FOOL ON THE HILL

The Great PR Caper

Bill Mann noticed that Hemispherx Biopharma's stock leapt up 400% in a week. Then he saw something fishy: a press release trumpeting a multimillion-dollar investment in the company by the "Royal Family of the United Arab Emirates." One problem: There's no such thing. Plus, John Biggs, a leading candidate for chair of the new accounting oversight board, suddenly saw his support evaporate as the accounting industry fears a true reformer.

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By Bill Mann (TMF Otter)
October 11, 2002

There are a few companies I follow simply because I cannot believe people invest in them.

One is Hemispherx Biopharma (AMEX: HEB), a pharmaceutical company that has managed to operate for more than three decades without ever generating much in the way of revenues. Over the years, it has touted its interferon therapy, Ampligen, as a potential treatment for AIDS, hepatitis, chronic fatigue syndrome, smallpox, the Ebola virus, bad fashion sense, and a myriad other afflictions du jour that have caught the company's fancy. Ampligen has never been approved by the FDA, and yet Hemispherx still has a market capitalization of some $70 million.

Its total lack of revenues also didn't stop an "analyst firm," Taglich Brothers, from issuing a glowing research report (.pdf file, Adobe Acrobat required) with a price target of $25 per share a few weeks ago, back when the stock traded at $0.70 per stub. Never mind that Hemispherx pays Taglich Brothers for these reports. The stock leapt up more than 400% in a few days.

This caught my eye, but more intriguing was a press release from Hemispherx issued in August, which said the royal family of the United Arab Emirates had signed a letter of intent to make a multimillion-dollar investment in the company. In it, Hemispherx CEO Dr. William A. Carter welcomed the collaboration between his company and the UAE.

Sounds good, right? There's a problem that a simple call to the Embassy of the UAE confirmed. There's no such thing as a "royal family" in the UAE. The UAE is a group of seven emirates ruled by a president, Sheikh Zayed bin Sultan al Nahyan of Abu Dhabi. Sheikh Zayed's family is the "ruling family," and a spokeswoman at the embassy confirmed that one would never, ever refer to them as the royal family. Further, no one at the embassy seemed to have any knowledge of Hemispherx, nor had they heard about any collaborative efforts between the company and the UAE.

A call to Hemispherx didn't help. Its press contact could not offer any details of the collaboration, and claimed that the last name of the royal family was not disclosed. Only after this did I tell her that, according to the UAE embassy, there was no such thing as a royal family, a fact that took her by surprise. She said that either she or Dr. Carter would call me back in a few minutes. That was Monday. Guess whose phone hasn't rung?

I don't know what the answer is here, but clearly someone's story isn't correct. I do know this -- when garbage-level "analyst reports" like the one issued by Taglich Brothers are still effective in pumping up a share price, we have not nearly gone through enough pain in the stock market.

Afraid of Mr. Biggs
Longtime readers of this column should find it unsurprising that I hold TIAA-CREF, the pension system for educators in the U.S., in highest regard for its willingness to play the role of shareholder activist for better corporate governance. Its principle-based investment criteria sprang largely from its chairman of 13 years, John H. Biggs, who is retiring this year.

Biggs has received support from SEC Chairman Harvey Pitt to be named head of the new accounting standards board, but pressure, primarily from Republican lawmakers including Rep. Mike Oxley from Ohio, has forced Pitt to back away from Biggs.

Accounting firms have complained to lawmakers that they fear Biggs will impose restrictions on auditors that go beyond changes called for by the legislation. Many corporations are also afraid that Biggs will push for stiffer accounting on stock options, like the ones he supported this past month as a member of the Conference Board (.pdf file).

And these entities are right to be concerned; that is what he'd do. However, they seem oblivious to the possibility that, in the long run, they'd be better off with a John Biggs watching the store.

There is a truism that, even in a demonstrably broken system, there are people whose interests lie in maintaining the status quo. The U.S. stock markets are far from broken, and yet investor confidence is at a low point.

We can point to the pop of the technology bubble as a reason, but there is much more. Coziness between auditors and corporate managements, deadbeat boards of directors, absurd executive compensation, dirty investment banks, and the bastardizing of professional standards are conspiring to destroy our markets. Until these issues are addressed, there will be no rebound in the stock market.

The SEC to this point has failed to provide this confidence, much as they'd like to. None of the big cases -- the Tycos (NYSE: TYC), WorldComs, Enrons, Adelphias, and so on -- was prevented by the SEC, whose job it is to protect the individual investor.

This past week, several Senate leaders pressed Chairman Pitt not to cave in to industry interests in filling the positions at the oversight board, but it appears he is doing just that. I'm baffled as to why Messrs. Pitt and Oxley are cooling on Biggs -- the only argument I can imagine is that they are lugging water for the accounting industry. In a time when the stock market sorely needs credibility with the investing public, John Biggs has it in spades.

Want a market you can trust? Then don't sit idly by while industries lobby to get their lapdogs ensconced in crucial regulatory positions such as the head of the oversight board. Write your congressional representative, your senators, and the SEC. For me, John Biggs is as legitimate a candidate as we might ever see.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann is a direct descendant of Niccolo Machiavelli. See, both their names start with the letter M! Bill owns no shares of any company mentioned in this article. The Motley Fool has a disclosure policy.