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In a piece late last month, Washington Post columnist Steven Pearlstein criticized Adam Feuerstein, a reporter at TheStreet, for his negative coverage of a DC-based biotech company called Northwest Biotherapeutics (NWBO).
Feuerstein’s NWBO pieces “have not only been filled with exaggeration, mischaracterization and half-truths but curiously have also coincided with the spikes in short trading,” he wrote, suggesting that Feuerstein was in cahoots with a cabal of market manipulators out to make a buck by tanking a company with cancer vaccines in clinical trials.
TheStreet has demanded a retraction, saying Pearlstein and the Post had defamed Feuerstein. TheStreet’s lawyers are still going back and forth with the Post‘s lawyers on that, I’m told. Pearlstein’s column already has required two corrections (ADDING: Which the Post failed to flag online. Here’s the correction.)
For its part, NWBO says what’s happening is obvious. “What we know is our own personal observations,” says Les Goldman, NWBO’s senior vice president for business development. “Which I think can be verified only after one starts watching the pattern by various sources of public information.”
And Citizens for Responsibility and Ethics in Washington, a left-leaning watchdog group, sent an open letter to the SEC in which Executive Director Melanie Sloan accused Feuerstein of corruption. “Publicly available information suggests a concerted effort to manipulate the price of shares of Northwest Biotherapeutics in a way that furthers the interests of short sellers through the blog posts of Adam Feuerstein, who has demonstrated a repeated pattern of using his blog posts to influence the market price of stock in the biotechnology and pharmaceutical industries,” Sloan wrote.
CREW, which Pearlstein relied on heavily for his column, did not return a request for comment. It never contacted TheStreet before sending its letter to the SEC, according to TheStreet.
There’s no doubt that Feuerstein is an aggressive, sometimes brash, reporter, with a deep knowledge of the biotech industry picked up over nearly 14 years of covering it. Generex Biotechnology Corporation brought a $250 million libel suit against Feuerstein and TheStreet in 2010 for writing that its actions were “aimed at misleading investors” and “a ruse to perpetuate a 15-year-long stock promotion scheme.” Generex had to drop its suit a year and a half later. Its shares now trade for 2 cents apiece, down 96 percent from when Feuerstein called out the firm.
But the charge that he’s working with shorts to undermine NWBO falls apart upon inspection.
It’s been clear for years that Pearlstein doesn’t like short sellers. He called for banning the shorting of Wall Street stocks during the financial crisis, and has criticized “the unfairness of short selling.”
In that, he’s hardly alone. People buy stocks because they want them to go up, and financial commentary, reporting, and analysis—both in the press and on Wall Street—tilt heavily toward encouraging investors to buy. In February, for instance, just 25 stocks in the S&P 500 were rated “sell” by analysts.
But markets work best when companies are scrutinized from all sides, allowing investors to weigh all the information. Not every company is worth buying, much less holding, and short sellers look for companies that are overvalued and/or have questionable activities that can signal deeper problems, like mismanagement or outright fraud. They pay (often very high rates) to borrow shares and then they sell them, hoping the shares fall in price by the time they have to replace them. It’s an extremely risky business and requires intensive research. That makes them potentially valuable sources for reporters. It’s also what helps make them a magnet for conspiracy theories, something we know all about here at The Audit, which used to be funded in part by a short seller, Kingsford Capital.
The small-cap and penny-stock sectors are particular minefields for investors, who are trying to evaluate companies that are too small to be scrutinized regularly on Wall Street, much less in The Wall Street Journal. Plus, the smaller and less-traded a stock is, the easier it is to manipulate with pump and dumps, bear raids, and the like—both by investors, long and short, and by management. And biotech has been a gold-rush industry in recent years, which means it deserves even more reportorial skepticism and as much publicly available information, positive and negative, as it can get.
Exchanging information with investors, both long and short, is a core part of a market reporter’s job. It’s one of the ways you learn new facts, particularly those that companies don’t want you to know.
But Pearlstein doesn’t think journalists should even be talking to shorts. “When I asked whether Feuerstein had been in contact with the shorts, he would only say that he was in touch with a wide range of investors,” he wrote. “Using thestreet.com’s journalistic standards, the headline on that might be: ‘Biotech reporter concedes he may be exchanging information with shorts.'”
It’s hard to imagine Pearlstein criticizing a reporter for talking to investors who are long on a stock and want it to go up. What’s different about shorts? They’re “Wall Street wise guys [who] use sleazy tactics to manipulate share prices for short-term profit” and have “contributed to turning financial markets into a giant casino which is easily rigged for the benefit of insiders,” he writes.
Certainly there are shady short sellers out there, just like there are shady longs. But there also are shorts that perform a vital service–ferreting out stock frauds and accounting scandals that an understaffed SEC and a press focused primarily on large-cap companies can’t or won’t.
“As I said to Mr. Pearlstein, our reporters don’t discriminate when they talk to investors about whether those investors are long or short,” says Janet Guyon, TheStreet’s editor in chief. “Reporting is the process of finding as many intelligent people as you can to inform your work.”
The key is to understand those agendas, vet the information, and weigh its importance for readers.
