Today we're talking with Theodore Jerome Cohen, author of Death By Wall Street: Rampage of the Bulls
FQ: Buy, Sell, or Hold? That is one major question that anyone interested in stocks must consider. There are also considerations authors need to deal with when writing a book. Perhaps you could tell us what they were and what motivated you to write your fictional exposé, Death by Wall Street?
What motivated me was my anger over how Wall Street has ‘captured’ the SEC over the last ten years or so and how the pharmaceutical industry has ‘captured’ the FDA over the same time period. In the case of the former, it has resulted in a Federal agency that couldn’t find the likes of Bernie Madoff even after Harry Markopolos stuck their nose in ‘that dung heap’ repeatedly for almost a decade. I also documented and reported case after case of market manipulations involving stocks in the biotech universe to the SEC’s Enforcement Division over the last several years, about which it did nothing. Apparently, the people at the SEC were too busy watching porn on their computers (documented in the press and cited in one of the book’s footnotes) or preparing their resumes for submission to the major Wall Street firms to do their jobs. In the case of the FDA, I have repeatedly watched as that agency approved waivers for consultants to participate in advisory committees, where they would sit in judgment of drugs that had been submitted to the agency for approval. The only problem was, many of these people were working on the development of competing drugs. They shouldn’t have been within a country mile of the advisory committees on which they sought, and ultimately were granted, a seat. There is more truth to this novel that one would think. If you want to read a real-world example of what the book reveals, all you have to do is go to www.deepcapture.com and key the “Michael Milken and Dendreon” hot button at the top. This will take you to the Dendreon Story by Mark Mitchell. The story also is accessible through the novel’s page on my web site, www.theodorecohennovels.com . [Full disclosure: I have owned shares in Dendreon Corporation since 2006.]
FQ: You mention that you had “wanted to write this book for 10 years.” Could you briefly tell us a bit about why it took so long and could you give us a glimpse into some of the manipulative practices you’ve observed on Wall Street, particularly with the biotech stocks?
The first question is easy to answer: I didn’t start writing books until two years ago, so the novel simply had to wait. But in the meantime, I did write numerous editorial and other expository pieces on the subjects cited in the book that were posted to several web sites (e.g., Seeking Alpha) and message boards (Investor Village, Yahoo!, Raging Bull, and so forth).
As for manipulative practices, one that stands out in my mind, and that I articulated in the novel, concerns the manipulation of a stock’s closing price in the days leading up to options expiration (the Saturday following the third Friday of every month). I can’t go into detail for legal reasons, but in 2002, a major brokerage house issued a negative analyst report on a biotech stock that contained no new information. The report was issued just days before options were set to expire and was timed to drop the stock below a certain option’s strike price. The intent was to ensure that the brokerage house didn’t have to go into the market and buy stock to settle their options account, where they had considerable exposure. I knew that they were in a bad position from having tracked the growth of their short position in the biotech stock of interest in the months leading up to this event. Sure enough, when the market closed on that Friday, the price was safely below the strike price that would have triggered the need for the brokerage house to purchase stock in the open market. I documented everything in a letter to Chairman Pitt of the SEC. He didn’t even give me the courtesy of a reply. I then sent the material to Hon. Eliot Spitzer. I was told (privately, by a third party) that he used the information to take legal action against, and fine, the brokerage house. The SEC still is asleep at the switch. Today, it’s Hon. Preet Bharara, US Attorney for the Southern District of New York, who is doing battle in the fight against insider trading and the hedge fund industry. The SEC is missing in action! For my money, they are a totally worthless agency and should be disbanded. Anyone who thinks the SEC is protecting the American Public is smoking something!
FQ: In Death by Wall Street, Alexa, a forensic analyst “specializing in stock market manipulation,” claims that “There is no question in my mind that these people have been manipulating the market in Barranger and other companies’ stock for several years.” Do you see this happening in “real” life and what made you come to your conclusion?
There is no question that stocks are being manipulated. I have witnessed this especially in the biotech universe, an area in which I have specialized for 30 years. Let’s talk generalities first. As I say in my novel, the chances of a drug making it through the FDA approval cycle are about one in ten. Here’s what the character ‘Steve Jacobs’ told ‘Detective Lou Martelli’ about the process:
“Look. All drugs go through three FDA-mandated phases of testing that must be performed before they can be approved for use by humans. Phase I trials are intended to gauge safety, Phase II trials look at the effectiveness of the drug, and Phase III trials examine the overall benefit-risk relationship so that the FDA can develop labeling for use of the drug by physicians. The process can take up to ten years to complete. Given that timeline, you can see why it’s not unusual for companies to spend billions of dollars on the development of just a single drug. Even more depressing is the fact that for every ten drugs that enter the development cycle, nine fail somewhere along the way. And people wonder why drugs are so expensive? Someone has to pay for all those failures just to get the one winner.” (Death by Wall Street: Rampage of the Bulls, Theodore Jerome Cohen, AuthorHouse, copyright 2010)
What Wall Street loves to do in the biotech universe is bet that companies will fail to bring a drug to market by shorting the stock. In shorting, one borrows the shares and sells them. And why not do this? Nine out of ten attempts to develop new drugs will result in failure, so from a statistical standpoint, you can make money betting against success in the biotech industry. But the Street doesn’t like to wait for its money. So there are those who speed things along by manipulating biotech share prices, attempting to drive the stocks they’ve shorted into the ground. And if, by chance, they can drive a company into bankruptcy, they never have to buy those shares back (that’s called ‘covering your short’). In those cases, they get to keep all the money they made shorting the stock and they pay no taxes on their windfall profits! Again, take a look at what happened to Dendreon; it’s all laid out in the DeepCapture article. You will be amazed at who is cited as being involved in attempting to sink that company. Congress could fix the tax problem, and with it, part of the Federal Budget deficit. But then, that might anger the people that put money in our representatives’ pockets, and G_d forbid, we wouldn’t want the upstanding people who represent us in Washington to go without! Do I sound jaded?
