Tuesday, May 15, 2012

Biotech Pioneer David Blech Pleads Guilty to Stock Manipulation

Previously Convicted 'King of Biotech' Charged Separately by SEC

Another black eye for Wall Street.

David Blech, once known internationally as the King of Biotech and hailed by the Wall Street Journal as the "Pied Piper of Biotechnology," pleaded guilty this week to stock manipulation; and the U.S. Securities and Exchange Commission separately charged Blech and his wife, Margaret Chassman, with manipulating the two biotech stocks, Pluristem Therapeutics and Intellect Neurosciences.

Click here for the news story, here for the FBI writeup of the case, and here to read about Blech's rise from Brooklyn to the Forbes 400 and his tragic fall into an … insane asylum.

Wikipedia has this to say about Blech:

Since 1980 Mr. Blech has been a founder of companies and venture capital investor in the biotechnology sector. His initial venture investment, Genetic Systems Corporation, which he helped found with his father and his brother Isaac Blech …  developed the first inexpensive and accurate test to diagnosis sexually-transmitted diseases using monoclonal antibodies, allowing tens of thousands of babies to be born to women who otherwise would have become sterile from pelvic inflammatory disease. The company was sold to Bristol Myers in 1986 for $294 million (3%) of Bristol Myers stock. 
In 1989, Blech co-founded Icos Corporation with Nowinski and George B. Rathmann, receiving the largest start up financing in biotech history at $33 million. Icos discovered the drug Cialis, which was acquired by Eli Lilly in 2003 for over $2.6 billion. The Blechs also co-founded Celgene Corporation in 1986, which was a unit of the Celanese Corporation, and was spun off as an independent company following the merger of Celanese Corporation with American Hoechst Corporation. Celgene introduced two major cancer drugs, and has a current value of over $35 billion, making it the 5th largest biotech company in the world. 
Other companies he helped found include DNA Plant Technology, Neurogen Corporation, Incyte Pharmaceuticals, Alexion Pharmaceuticals, Ariad Pharmaceuticals, Neurocrine Biosciences, Cytosorbents Inc, and Intellect Neurosciences. He was also instrumental in the turnaround of Liposome Technology Inc. and Biotech General Corporation. In 1990 Mr. Blech founded D. Blech & Company, which, until it ceased doing business in September 1994, was a registered broker-dealer involved in underwriting biotechnology issues. At his peak in 1992, Blech's wealth was estimated at almost $300 million, briefly making him a member of the Forbes 400.

An archived article in the Seattle Times picks up the story:

D. Blech and Co. failed to open its doors on Sept. 22, 1994 - referred to on Wall Street as "Blech Thursday." At least 13 stocks for which Blech was the underwriter declined by 23 percent or more that day. One fell 64 percent. The whole biotech sector sagged.
More than 300 brokers lost their jobs when the firm collapsed, and Blech stood sobbing in his trading room at the end of the day.
A few days after D. Blech & Co. closed its doors on September 22, 1994, Blech entered the hospital due to an emotional breakdown. He never returned to the firm's offices. Within days of the firm's collapse, Blech's wife filed for divorce," according to a National Association of Securities Dealers report. Blech hadn't told his wife he was forging her signature on documents.
The SEC said investors and broker-dealers took $22.5 million in losses because of Blech's stock manipulations.
As the SEC developed criminal charges against Blech, he turned informant. Lloyd Schwed, a Florida attorney for four brokers who sued Blech, was arrested in August 1996 and charged with shaking down Blech by offering to withhold tapes subpoenaed in the SEC investigation. Schwed told Blech he would destroy two especially damaging tapes if Blech settled the suit with a big payment. Blech had worn a wire for the feds.
In April 1998, Blech was charged with the illegal security actions that led to "Blech Thursday." He pleaded guilty to two counts of criminal fraud. He faced up to 97 months in prison.
He refused to seek an insanity plea, though, even after a court-appointed psychiatrist said manic depression had contributed to his crimes.
Federal prosecutors suggested leniency because Blech had helped them. In October 1999, U.S. District Judge Kevin Duffy sentenced Blech to five years' probation and community service.
The National Association of Securities Dealers fined Blech $20,000, censured him and barred him from associating with NASD members in the future. In addition, the SEC, four former brokers and a class of investors all filed lawsuits against Blech.

Endnote: Blech's latest arrest and admission of guilt is certain to be causing some penny stock promoters sleepless nights. Anyone who has had recent securities-related dealings with Blech, no matter how innocent of any wrongdoing, could be questioned by the SEC about the transactions. Remember: from trading derivatives at firms like JPMorgan to wheeling and dealing in the micro-cap world, the men and women who make money by lending and investing live in fear of learning that their names are on the proverbial radar screens of regulators. As one New York securities lawyer once put it to this reporter, nobody, regardless of how rich he or she may be, relishes the thought of sitting across a table from people with guns and badges.