Thursday, December 2, 2010

WSJ "Misses" One Key Element In Now-Unfolding Pharma-Deal Insider Trading Rings


The continuing coverage tonight, by Susan Pulliam, Michael Rothfeld, Jenny Strasburg and Gregory Zuckerman (contributing) -- for the Wall Street Journal -- is generally excellent.

But they've missed one more very public document -- and thus, "one shiny thread, in the rich tapestry", of information -- related to the SEC investigation into trading prior to the bust-up of Schering-Plough, by Merck. [And doubly so, when we note that the same shiny thread involved both players, as lead bankers, in a prior $3.8 billion financing for Schering-Plough, in the late Summer of 2007 (used to finance the Organon buyout). But that is a story for another day -- see dot point (3) here, in that regard.]

No, tonight's shiny thread is that Schering-Plough was in fact advised by two firms presently cooperating with the SEC -- in these ever-widening investigations. Goldman Sachs & Co. was prominently mentioned last week, and is rightly mentioned again, this week.

But throughout (since March of 2009, in fact), it has been known (via the definitive SEC 14A filings, on the deal, no less!) that Morgan Stanley also advised Schering-Plough's Fred Hassan, Hans Becherer, Carrie S. Cox, Tom Sabatino and crew. It also told shareholders of Schering-Plough that the deal was fair, from a financial point of view.

That is, these senior Schering-Plough executives and board members engaged two banks, not just one, to render fairness opinions to Schering-Plough shareholders -- on the bust-up. That is significant, because as the Journal reporters recite tonight, Morgan Stanley also advised on another deal the SEC is investigating for leaks -- it also advised Wyeth, as it was being bought out by Pfizer. Here is that part of the WSJ's story:

. . . .One part of the investigation, as previously reported in The Wall Street Journal, is examining whether Goldman Sachs Group Inc. and other bankers leaked information about transactions including health-care mergers in ways that benefited certain investors, the people say.

Goldman, which advised Schering-Plough and MedImmune on their deals, declined to comment. Morgan Stanley and Evercore Partners, which advised Wyeth on its deal, declined to comment. . . .

That last bit should read -- based on public SEC filings -- that "Morgan Stanley, which advised Schering-Plough, and Wyeth, on the deals involving each. . . declined to comment. . . ."

It is significant that both the Wyeth deal, and Merck deal saw pre-announcement run-ups, and that Morgan Stanley advised both of the targets. I am not trying in any way to minimize the role of Goldman, Sachs here (as already recounted in my earlier reports) -- it is just simply hard to ignore the fact that both targets had the one bank in common, and there were spikes in the stocks of each, pre-announcement, per the Journal again -- do go read it all:
. . . .A similar pattern held for share holdings in Schering-Plough, which was purchased by Merck in a deal announced March 9, 2009.

SAC increased its Schering-Plough share holdings to more than 352,000 shares at the end of 2009's first quarter, when the deal was announced, from 27,300 shares at the end of 2008, filings show.

Diamondback's Schering-Plough holdings rose to more than 286,000 shares during 2009's first quarter, from less than 37,000 at the end of 2008, according to the filings.

Citadel LLC, which also has received a subpoena in the investigation, increased its Schering-Plough holdings to more than 230,000 shares in 2009's first quarter, from less than 57,000 at the end of 2008, the filings show. A Citadel spokeswoman declined to comment. . . .

A spokesman for Merck & Co., which took over Schering-Plough Corp., said the firm "has a long-standing practice of fully cooperating with any regulatory inquiries and has explicit policies prohibiting the sharing of confidential information about the company and its potential partners. . . ."

It should be noted that the Journal's figures (immediately above) come from required quarterly SEC Schedule 13F and 13HR filings -- and, as such, may reflect merger arbitrage bets placed after the relevant deal was announced -- in the third month of the first quarter of 2009. If these increases in holdings occured only after March 9, 2009, it would be nearly impossible to prove inside information was used to establish the increased position(s). Was it pre-, or post-announcement? We'll soon know.

In any event, I think this is all about to come together, in a series of arrests and/or indictments -- as I've been saying for a few weeks. To be clear, no person at legacy Schering-Plough or old Merck is known to be a target here. The SEC's targeting of James W. Self (an ex-Merck Vaccines business development excecutive), and/or Ex-Merck Vaccines guy Arthur P. Cutillo both seem to be unrelated to the premerger trading in Schering-Plough-Merck, in focus above. But we'll keep you posted.

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