FQ: Alexa also stated that the “pharmaceutical industry has figured out a way to get around these pesky little problems and defeat any attempts by Congress and others to ‘follow the money.’” She was discussing how doctors (university-based clinicians) and others can actually be surreptitiously paid by the pharmaceutical industry. Can you explain this process?
Yes, of course. Actually, it’s explained in the book together with figures. Drug companies can't pay university-based clinicians directly for their work—ethical concerns and the like prohibit it. But Big Pharma can get money to university personnel working on their drug trials in two ways. The first way is for a drug company to contract with the general administrative office of a medical school. The contract they put in place is essentially a ‘grant’ to a specific department in which the clinical trial will be operated. A variant on this method is for the drug company to contract with one of hundreds of clinical research organizations—or CROs, as they are called—to run a clinical trial. Then, the CRO will put the grant in place with the general administrative office of a medical school. Either way, some of the money trickles down to the intended recipients. When those consultants go to fill out their waiver requests to participate in FDA advisory committees, the true source of the money is masked. The FDA knows what is going on, but so far, it hasn’t taken action to stop it. The people responsible just wink and nod. There are people in Congress who have been pushing to correct the problem, but it hasn’t garnered the support that it should, probably because people are being bought off by the pharmaceutical industry through campaign contributions. We do, after all, have the best government that money can buy!
FQ: You said you have been an “investor with more than 50 years’ experience.” Is there one particular instance of what you perceived as medical malfeasance in the trading of biotechnology stocks that was particularly striking and why?
No, I can’t say I’ve ever witnessed ‘medical malfeasance’. I attempt to identify and invest in companies that tell a compelling development story and whose drugs fill a major medical need. This has resulted in many missteps, to be sure, because as I’ve noted above, failures far outnumber successes. But actual ‘medical malfeasance’, no.
FQ: Death by Wall Street is not “just” a book for you. It obviously carries quite a bit of emotional weight. Perhaps you’d like to talk about this and if any of these events described in the book have impacted your life in any way.
Yes, it’s very personal because the events in the book are based, in part, on my experiences in biotech investing, particularly those of the last 10 years. I have, for the last three years, been one of several rather vocal people who have attempted to push the SEC, HHS (Office of the Inspector General), and the FDA into investigating certain individuals who I felt were sufficiently conflicted as to have impaired their judgment and delayed the approval of Dendreon’s immunotherapeutic treatment, Provenge, for end stage prostate cancer. (The treatment now has been approved.) When I didn’t get anywhere with the SEC Enforcement Division, I filed a formal complaint against that office with the SEC’s Office of the Inspector General. As well, I asked for a complete investigation into the April 2009 Bear Raid on Dendreon’s stock…a raid that saw the stock drop for $24.50 to $7.50 in 75 seconds. Importantly, someone posted on a Yahoo! message board that the raid would occur 30 minutes from the time of posting. Sure enough…Bam! Down the stock went. The SEC and NASD did nothing. Sen. Grassley asked for all of my evidence of malfeasance in the Dendreon matter during the summer of 2009, and he, too, called for a complete investigation. In the end, the SEC OIG refused to investigate my complaint about the conflicts of interest and pushed my complaints about the Bear Raid over to…(wait for it)…3, 2, 1: the Enforcement Division. (This is like asking the fox with chicken feathers in his whiskers what happened to the chicken!) We do know that the Enforcement Division has completed the investigation requested by Grassley (and me, via the SEC OIG (see the footnotes in the novel)) and has forwarded their Report to the SEC Chairwoman. But the Chairwoman’s Office refuses to release the Report under the Freedom of Information Act. So much for transparency.
FQ: If you want your readers to take away one thing from this book, what exactly would you want them to discover, to feel?
I want them to understand that their finances and health are being impacted every day by the fact that two agencies of the Federal government, the Securities and Exchange Commission (SEC) and the Food and Drug Administration (FDA), have been ‘captured’ by the very industries these agencies are supposed to regulate. And unless and until this situation is corrected, they and our nation are in jeopardy.