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Rogue Missives
Friday, January 31, 1997

The Quarrel Over Quigley
by Louis Corrigan (RgeSeymour)

QUIGLEY CORP. (OTC: QGLY) is a bulletin board high-flyer that markets Cold-Eeze, a zinc gluconate-glycine lozenge which advocates claim has an anti-viral effect on the human rhinovirus, the most common cause of colds. The veracity of this claim is something which remains hotly contested to this day, and there has also been more than a little debate over the legitimacy of the company and its associates.

On January third, Rogue reporter Louis Corrigan (RgeSeymour) brought you "Quigley: A Real Cold Cure?", wherein the clinical evidence was examined, and the debate over the efficacy of the product was presented through interviews with many of the principal researchers. One week later, the television show 20/20 presented its own segment on Cold-Eeze, a glowing report which left Quigley bulls cheering.

Their celebration was not destined to last for long, though, as Barron's printed a scathingly bearish view of the company the very next day. The article raised questions about the legitimacy of the company and its associates. A number of other articles have since appeared in various media outlets, most recently in The Washington Post. Today, Rogue brings you an in-depth look at many of the questions raised about the company, the stock, and Quigley's financing efforts. For the story, Rogue contacted Quigley's general counsel, an outspoken market-making bear, Quigley counsultants, and a securities firm that bears say ran nominee accounts for people close to the company. While the verdict is far from being in on Quigley, Rogue presents some interesting accounts of the activity surrounding the company, and answers some lingering questions.

Barronized

For every person who likes to tell a great story, there's often someone else who likes to ruin it, or at least give it a tragic twist. Investors following the saga of highflyer QUIGLEY CORPORATION (OTC Bulletin Board: QGLY, formerly QUIG) were treated to just such a double dose of conflicting media attention three weeks ago. It's worth asking exactly which version of the story sounds right.

On Friday, January 10th, ABC's 20/20 news magazine featured a lengthy segment celebrating the company's Cold-Eeze lozenges as one of the only cold remedies that actually works. Dr. Michael Macknin, the lead author of an important double-blinded trial conducted at the Cleveland Clinic, was shown saying he got goosebumps when he first realized how positive the Clinic's trial results were. After watching this glowing broadcast, investors were no doubt left with goosebumps of their own -- until they checked out the next day's Barron's.

In a two-page article, reporter Bill Alpert wielded the oft-bloody Barron's hatchet. First Alpert chopped up the science supporting the company's claims for Cold-Eeze. Macknin reappeared, this time as a clinician so full of caution that he now seemed nearly to disbelieve his own findings. He said that the clinic's trial was conducted on just 100 patients in the same city during just one month. Who's to say that the researchers didn't just get lucky in finding one virus -- of the more than 200 than can cause a cold -- that was incredibly susceptible to Quigley's zinc gluconate-glycine lozenges?

Then there were lingering questions from cold experts, such as the University of Virginia's Dr. Jack Gwaltney. Had the trial subjects been adequately blinded about whether they were receiving the zinc lozenge or a placebo? Any such bias could completely undermine the trial results. Since Alpert included no response from Macknin about this important concern, a reader was left to think that the clinician had no adequate response to Gwaltney.

Still, Alpert saved the real dirt for last. In the final nine paragraphs, the Barron's piece laid out an astonishing web of people "censured, barred or jailed by securities authorities for stock fraud" who have had, or still have, connections with Quigley Corp. The article ended with the kind of knowing comment Barron's loves to issue: trading in Quigley stock was now under investigation by the Securities and Exchange Commission (SEC), so investors shouldn't expect the stock to "levitate" forever.

Specifically, Alpert reported that Raphael D. Bloom, a disbarred stockbroker convicted in 1989 of stock fraud, had introduced company Chairman and CEO Guy Quigley to a financial consulting and public relations firm called Diversified Corporate Consulting. The "managing member" of Diversified is William A. Calvo, III, a securities lawyer who was disbarred in Florida state court, and later in Federal Court, for his participation in a fraudulent public offering. Diversified, in turn, introduced Guy Quigley to another public-relations firm, Carousel Consulting, run by former stockbroker Joseph Radcliffe who has had a career "at notorious brokerage firms."

