It seems the biopharma industry isn’t immune to the perils of “fake news.”
On Monday, the Securities and Exchange Commission (SEC) revealed charges against 27 individuals and entities behind alleged stock-promotion schemes.
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According to the statement, certain executives hired third-party communications groups to post bullish articles about their companies, encouraging an artificial boost in market value. Not only did the authors not disclose they were working for the companies in question, in 250 articles the SEC asserts that they deliberately misled readers by stating they had no affiliation.
The blacklist includes three public companies; ImmunoCellular Therapeutics (IMUC), CytRx Corporation, and Galena Biopharma. Two former CEOs, Manish Singh of IMUC and Michael Ahn of Galena, were also directly charged, alongside seven stock communications firms and 15 of their employees/writers.
“Deception takes many forms,” said Melissa Hodgman, associate director of the SEC’s Division of Enforcement, in the SEC statement. “Our markets cannot operate fairly when there are deliberate efforts to reach prospective investors with positive articles about a stock while hiding that the companies paid for those articles.”
Headquartered in Calabasas, California, ImmunoCellular Therapeutics and Singh were both charged for their market ruse. In an enforcement letter, the SEC alleges that between September 2011 and August 2012 (when Singh retired), the company paid more than $230,000 to a communications firm called Lidingo Holdings.
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“Lidingo, in turn, paid writers to publish articles describing IMUC securities on investment websites SeekingAlpha.com and Benzinga.com. In addition, Lidingo paid writers to ghost-write articles about IMUC that Lidingo then published on Seeking Alpha’s website under Lidingo-selected pseudonyms. None of the over 50 articles disclosed the writers’ or Lidingo’s compensation from IMUC or otherwise suggested that the articles were part of a paid promotion.”
IMUC went on to win a $19.9 million grant from the California Institute for Regenerative Medicine in 2015. As of Monday, when the charges were publicized, the company had a market capitalization of just over $9 million.
Another cease-and-desist went to Los Angeles, California-based CytRx Corporation. According to the SEC letter, CytRx was approached in 2013 by Michael McCarthy, owner of the DreamTeam Group and a number of other entities. CytRx signed on for social media, marketing, and branding services several months later.
By December, the oncology company was considering an IPO. The SEC charges that CytRx emailed DreamTeam towards the end of the month stating: “We need one to two articles that are bullish on seeking alpha by 12/31. In addition we need a huge blitz in January 2014…”
The third public company accused of market manipulation is Galena BioPharma, based in Portland, Oregon. It seems the SEC already had this one’s address. As The Street’s Adam Feuerstein reported in 2014, the NASDAQ-listed company has already had several strikes. One of the investor websites, Seeking Alpha, took direct action in 2013, removing five articles written by the same author using various pseudonyms.
The SEC’s allegations span from January 2012 to February 2014, overlapping with the Seeking Alpha controversy. During that time, Galena published over 100 publications, according to the enforcement letter, which all claimed to be independent and objective. They were, in fact, advertisements for the company crafted by Lidingo Holdings and the DreamTeam Group at the request of then-CEO Mark Ahn.
“On over forty occasions, the writers affirmatively misrepresented that they were not receiving payment for their articles other than from the website on which their articles appeared,” the letter states. “…As a consequence of this conduct, Galena and Ahn violated the anti-fraud provisions of the federal securities laws, caused violations of the antitouting provisions, and engaged in improper “gun-jumping.”
With stock options included, Galena paid Lidingo a total of at least $460,000 in monthly fees and a $20,000 bonus. DreamTeam received a further $50,000 for its services.
The SEC’s Office of Investor Education and Advocacy released an “Investor Alert” on the same day, underscoring the need for analysts to not take investor articles at face value — even when they claim to be objective. Among its recommendations, a note to be particularly cautious when dealing with micro or nanocap companies.
“Microcap stocks, some of which are penny stocks and/or nanocap stocks, may be particularly susceptible to stock promotion schemes and other forms of market manipulation.”
Of those charged, 17 have agreed to forfeit profits or pay penalties ranging from approximately $2,200 to nearly $3 million, based on frequency and severity of their actions. Litigation is ongoing against the 10 others.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. For real.
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