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Biotech / Medical
Analysts and Calls -- Sterling Research
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From: Doc Bones
Tuesday, Aug 20, 2002 2:11 AM
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NASD Probes a Biotech Analyst Who Tried to Get in Drug Trial

Public guardians at NASDAQ embarrassed into investigating "Risky" and "Dr. Rosen." - Doc


For months, securities regulators have been investigating allegations that bullish Wall Street stock analysts didn't go far enough to find out the true financial picture of companies they followed.

Now, regulators are examining whether one bearish analyst went too far.

The National Association of Securities Dealers has launched an investigation into efforts by a securities analyst at Sterling Financial Investment Group in Florida to enroll himself in a clinical drug trial, in an apparent attempt to glean information about the trial's progress and the drug's side effects, said Sterling executives and the trial's manager.

Such activity could be considered insider trading if the research analyst misappropriated clinical-trial information or obtained it under false pretenses, then traded on it or passed it along to someone who did, securities lawyers say. The information would have to be material, meaning substantial enough to influence the stock price, they add. Sterling has denied wrongdoing, but said it will take action as appropriate; the NASD declined to comment on the probe.

On Monday, Sterling suspended the analyst, David Risk, for 90 days and fined him $25,000, after learning that he had signed additional forms to participate in the trial that he hadn't told Sterling about previously. Mr. Risk couldn't be reached to comment.

In a separate development, another stock analyst, Jonathan Aschoff, was let go by Friedman, Billings, Ramsey Group Inc., an Arlington, Va., securities firm, after posing as a doctor in his own effort to glean information about a different trial. In a statement, the firm attributed the action to Mr. Aschoff's "failure to follow firm policy related to the conduct of research analysts." Mr. Aschoff couldn't be reached to comment.

In the Sterling inquiry, being conducted by the NASD's regulatory arm, investigators interviewed David Scott, vice president of the Palm Beach Research Center, and other employees of the center over a two-day period last week, according to Mr. Scott. NASD regulatory officials also told Sterling executives of the probe last week, said Sterling Chief Executive Charles P. Garcia.

As reported in a page-one article Aug. 8 in The Wall Street Journal, Sterling's Mr. Risk signed up as an insomnia sufferer in February as a first step to enrolling in a trial of a sleep drug being conducted for Neurocrine Biosciences Inc. Although Mr. Risk never actually took the drug, he did publish a research report five days later recommending the sale of Neurocrine stock, citing a side effect he learned of during the registration process. The stock later fell about 34%.

Sterling said Mr. Risk wasn't available to comment. In an interview in the spring, Mr. Risk defended his actions and said he did nothing wrong. The 25-year-old analyst said at the time that he didn't check with Neurocrine before putting out the report, adding that he didn't believe it was essential to call companies before attacking or lauding their products. "I'm young and inexperienced and not afraid to be wrong," he said.

The NASD probe shows the eagerness of regulators these days to crack down on possible instances of analyst misconduct in a broader effort to restore investor confidence. In the past year, a series of scandals -- involving misleading accounting, analysts' rosy research that was conflicted by investment-banking considerations, and misconduct in handing out hot IPOs -- has roiled the markets. Just last month, the NASD unveiled a series of measures aimed at securities firms that improperly hand out hot initial public offerings of stock in exchange for kickbacks from investors in the form of oversize commissions or promises of future business from corporate clients.

"In today's climate, regulators are going to be much quicker on the draw to respond to this type of behavior," said Michael McAlevey, a former deputy director of corporate finance at the Securities and Exchange Commission who now practices law at the firm of Alston & Bird LLP in Washington.

Regulators generally want to balance the need for analysts to behave ethically with the importance of "creating incentives for analysts to be industrious and inquisitive in trying to root out information," Mr. McAlevey added. In the current environment, he said, regulators may give priority to "the perception of unethical behavior."

In an interview Monday, Mr. Garcia said NASD officials "told us they are conducting a very narrow investigation to find out if some of the allegations are true or not." He defended Mr. Risk's actions, saying that although he does suffer from insomnia, he didn't actually intend to enter the trial, but was merely "getting as much information on the drug" as possible. Sterling, he added, prides itself on offering no-nonsense research without the kind of investment-banking conflicts prevalent among major firms that also serve as securities underwriters.

However, Mr. Scott, the clinical-trials executive, asserted that Mr. Risk signed a separate agreement promising "not to divulge any and all treatment information concerning patients or families participating" in trials being conducted by the Palm Beach Research Center. What's more, he said, Mr. Risk gave his occupation as "student" in a patient data form.

Asked for comment on Mr. Scott's allegations, Sterling said Mr. Risk had been suspended after he acknowledged signing additional agreements, which he hadn't previously disclosed to Sterling executives. A Sterling spokesman said the firm was cooperating with the NASD probe.

Meanwhile, Friedman Billings's Mr. Aschoff posed as a "Doctor Rosen" in calling Casey Cunningham, who runs clinical trials of a cancer drug for Genta Inc. Mr. Aschoff said he had a leukemia patient interested in enrolling in the Genta drug trial, but when Dr. Cunningham realized the purported subterfuge, he chastised the analyst for what he considered unethical behavior.

In a July interview, Mr. Aschoff defended his actions. "Companies are saying to investors, 'Give me your money.' Are you going to give it to idiots who go off unchecked? I'm trying to bring the truth to investors." He acknowledged at the time lying about being a doctor, but said it was for the greater good of unearthing the truth.

In explaining Mr. Aschoff's termination, Friedman Billings said the firm "holds its employees to the highest standards of ethical and professional conduct. Deviations from these standards will not be tolerated. Improper behavior will be met with prompt disciplinary action." The firm's disclosure reflecting Mr. Aschoff's termination indicated there wasn't any regulatory probe of his actions.

Write to Randall Smith at and Geeta Anand at

Updated August 20, 2002
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