Vaso Active's Claims Prompt SEC to Step In
By Matthew Goldstein
TheStreet.com Senior Writer
Vaso Active Pharmaceuticals (VAPH:Nasdaq - commentary - research), one of the hottest stocks of the year, was stopped dead in its tracks Thursday by securities regulators.
The Securities and Exchange Commission suspended trading in shares of the tiny Massachusetts company, which claims to have developed a miracle treatment for athlete's foot and a "revolutionary" transdermal delivery system for over-the-counter drugs.
The SEC imposed the suspension "because of questions regarding the accuracy of assertions" by the company in press releases, its annual report and other corporate filings. SEC officials have been investigating the company, which went public in a mid-December IPO, for a little over month.
The action followed a series of articles on TheStreet.com questioning the company's statements about its clinical trials and medical endorsements and noting troubling aspects of its corporate pedigree.
In a press release announcing the temporary suspension, the SEC says the questions surround statements Vaso Active made about Food and Drug Administration approval of "certain key products" and "the regulatory consequences of the future application of their primary product."
The trading suspension expires at midnight on April 15, and it gives time for the SEC to gather information and possibly bring an emergency enforcement action against a company.
Mark Kreitman, an SEC assistant chief litigation counsel, declined to comment on the suspension, but he said the investigation is continuing. The company did not return telephone calls seeking comment.
Matt Meister, president of Kashner Davidson, the small Florida brokerage that was the underwriter on the IPO, declined to comment.
Shares of Vaso Active were frozen at $7.59 a share. The stock is up 314% since its December 2003 initial public offering, after adjusting for a 3-for-1 stock split last month.
The past few months have been a helter-skelter ride for Vaso Active, a money-losing company with just seven employees and less than $60,000 in annual sales. The stock soared on the company's claim that its Termin8 foot lotion and its patented transdermal technology system will revolutionize the over-the-counter drug market.
Last week, in a conference call with investors, Vaso Active Chief Executive John Masiz read a statement predicting that the company's annual sales will climb from $53,000 in 2003 to a "run rate" of $12 million next year because of a number of strategic deals it has reached. The conference call sparked controversy, because Masiz abruptly ended it without fielding questions, even though more than 100 people were listening in.
Controversy is nothing new to Vaso Active. The company has had to fend off questions about an endorsement for its athlete's foot lotion Termin8 and the authorship of a six-year-old clinical study of the foot lotion.
Regulators also have raised questions about the high level of trading in the stock. In the weeks before the stock split, the shares skyrocketed from $8 to $39. The trading volume rose from just a few thousand shares changing hands each day to several million.
Despite all the controversy, Vaso Active was able to ink a $7.5 million private placement with Millennium Partners, a big New York hedge fund led by Wall Street impresario Israel Englander. The financing arrangement consisted of an 18-month convertible 2% note that can be turned into roughly 833,000 shares of Vaso Active stock, if the share price reaches $9. The deal also included warrants to purchase 166,667 shares of Vaso stock at an exercise price of $8.75.
A Millennium spokesman declined to comment on the trading suspension.
A familiar stench wafts from Vaso Active (VAPH:Nasdaq - commentary - research), the small Massachusetts company that claims to have developed a new treatment for athlete's foot.
The smell spawns memories of the late 1990s IPO market, when any company with a whiff of a business plan, vague stories and an investment bank could sell shares to the public and see them soar.
Skyrocket is the more apt verb for Vaso, which, since going public in mid-December, has seen its shares jump 440% to just below $27. This is for a company with no profits, less than $100,000 in annual sales and seven employees.
Trading in the 1.6 million Vaso shares sold to the public has been frenzied. Over the past two weeks, an average of 1 million shares have changed hands each day. The trading has been so frenetic that even the investment bankers at Kashner Davidson, the small Florida brokerage firm that led the IPO, are expressing dismay.
Perhaps investors also should worry.
For starters, there's the debate about just how amazing its foot-fungus-fighting treatment Termin8, really is.
The company contends the product, with its "revolutionary transdermal drug delivery technology," is a "highly advanced and remarkably effective cure for Athlete's Foot." The company has such high hopes for Termin8, which retails for $19.99, it recently told investors that it foresees a $365 million market for the product. Furthermore, Vaso Active boasts on its Web site that Termin8 has won the endorsement of The American Association of Medical Foot Specialists.
In a recent interview, David Z. Ascher, a New York podiatrist and the foot association's president, seemed more impressed with Termin8's packaging.
"There is no such thing as a miracle cure," Ascher said. "It is as good as any of the other products."
The doctor continued: "The packaging is fantastic. The box is so beautiful."
Vaso Active might be ruing ever getting involved with Ascher, who won't say how many members are in his medical association.
Last week, Ascher told Barron's he didn't recall endorsing the company's product. He has since amended that. Ascher told the TheStreet.com this week that he was confused when he talked to Barron's because Termin8 used to be called something else, deFEET. Ascher said his association stands behind its endorsement, but now he wants Vaso Active to make a donation to an association scholarship.
