Yesterday’s crackdown on paid-for stock promotion was notable not only for its severity but also because it took place at all. The small size of the companies targeted – all of them biotechs – would normally have allowed them to sail under the radar of the SEC, the US stock exchange regulator.
Clearly the SEC aims to nip a growing problem in the bud. The broader question will be whether this ushers in a fundamental change in the way biotechs present themselves to retail investors – a vital audience – and whether it also curtails the ability of legitimate advisory firms and the sellside to raise capital for clients.
After all, the fundamental aim of any biotech is to raise cash for its next stage of development. And, Chinese walls between equity research and corporate finance notwithstanding, one goal of the sellside is to present the markets with a positive view of small cap stocks with a view to earning commissions when these subsequently raise funds.
A crucial distinction has to be drawn. The SEC has specifically targeted not stock promotion per se, but stock promotion by individuals who do not disclose the fact that they have been paid for this service.
In many cases this involved companies paying advisory firms money on the specific instructions that a certain number of promotional articles appear on websites such as Seekingalpha. In each case the author, sometimes using numerous aliases, gave the impression of being an independent commentator, without revealing a financial connection.
This contrasts with PR and IR firms – whose obvious and transparent aim is to promote client companies – and the sellside. Sellside analyst research typically includes boilerplate wording making it clear that the bank issuing it might seek corporate finance business with the company covered.
The SEC makes its aim clear: yesterday’s statement is headlined “payments for bullish articles on stocks must be disclosed to investors”, while a separate investor alert warns of “seemingly independent commentary” on the internet.
But the SEC’s ability to police social media like Twitter is questionable. And the business models of paid-for equity research outfits like Edison Investment Research clearly lie outside the scope of the crackdown: Edison’s research discloses the fact that companies covered are clients, and generally does not set specific share price targets.
None of which can hide the fact that yesterday’s shot across the bows is a serious embarrassment for the companies involved and for the sector in general; it will not go unnoticed that the SEC specifically targeted biotech.
The three companies subject to cease-and-desist orders citing fraud and misleading of shareholders are Galena Biopharma, Lion Biotechnologies and Immunocellular Therapeutics. Separate charges were also instituted against Cytrx, but the information this company paid to disseminate was not false or misleading, the SEC states, and the charges were settled.
Also on the receiving end of legal complaints were several advisory firms involved, including Lidingo, CSIR and Dreamteam, as well as associated individuals. Remarkably, the SEC has barred Manish Singh, ex-chief executive of Lion and Immunocellular, and Mark Ahn, former head of Galena, from serving as an officer or director of a listed entity for five years.
True, this does not prevent them from heading up private biotechs – as Sam Waksal, the disgraced former chief executive of Imclone Systems did at Kadmon until that company decided to go public – or groups listed outside the US.
But the message to retail investors is clear. Biotech's complex subject matter makes it easier for non-specialists to be swayed. At least now a hidden agenda might be easier to spot.