The whistle blowers' version of SAC's tactics:
True or False: A Hedge Fund Plotted to Hurt a Drug Maker?
By JENNY ANDERSON
Published: March 26, 2006
Jeff Topping for The New York Times
Scotsdale, Ariz.
AS they tell the story, it seemed like just an office turf war.
Three summers ago, Daryl Smith, a sales representative for Gradient Analytics, a small independent research firm here, says he participated in a conference call with his biggest prospective client, a unit of SAC Capital Advisors, a powerful hedge fund on Wall Street.
Mr. Smith listened eagerly, he says, but was troubled by what he heard:
His boss was agreeing to delay the release of a report that was largely negative about a pharmaceutical company, Biovail, in order to allow SAC to build a position to profit should that report then cause the stock to fall. Even worse: that report, he contends, was essentially created by SAC.
He dashed down the hall to tell his friend Robert Ballash, another salesman at the firm, about the call. Mr. Ballash was incensed. "I have clients, too," he recalls yelling at Mr. Smith, apparently with some envy at the advantage his colleague's client seemed to be about to enjoy. "Why are you getting a three-day advance?"
That intraoffice turf war — if it took place, which Gradient adamantly denies — has metastasized into an ugly legal war. The company that was the subject of the report is not only taking on the $8 billion SAC hedge fund and the research firm, Gradient, but also a Bank of America analyst and others.
At the heart of Biovail's racketeering lawsuit, filed last month in New Jersey Superior Court in Newark, is an audacious claim: that some of the nation's biggest hedge funds colluded with independent research firms and analysts at big banks to produce purposely misleading research with the sole object of driving down a company's stock price. Hedge funds do so, the suit contends, to profit from their huge short positions on these companies, essentially bets that the stocks will drop.
SAC, Bank of America and Gradient vehemently deny the accusations. Carr Bettis, a founder of Gradient, says the lawsuit reads like a "fiction novel," and his business partner and co-founder, Donn W. Vickrey, says the conference call that Mr. Smith cites never took place. Mr. Vickrey further said that the practices alleged by Mr. Smith did not occur.
Daniel J. Kramer, a lawyer at Paul, Weiss, Rifkind, Wharton & Garrison who represents SAC, says Biovail's allegations of manipulation are "false and implausible." He adds that the company's stock dropped in 2003 because of its publicly disclosed earnings disappointments and regulatory problems, not because of any supposed conspiracy.
Biovail's lawsuit does have a familiar plot line: it aims at analysts who write negative research — something that regulators have tried to encourage, because too-positive research has historically been a problem.
The suit also takes aim at some familiar targets. Whenever companies are in trouble or there is panic in the market — from the bursting of the South Sea bubble in London in 1720 to the plunge in markets after the Sept. 11, 2001, attacks — critics are often quick to vilify short-sellers as market manipulators. Recently, companies have even hired public-relations firms to spread the contentions.
In a short sale, an investor borrows shares and then sells them, hoping to buy them back at a lower price before having to return them, and aiming to profit from the difference. If buying a stock — going long — represents faith in the future of a company, then going short signals skepticism about those prospects. Short-sellers recognized Enron's problems long before investigators issued any subpoenas.
"Short-selling makes the market more efficient and more liquid," said Owen A. Lamont, a professor of finance at the Yale School of Management who has studied short-selling. "It helps get the opinions of the pessimists into the market so that prices can be more accurate."
Biovail's chief executive, the Canadian billionaire Eugene N. Melnyk, says that the suit is not about short-selling. "We are talking about misinformation put into the marketplace," he said. (Mr. Melnyk has sued a short-seller in the past.)
The Securities and Exchange Commission is investigating some of the allegations made by Biovail and Overstock.com, which has filed a similar lawsuit against short-sellers and analysts. At the same time, the S.E.C. is investigating Biovail for its own accounting practices, one further twist in a knot of a case.
Surrounding these claims about short-selling and market manipulation is an anxiety about the growing power of hedge funds. These funds, private investment pools for institutions and the wealthy, have increased sharply in number, size and effect on the market: according to New York Stock Exchange officials, they constitute from one-quarter to one-half of all trading on that exchange every day.
Hedge funds operate with a fair amount of secrecy, which naturally shrouds them in mystery and, often, suspicion. Combine that with the veiled practice of shorting and the devaluation of stock research since the market collapse, and it becomes a recipe for concern — if not paranoia.
AI