Whatever the connection, Ascher's group wants no part of a controversy. "We do not want to be involved with any hanky-panky," he commented.
A Vaso Active spokesman declined to comment.
If that doesn't give investors pause, consider the cast of Wall Street characters surrounding the tiny company.
TheStreet.com previously reported that Ray Dirks, a legendary analyst whom regulators have charged with pumping up a handful of penny stocks, initially had a hand in Vaso Active's IPO. Dirks' firm, Sky Capital, was going to be the lead underwriter on the deal, until Kashner Davidson replaced it at the last minute.
Still, sources familiar with the deal said, Sky Capital got an allocation of shares to sell to its customers. Also, one of Vaso Active's directors, Gary Fromm, also is a director of Sky Capital Ventures, a subsidiary of Sky Capital.
Kashner Davidson, the firm that ultimately took Vaso Active public, has also known controversy. The 27-year-old firm, which specializes in so-called microcap IPOs, has been fined or censured by securities regulators 19 times. The most serious infraction occurred in 1996 when state and federal regulators fined and sanctioned Kashner Davidson for having an improper relationship with a stock promoter.
Some of the investment firm's recent IPOs haven't fared too well.
EsafetyWorld, a Bohemia, N.Y., company that Kashner took public in 2000, is out of business. It imploded after regulators raised concerns about some of its financial filings and a post-Sept. 11 claim that it had developed a safe system for opening mail suspected of containing anthrax.
Two other companies, Able Energy (ABLE:Nasdaq - commentary - research) and BioDelivery Sciences (BDSI:Nasdaq - commentary - research), are both selling well below their IPO prices. Shares of Able, which went public at $7 a share, were most recently trading around $2.58, while BioDelivery, priced at $5.25, is trading around $3.75.
Matt Meister, Kashner Davidson's president and chief executive, defended his firm's reputation and underwriting track record. He said the regulatory issues at Kashner Davidson are in the past and there's always a risk in taking companies, especially small ones, public. Vaso Active's success, he said, doesn't depend on the sales of a single product, but the company's ability to develop its transdermal technology.
"This is a company we think that may have a technology platform for transdermal delivery," said Meister. "It's more the technology than the product itself. It looks like it could be pretty good, with some sound science behind it."
Wall Street wheeling and dealing can make for some strange relationships, such as the one entered into this week between Millennium Partners and Vaso Active Pharmaceuticals (VAPH:Nasdaq - news - research) .
On Tuesday, the embattled hedge fund led by legendary Wall Street trader Israel Englander made a big bet on the quirky little drug company that claims to have developed a miraculous cure for athlete's foot.
The private equity arm of Millennium, in a $7.5 million private placement, purchased an 18-month convertible 2% note that can be turned into roughly 833,000 shares of Vaso Active stock, if the share price reaches $9. The deal also included warrants to purchase 166,667 shares of Vaso stock at an exercise price of $8.75.
On Tuesday, the day the deal was inked, shares of the Danvers, Mass.-based company closed at $7.03. Vaso Active stock soared 15% Wednesday to $8.11 after the company announced the transaction, leaving the shares within striking distance of both magic numbers.
News of the deal comes as Millennium and Vaso Active face regulatory scrutiny.
With $3.2 billion in assets, Millennium is one of the big hedge funds at the center of the far-reaching investigation into improper trading in the mutual fund industry. Last year, one of Millennium's top traders pleaded guilty to making illegal trades in shares of mutual funds. Englander is bracing investors for the possibility the hedge fund could be ordered to pay a stiff fine when the investigation is completed.
Millennium Partners, one of the hedge funds at the center of the mutual fund trading scandal, has set aside 10% of its investors' money in preparation for a possible settlement with federal or state regulators.
Investors at the $3.2 billion hedge fund run by Israel Englander, the storied Wall Street trader and buyout specialist, learned in December that some of their money would be set aside for the firm's legal reserve, even as backers clamored for their cash. About $800 million has streamed out of two Millennium hedge funds since the firm surfaced in the mutual fund late-trading and market-timing scandal last October.
Millennium's decision to set up a legal reserve looks prudent, particularly after a former trader, Steve Markovitz, pleaded guilty in October to making illegal late trades in shares of mutual funds. The action is similar to one taken by Veras Investment Partners, a Sugar Land, Texas, hedge fund that put away up to $100 million to cover any fines and penalties regulators might impose in their investigation of its role in the mutual fund scandal.
Harry Davis, a partner with Schulte Roth & Zabel and one of Millennium's outside attorneys, didn't return repeated phone calls. Tom Daly, a Millennium spokesman, declined to comment. TheStreet.com reported Tuesday that a number of witnesses familiar with Millennium and Markovitz have appeared before a New York state special grand jury that is investigating the mutual fund industry.