I asked Pearlstein if he thought it was wrong for Bethany McLean, for instance, to talk to Jim Chanos, the short seller who helped her uncover the colossal Enron scandal. He declined to comment, and referred me to a Post spokeswoman who said, “We have responded to TheStreet’s concerns and are engaged in an ongoing dialogue with them. We have nothing additional to share at this time.”
The heart of the claims by Pearlstein and CREW is that Feuerstein (who over the last 18 months has been very bearish on NWBO, arguing repeatedly that the company is misleading investors in its statements by overstating its prospects) published negative posts at the same time short-seller interest in NWBO’s stock has spiked.
That’s awfully thin stuff for Pearlstein and CREW to base such serious charges on. Correlation does not equal causation, as Pearlstein should know. The chart accompanying his column points to six Feuerstein pieces that appear to coincide with short spikes. All but one of those reports, however, came in response to NWBO-created news events, many of which sent its shares soaring on ethically questionable, scientifically dubious, and selectively released information. These news events and stock surges are natural times for short-seller interest to spike, and for reporters to weigh in with concerns and questions.
Take the third Feuerstein story Pearlstein points to, which came on May 15, hours after NWBO issued a press release headlined, “NW Bio Announces First Data From Ongoing DCVax-Direct Trial.”
More like “datum.” NWBO’s “case study” reported the progress of a single patient in one of its trials, an ethically dubious practice.
The fifth story Pearlstein singles out is the only one that doesn’t follow NWBO-driven news. That’s because it was enterprise reporting.
Dr. Aman Buzdar, vice president of clinical research at MD Anderson, the renowned Houston medical center NWBO is paying to conduct a clinical trial, told Feuerstein, “I have read the information that the company has put in the public domain. It is extremely unusual and inappropriate.” Buzdar told Feuerstein the company’s behavior was “very concerning” and that, “I’ve never come across a company that has done something like this before.”
Bizarrely, Pearlstein dinged Feuerstein and Buzdar for the story, and CREW insinuated that Buzdar was in the pocket of Big Pharma and that Feuerstein’s decision to quote him was “suspicious.”
But Buzdar was acting as a spokesman for MD Anderson. Feuerstein didn’t select him to be quoted, the hospital did. Within days of Feuerstein’s piece, MD Anderson issued a press release affirming that—a clear rebuke of NWBO’s practices by the hospital.
NWBO and Pearlstein have a point on just one of the stories. TheStreet’s headline on Feuerstein’s post read, “Northwest Bio Warns FDA May Throw Out Phase III Brain Cancer Study,” which, while technically accurate, was sensationalized enough to be misleading. In reality, NWBO had updated its risk-factor boilerplate in its securities filings to say it was possible that the FDA might not approve of its process–standard legal rear-covering by a company. And it wasn’t a “brand new risk nugget,” as Feuerstein asserted. NWBO had updated the language four months earlier. Still, that’s no evidence that Feuerstein was plotting with shorts.
The questionable press releases are hardly the only red flag with the company. NWBO has almost no institutional investors. Its CEO and controlling shareholder, Linda F. Powers, is a former senior vice president of global finance at Enron—Andrew Fastow’s fiefdom. She wasn’t implicated in the Enron scandal, but her years there are not mentioned in her corporate biography. Powers also controls Cognate Bioservices, which does a significant amount of contract work for NWBO. Those are so-called related-party transactions that should be scrutinized closely by any investor or reporter. “Every one of those (related-party deals) is not only subject to review by internal accounting but by a ‘Big Ten’ auditor,” says NWBO’s Goldman. “It could not be more transparent.”
“We’re still a small biotech company,” he adds. “If you’re looking for validations from major institutional investors, they start playing with somebody, if you will, when they approach a billion-dollar market cap.”
But other biotech companies with similar market caps do have multiple institutional investors, including Stemline Therapeutics, Ziopharm Oncology, and BioSpecifics Technologies.
And what Pearlstein didn’t mention in his column is that Feuerstein is hardly alone among journalists in his skepticism of how NWBO does business.
John Carroll, a Pulitzer-Prize winner (UPDATE: Carroll writes to note that he was part of a team that won the Pulitzer) who is editor in chief of the life-sciences group at DC-based FierceMarkets, wrote this on Twitter, before Feuerstein’s May 15 blog post appeared: “Touting ‘case studies’ about cancer drugs is grossly unethical. Pandering to a market of dying patients. The stuff of snake oil sales.”
“I’d say small-cap biotech is a swamp, within which NWBO is an outlier,” says Jacob Pileth Plieth, a former analyst and Wall Street Journal reporter who covers biotech for London-based EP Vantage. “NWBO has a long track record of dubious market practices and ethically questionable clinical trial behavior.”
“The bottom line,” Pileth Plieth says, “is that journalists should fight together to expose companies like NWBO, not use the WaPo or a Pulitzer as a shield from behind which they can make baseless attacks on each other.”
Pearlstein should take some advice from a column he wrote seven years ago about the short seller David Einhorn’s campaign against Allied Capital. “From the beginning, Allied spent too much time and energy questioning the motives of its critics and too little digging into the substance of Einhorn’s allegations.”
(UPDATE: A commenter reminds me that Pearlstein is a Pulitzer winner, as well.)
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