and presumably this is because they find my work credible and valuable. Integrity is key to the website’s success, but Pearson would have you believe that for $250, I can be hired to write positively on any company.

Pearson Has No Biotechnology Credentials So Why Is He Publishing So Many Short Articles

I note that Pearson first published on Seeking Alpha in September of 2009. He wrote sparingly until October of 2012. His early articles through October 2012 dealt with Chinese companies that were engaged in coal production and ion lithium batteries. He has no background in biotechnology but in October 2012, he developed a keen interest as he wrote his first short selling recommendation on Ziopharm. In the last year and one half, he has become a prolific biotech pundit mostly focusing on short sales.

Pearson has written that the going rate from investor relations firms for Seeking Alpha authors to write on companies was $250 per article. Because of my strong following of over 2400 followers on Seeking Alpha I have frequently been approached to write such articles and indeed this was the going rate. I told each firm that this was not something I would do. I was also approached by hedge funds who offered as much as $10,000 to write articles under my name that they had written. Perhaps Pearson with his admitted close ties to hedge funds has something to say on this.

Obviously, if you want to make money writing articles, it is much more lucrative to write for hedge funds. I make no accusation that Pearson is being paid to write for hedge funds although using his standards and looking closely at his disclosures this is a question that needs answered. Earlier in this report I asked Pearson to clarify his relationship with hedge funds. I await his response.

Pearson Portrays Me as a Shady, Manipulative Figure

Pearson places great emphasis on an NYSE action that occurred in 1999 and led to a suspension of my registered representative license. That suspension expired over a decade ago and there is no restriction of any sort now nor has there been for the last decade. I have written a very detailed account of the suspension in the Seeking Alpha profiles section and I strongly encourage everyone to read my account. The issues that led to the suspension were not intended to and did not benefit me financially and no investors were affected in any way by these issues.

Pearson for obvious motives has chosen to frame my whole career that has spanned over 40 years by that one issue. Again it is a vicious attack purposely designed to discredit me. It is the only blemish of an otherwise highly distinguished career of which I am proud.

Adam Feuerstein Springs to My Defense

Pearson alleges that I was being paid by the social media firm MDM to write positive articles on their clients. MDM has denied this and I deny it as well in the strongest possible terms. I will go into this in more detail later. However, I think that any refutation that I might make dims in comparison to an assessment of this issue by Adam Feuerstein. Most readers know that Feuerstein and I have had some brutal battles over NWBO so that he is the most believable person I can think of when it comes to the MDM relationship and the NYSE suspension. Here is what Feuerstein wrote.

“ Larry -- As I stated publicly on Twitter this morning, I believe the personal attack leveled against you in this story is unjustified.

You're upset and we've had our differences in the past, so I understand why you've lumped me together with Richard. But let's clear up some mis-understandings. I never threatened to use the NYSE issue to silence you on NWBO.

Here's what really went down:

In the comments section of your last SmithonStocks blog post on NWBO, you accused me of illegal activities with respect to NWBO stock, without any proof whatsoever. I responded via private message that you shouldn't be accusing people of running afoul of securities regulations without proof given your NYSE troubles. In response, you deleted those comments. I appreciate you doing that.

You also know that I looked into the connection between your research and MDM biotech clients months ago. We spoke about it. I also spoke to MDM's CEO. I concluded that there wasn't anything relevant to report so I never wrote about it. I strongly disagree with your analysis on most stocks, particularly NWBO. I think you got this one really wrong. However, I also believe you're not a paid shill for NWBO. I believe you when you say you weren't paid by MDM or anyone else to promote NWBO.

Richard's discussion of your NYSE issue was off topic and out of line. It's just not relevant and should not have been used to attack your credibility.

Adam “

What can I add?

More About The MDM Relationship

In regard to MDM, Pearson spoke to MDM and they explained the situation in the way that I would have explained it had he bothered to ask before attempting to demolish my reputation. MDM is a social media, investor relations and website construction firm. I paid MDM to design my website and establish social media connections. There was no money paid directly or indirectly to induce me to cover their clients. If you look at my stock picking record on the companies I chose to write about who were MDM clients it is quite impressive.

MDM introduced me to some of their clients. Pearson is correct that I have written on seven MDM clients. I will go into this in more detail in a moment, but I would emphasize that I have written in total on 44 companies on my website. My focus is on emerging biotechnology companies are the same as that of MDM so we cross paths naturally. I built a close relationship with MDM as they worked on my website and they introduced me to a number of current and prospective clients.

Pearson focuses very hard on Northwest Biotherapeutics which is a client of MDM and implies that the only reason that I wrote on the Company was because it was a client of MDM. This is absolutely incorrect. I want to explain my involvement with NWBO in great detail.

I first recommended NWBO in a report published on my website in a report published on April 26, 2012. The link is http://smithonstocks.com/the-rationale-behind-dendritic-cell-based-cancer-vaccines-and-how-they-are-manufactured-nwbo-ob-0-22/?co=northwest-biotherapeutics. This report details why I recommended NWBO. For anyone who has a shadow of a doubt about my veracity, please read that article. It goes into the investment thesis in great detail. I go to great lengths to explain that there is significant upside, but strongly make the point that there is a risk of losing all of one’s investment in NWBO stock. At the same time, I initiated coverage of ImmunoCellular Therapeutics (IMUC) with a Buy. It has never been a client of MDM.