While Millennium investors have been pulling out of funds, the situation would be worse if not for restrictions in their investment agreements that allow Millennium to bar larger withdrawals. Millennium's investors include Duke Management Co., which runs Duke University's $5 billion endowment; the Belzbergs, one of the richest families in Canada, and many funds of hedge funds.
According to an investor that still has "a few million" in one of Millennium's hedge funds, word of the legal reserve was one of very few communications the beleaguered Englander has offered to his backers in recent months. While the fund was once open about market-timing, a legal-if-frowned-upon strategy involving frequent trades, it clammed up around the time of the Markowitz late-trading plea, the investor said.
The ice is beginning to crack beneath Millennium Partners, the big New York hedge fund run by Wall Street trader and buyout specialist Israel Englander.
Over the past several months, lawyers and other sources say, investors have pulled $800 million out of Millennium, in the wake of a guilty plea last September by Millennium trader Steve Markovitz to making illegal mutual fund trades. The redemptions, which sources say coincide with the departure of several traders and back-office employees, have slashed Millennium's total assets under management to about $3.2 billion.
The drop in assets under management is particularly sharp -- Millennium had $3.3 billion in its offshore fund as of the end of December plus about $1 billion in its fund for domestic investors, according to the Center for International Securities and Derivatives at the University of Massachusetts.
More troubling, legal sources say, state and federal securities regulators looking into allegations of improper trading in the $7 trillion mutual fund industry are stepping up their inquiry into Millennium's role in the scandal. Lawyers familiar with the investigation believe the renewed focus on Millennium could be a prelude to the filing of additional criminal charges, or the imposition of a stiff fine on the giant hedge fund.
In recent weeks, a number of witnesses familiar with Millennium and Markovitz have appeared before a New York State special grand jury that is investigating the mutual fund industry, several sources said. One person familiar with the investigation said the grand jury has heard testimony from a number of people in the "Markovitz universe.'
Markovitz, one of the first people on Wall Street arrested in the far-reaching mutual fund trading scandal, pleaded guilty to making illegal late trades in shares of mutual funds. In pleading guilty, Markovitz agreed to cooperate with prosecutors and his sentencing has been delayed several times while Spitzer's office continues its investigation.
Late-trading and market-timing are the two main trading offenses at the center of the mutual fund investigation. Late-trading, which is illegal, involves buying shares of a mutual fund after the close of trading, but at an old price that doesn't reflect the impact of late-breaking market developments. Market-timing, which is not illegal, entails the frequent trading of mutual fund shares, often in violation of fund company rules.
Despite the increased grand jury activity, prosecutors are not believed to be close to filing criminal charges against anyone else at Millennium. People familiar with the inquiry said investigators with New York Attorney General Eliot Spitzer are still trying to determine what, if anything, Englander may have known about any improper mutual fund trading.
Englander, because of his past dealings with some of Wall Street's more notable characters, would represent a high-profile catch for securities regulators.
Back in the 1980s, Englander was a friend of convicted Wall Street felon Ivan Boesky. Later, he was partner in a buyout firm with John Mulheren, the storied arbitrager who was arrested on gun charges in 1988. Mulheren, who died late last year, was convicted of insider trading in the investigation that brought down Boesky. The conviction was later thrown out on appeal.
A Spitzer spokesman declined to comment. A Millennium attorney, Martin Pershetz, a former federal prosecutor and a partner at Schulte Roth & Zabel in New York, didn't return phone calls over a period of several days. Harry Davis, another Schulte Roth attorney who does work for Millennium, declined to comment. Tom Daly, a spokesman for the fund, also declined to comment.
The increased grand jury activity comes at a time when Millennium is taking steps to fortify its regulatory and compliance operation. Last month the hedge fund hired Simon Lorne, a former Securities and Exchange Commission general counsel, as a vice chairman and chief legal officer.
Some people familiar with the Millennium investigation see Lorne's hiring as setting the stage for a possible settlement between Millennium and regulators and prosecutors.
Regulators have long eyed the dozens of hedge funds that reaped big profits from improper trading as potential deep pockets for reimbursing mutual fund shareholders.
TheStreet.com previously reported that Spitzer's office and the SEC advised Veras Investment Partners, another hedge fund, to set aside more than $100 million to cover the cost of a possible settlement for its role in the trading scandal. The Sugar Land, Texas, hedge fund, which is in the process of closing down, allegedly made improper trades in shares of funds sold by Fred Alger Management and Federated Investors (FII:NYSE - commentary - research).
The mutual fund investigation began last September with Spitzer's announcement that he had reached a $40 million settlement with Canary Capital Partners, the New Jersey hedge fund run by Edward Stern.
Meanwhile, the exodus of investors from Millennium could have been far worse than the $800 million that's already been taken out. Under Millennium's partnership agreements, investors are generally obliged to leave their money in the funds for a minimum of three years.
A spokesman for the fund also declined to comment on the investor withdrawals.
And who are the investors still left behind Millennium?
