Jonnie Williams, Stock Market Cicada? (SPTPQ, STSI)

While reading the series of stories in the Washington Post about the bribery scandal currently engulfing various Virginia politicians and shady Star Scientific (STSI), a documentary about a curious insect was playing on the television.

The North American cicada, Magicicada cassini, is famous for its distinctive chirp, and its life cycle, returning every 17 years. And so it is with some con men residing in the lower rungs of the stock market, reappearing every so often, and promoting their worthless shares with the same siren songs.

In January 1988 an article appeared in JAMA discussing Retin-A, a derivative of vitamin A, as a treatment for wrinkles. It set off an explosion in the use of Retin-A and a flurry of hype around some other, less well studied, products. The frenzy was so great that then-FDA commissioner Frank Young issued a warning to the public. An article in the LA Times, available here, explains:

Young said some unethical pharmacists, dermatologists and manufacturers were promoting and selling mixtures called Retin-A that actually contain different amounts of the active ingredient, retinoic acid.

Some manufacturers, he also said, are making bogus creams sold as Retin-A or as look-alike products that contain no retinoic acid…The FDA said it was “actively investigating a number of firms” promoting and selling wrinkle creams

Imagine the reaction at a small struggling firm in Massachusetts, called Spectra Pharmaceuticals (SPTPQ) when the JAMA article hit. For years Spectra, its Chairman and CEO, Dr. Al Maumanee of Johns Hopkins’ Wilmer Eye Institute, along with another scientist, Dr. Scheffer Tseng, had been studying their very own vitamin A derivative as an eye ointment first at Hopkins, and later at the Harvard-affiliated Massachusetts Eye and Ear Infirmary. But the studies were quite controversial.

According to a New York Times article, available here:

Dr. Scheffer Tseng, tested an experimental vitamin A ointment on hundreds of patients from 1984 though 1986 at the Massachusetts Eye and Ear Infirmary. The ointment, tested as a remedy for chronically dry eyes, apparently worked for only a few patients.

Subsequent investigation by the school and the hospital found that the researcher made unauthorized modifications to his study, varying the approved doses and enrolling more patients than approved, and that he minimized negative findings while he sold his rights to the formula and sold his stock in the company he had helped form to market the product.

According to an article in the Boston Globe, available here, Tseng‘s supervisor at Harvard, Kenneth R. Kenyon was forced out of his administrative positions at the hospital because of the scandal.

If that was not enough, according to interview transcripts with Dr. Maumanee, available here, there were problems with the original Maumanee and Tseng work at Johns Hopkins as well. They failed to obtain both the necessary Investigational New Drug (IND) approval from the FDA, and permission from the JCCI (Joint Commission on Clinical Investigation) at Hopkins to perform the study.

The Spectra affair became a political matter.. Maumanee stated that:

(W)e were investigated by the Subcommittee on Oversight and Investigations of the House Committee on Energy and Commerce, the Maryland Medical Society Committee on Ethics, the U.S. Securities and Exchange Commission, the Massachusetts Securities Exchange, the National Institutes of Health, the Harvard committee on ethics, and the Johns Hopkins Medical School Committee on Misconduct.

The House Committee hearings were led by Rep. Ted Weiss. According to this article from the December 1989 edition of the Multinational Monitor:

Weiss’s hearings focused attention on several previously reported conflicts of interest. At a Harvard-affiliated hospital, for example, a researcher, Scheffer Tseng, distorted the results of experiments he conducted for a company, Spectra Pharmaceutical Services, Inc., established to market an eye ointment he had developed. Declaring the ointment a success by virtue of his fraudulent data, Tseng was able to jack up the price of Spectra stock. He then sold his Spectra holdings at a reported profit of $1 million. The faculty overseer who should have enforced Harvard’s conflict of interest guidelines failed to do so, apparently because he owned stock in Spectra and profited from Tseng’s deceit.

What is a disgraced company with a failed Retin-A-like product of its own to do? The answer was simple. Hype the eye ointment, Lacramore, as an anti-aging wrinkle fighter.

The scheme, according to the SEC, was simple. In May of 1988, a stock promoter, who had actually helped form the company, now working out of the offices of a bucket shop in Florida, deposited 600,000 shares of Spectra into a brokerage account.

During the next two months the promoter had some fake research reports written up and gave them to the bucket shop for distribution to thousands of potential investors victims. The reports made outlandish claims of future revenue and earnings, along with comparisons to Retin-A. According to an article, available here, in the Richmond Times-Dispatch:

The federal complaint argued that the reports led investors to believe that a product called Lacramore could make wrinkles disappear, though it proved to be ineffective. The suit accused [The Promoter] of purchasing Spectra stock at below-market rates, then selling it while promoting the company to other investors.

According to a Boston Globe article, available here:

[The Promoter] paid Florida financial newsletter publisher Robert E. Baker at least $5,000 to produce a glowing report about Spectra, which was then mailed to thousands of doctors by a company owned by O’Donnell and [Promoter].
Among other things, the report claims that a new market had been discovered for Spectra’s eye drug: as a substitute for a popular skin cream. And it touts the company’s university connections, especially through Maumenee. “Other drug companies have research arms,” it declares “Dr. Maumenee has friends and former students in key positions in almost every university ophthalmic research institute in the world.

As the bogus research reports circulated, the promoter sold 350,000 of his shares, while failing to properly report the sales.

In late 1993 the SEC finally came down on Spectra, along with various officers, shareholders, promoters, fake analysts, brokers, and the sleazy bucket shop behind the pump and dump, but by then it was far too late for the public shareholders. The company had already collapsed.

The name of the stock promoter? Jonnie Williams the CEO of Star Scientific (STSI), here is a pic. The bucket shop where he had an office? Florida-based Kashner Davidson. His defense attorney in the SEC case? A man named Paul L. Perito.

Much like the cicada, the Spectra cycle repeats with Star.

1. A purported breakthrough anti-aging product? Star’s got that with anatabine.

2. A troubled research relationship with doctors at Johns Hopkins? Star’s got that. Read Adam Feuerstein’s piece on that issue here.

3. A series of fake research reports by penny stock touts with outlandish claims? Star’s got that. Read about Patrick Cox right here.

4. A Federal Government investigation? Star’s got that too. Subpoenas have been served. Read more here.

5. A bucket shop pushing the stock? Star’s got one. Gilford Securities, home of “analyst” Otis Bradley.(Otis B. also pumps ECTE)

6. A lawyer named Paul L. Perito? Surprise! He’s the Chairman and President of STSI.

One must ask how far away is a collapse, a Q at the end of the ticker and a delisting?

The content contained in this blog represents only the opinions of the author. The author may hold either long or short positions in securities of various companies discussed in the blog. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. This blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.
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