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Thursday, June 20, 2002

IClone analyst says IDon't

The latest fracas involving Merrill Lynch stock analyst Hecht raises again the paucity of information available to ordinary garden variety investors. Hecht is being accused by some members of the House Energy Committee of using insider info as the basis of a stock recommendation

Merrill Lynch and Co. Inc. on Wednesday rejected suggestions from congressional investigators that its biotechnology analyst received and disseminated inside information when he issued a report on ImClone Systems Inc. a day before negative news sent the company's stock tumbling. Investigators are examining a research note issued by the investment bank's analyst Eric Hecht on Dec. 27, which drew attention to market speculation that the U.S. Food and Drug Administration might decline to review ImClone's experimental cancer drug, Erbitux. A day later the FDA did just that.

Apart from that fact that the so called 'lifestyle diva' Martha Stewart has already been tangled up in insider dealing scandal, what is interesting about what is going on is that it highlights just how important for 'stock analysis' are the internet chat-boards:

In pointing out that investors were speculating approval of Erbitux might be delayed, Hecht was stating the obvious. Investors had been discussing their concerns on Internet chat-boards as early as Dec. 18. They even speculated about possible insider trading as they watched the stock begin to slide two weeks ahead of the FDA's announcement on Dec. 28.

In the days leading up to the announcement, trading volume in ImClone's stock soared. On Dec. 27, more than 7.7 million shares changed hands, more than triple the average and the most in a single day since September 19, 2001, when Bristol-Myers Squibb Co. agreed to pay up to $2 billion for U.S. rights to Erbitux and a 20 percent stake in ImClone. That level of trading activity and a sharp drop in ImClone's stock price prompted questions from Merrill Lynch's trading desk, Merrill Lynch said. Hecht's report came in response to these questions.

Hecht was not the first to point out investor concern over potential negative news from the FDA. A full week before Hecht's note, Cory Kasimov, an analyst at Gruntal & Co., had also noted that some investors were concerned the FDA may request additional data from ImClone, potentially delaying the drug's acceptance. Kasimov's comments were distributed widely via the Dow Jones news agency. One day after Kasimov's comments, the online news organization The Street.com also published a report stating that "fears are rising that the FDA's acceptance of (ImClone's) application, expected by Dec. 31, could be delayed."
Source: Reuters on Yahoo News LINK

The defence seems reasonable given that you don't have to be a genius to fathom that, since the FDA has been tightening up a lot on drug permits lately, any pharma company with a product up for approval could get a negative result. But the more interesting detail is the attention paid to the quantity of information available on the chat boards, and then again just who exactly was doing the posting. It is widely assumed that some Enron employees were in fact using these boards to publicly blow the whistle and call attention to the dangers of the stock months before any 'official' analyst was willing to accept that there might be a problem. So in this environment, just exactly what is insider trading. When the Street's commentator states that 'fears are rising', they are presumably rising and being aired over the internet.

The lesson is clear, if you really could stand to wade your way daily through the type of stuff that's in these posts, then you could probably make yourself a lot of money, but in my book you'd have to do a hell of alot of tedious work to earn it. It wouldn't be my way to spend a nice sunny day.

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