In a remarkable display of sleuthing Pearson, or whoever did the research, notes that my website was operated and maintained by BlueLine International until sometime in the summer of 2012. This is roughly correct. At that time, Blue Line went suddenly and unexpectedly bankrupt.  My website was a mess and was being hacked on a regular basis. I first turned to IV Most Consulting to keep the site operating; this was in the summer of 2012. However, IV concluded and I concurred that the whole website had to be reconstructed. It was approximately in the third quarter of 2012 that I began to speak with MDM about rebuilding my website. This was one-half year after I initiated coverage of NWBO.

My initial report on NWBO was at a price of $3.52. The stock is up 90% to $6.71 as of the close on July 8. This is after a massive bear raid that has been ongoing throughout 2014.

MDM did introduce me to its clients. This was to be expected as we were both focusing on emerging biotechnology firms. The first company they introduced me to was Advanced Cell Technology, their biggest and most important client. Because of the early stage of development of the company, I elected not to pick up coverage. They later introduced me to their second largest client Amarantus which I also elected not to cover.

Let me go over six companies that MDM introduced me to and which I decided to pick up coverage. In each case my interest was to find companies that could make money for investors. May I remind you that I run a subscriber based website in which my only interest is to find good ideas? May I also remind you that investing in emerging biotechnology stocks is a high risk exercise and there is a large failure rate? Here is my experience with five biotechnology companies that MDM introduced me to and that I decided to write on.

Trius Pharmaceuticals was the first company. I recommended the stock at a price of $5.05 on May 30, 2012. It was acquired by Cubist in September 2013 for $13.48 plus some contingency value rights that may be worth $2.00.

Neuralstem is a company that I first called on over 15 years ago and I have had a long relationship with the Company since then. I had not followed the company closely for some years and MDM set up a meeting. I was impressed at the progress of the company. I recommended the stock on November 5, 2012 at a price of $0.90. It closed Last night at $3.55 which is up 394% from my initial recommendation.

OncoSec Medical is an immunotherapy company that injects a cytokine into tumor lesions. (Pearson might like this company with his interest in syringe immunotherapy). I took a hard look at the company and wrote a detailed report. The stock was at $0.32 when I wrote my report. I recommended that investors should not buy the stock due to competition from Bristol-Myers. I was wrong to not issue a buy as the stock has since doubled to $0.63. I missed that one.

My recommendations on InSite Health and NovaBay were less successful. I recommended InSite on the basis that there was the potential for success in a very important phase 3 trial in blepharitis, but the trial failed. I initiated coverage at a price of $0.30. In a report on my website issued on March 5, 2014 my latest rating on the stock was neutral and the stock was at $0.30. The link to the report is

http://smithonstocks.com/current-recommended-stocks-and-an-analysis-of-past-recommendations-paid-subscribers-only-march-5-2014/

An initial recommendation was made on NovaBay (NBY) at a price of $1.40. The recommendation was on the basis of three clinical trials going on with their lead drug auriclosene. One trial failed and another was successful. My last rating on NovaBay was neutral in the same March 5, 2014 report cited above with the stock at $1.30. I think that the recommendations of IHSV and NBY while not successful were not unusual in biotechnology. About 50% of late stage trials fail. However, after the trial failures, I went to neutral and investors could make up their own mind on whether they should stay with the stock. They had not incurred any great loss as of that time.

MDM did not introduce me to Agenus, a company whose CEO, Garo Armen, I have known for many years and for whom I have great respect. My reason for picking up coverage was that Agenus is developing a cancer vaccine for glioblastoma multiforme. I had a keen interest in this area as this is the principal therapeutic target for the cancer vaccines of NWBO and IMUC.

At about the same time, I picked up coverage of Celldex (CLDX) in large part because they also have a cancer vaccine that is targeted at glioblastoma multiforme. I felt that this would give me a unique insight into this highly promising but competitive therapeutic arena. MDM followed up on my recommendations of Agenus and Celldex with an explanation of their services. I recommended AGEN at a price of $3.91 and the recent close was $3.60. I continue to have a buy.

Pearson Ignores The Other 37 Companies That I Have Written On

If you read the Pearson article, you would think that the companies I write about are the six MDM clients that I just described. Having two doubles in price, one triple and three breakeven investments out of these seven is not so bad. I am ignoring OncoSec on which I issued a neutral opinion only to see it double. In this small sub-segment of my 44 company universe, this is a pretty fair return.

I would like to point out some of my other successes. Eight of the 44 companies I have recommended have been acquired. This is a very strong validation of the quality of my stock picks. The increase in price from the time I recommended purchase to the time that they were acquired was as follows:

Santarus up 1696%, acquired by Salix (SALX)

Adolor, up 208% acquired by Cubist (CBST)

Trius, up 171%, acquired by Cubist

Inhibitex, up 144%, acquired by Bristol-Myers (BMY)

Anadys, up 109% acquired by Roche (RHBBY)

Cadence Pharmaceuticals, up 97%, acquired by Mallincrodt (MKC)

MAP Pharmaceuticals, up 95%, acquired by Allergan (AGN)

Somaxon, up 28%, acquired by Pernix

 

NYSE Action against Me

In 1999 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 a decade 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 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 Action

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 Initially Took No Action

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 picking 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.

 

 

 

 

 

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