In addition, the financial weekly reported that Quigley's Brooklyn-based auditor Nachum Blumenfrucht "was the auditor for the notorious stock promoter Phil Abramo." A key subject in the recent Business Week cover story about the Mob's activities on Wall Street, Abramo is reportedly identified in court documents as a capo in the De-Cavalcante crime family. He has just begun serving a one-year prison sentence for tax evasion. Barron's also reported that Quigley had previously employed the securities lawyer Barbara R. Mittman, who also once worked for Abramo. Mittman practiced law with another now disbarred attorney, Edward Grushko, who conducted work for some of the more spectacular stock swindlers of recent years, including Thomas Quinn and Arnold Kimmes.

This schizophrenic one-two media punch left investors reeling. On the one hand, the 20/20 segment strongly suggested that cold sufferers would be better off if retailers simply cleared away the palliatives that now dominate the cold remedy market and instead filled the shelves with Cold-Eeze. If Quigley could just increase its manufacturing, virtually any earnings target seemed possible.

The Barron's report, though, was enough to leave a reasonable investor leery of getting anywhere near Quigley. At any moment, it seemed, the SEC could halt trading in the stock. Six weeks down the road, Quigley holders might find themselves happy to cash out at a fraction of what they paid for the stock.

Anticipation of the favorable 20/20 coverage, in combination with short covering, had pushed Quigley's share price from $18 to an intraday high of $37 in the days prior to the broadcast. At that Friday's close, around $30 a share, Quigley had a market capitalization of over $250 million, based on the number of outstanding shares plus currently exercisable stock purchase warrants and options. Even for a company experiencing rapid growth, this was an astonishing figure, since Quigley had merely $1 million in sales for fiscal 1996 and had estimated its first quarter 1997 earnings would come in at $1.8 million, on $3.9 million in sales.

In the days immediately following these conflicting high-profile reports, the stock whipsawed wildly, losing half its value on a drop to the mid-teens before recovering to the mid-20s and then dropping once again. But after a roller coaster ride and a recent 2-for-1 stock split, Quigley recovered to levels seen just prior to being Barronized. Though the stock has drifted lower in recent days, it's still trading about where it did before anticipation of the ABC broadcast sent the stock soaring.

As aficionados of the efficient market theory suggest, share prices always discount the available news about a company. What Quigley's share price is telling us, then, is that market participants are not much worried by the web of intrigue fed to Alpert by the short-sellers who had gotten caught in the squeeze. Uncertainty about the SEC investigation may be weighing on the shares, though some would find that preposterous.

Still, the market doesn't seem to believe that company officials will be implicated if the SEC uncovers trading violations or other criminal actions. Indeed, the company has argued that it's under organized attack from someone, presumably the shorts, perhaps even some market makers, who have undoubtedly lost millions as Quigley's stock has made its improbable ascent from $0.65 a share last April.

In a press release dated January 14th, Guy Quigley said that the "clearly biased and inaccurate portrayal of the company, its management, its medical studies, and its patented Cold-Eeze product" in Barron's was the culmination of a series of attempts to hurt the company and its stockholders. These included "an onslaught of false, misleading and malicious information disseminated through Internet services such as America Online and through anonymous faxes and phone calls to major customers of the Company." The latter claimed that Quigley would be unable to meet its orders.

Quigley officials also said that the Bloomberg News Service picked up two phony press releases sent from a Staples store in New York City on fake Quigley stationery. The first one, sent on December 31st, erroneously claimed that the company's then Chief Financial Officer Eric Kaytes was resigning. (Kaytes was recently "promoted" to Vice President in charge of Management Information Systems. The company named George Longo as the new CFO. Longo has previously worked for KPMG Peat Marwick and Rhone-Poulenc Rorer, Inc., where he handled SEC, IRS, and general accounting issues.)

The other fake press release, on the day of the 20/20 broadcast, indicated that Quigley had made a $10 million "Reg S" private placement of shares to offshore investors at $6.50 a share. An offering at such a deep discount to the market price would have worked as well as a pin would in bursting a bubble.

Quigley General Counsel Thomas F.J. MacAniff told Rogue that the company asked the SEC before Christmas to investigate these criminal disruptions of the firm's business activities. Contrary to the rumored conspiracies, he said that Diversified Corporate Consulting was actually the first party to request that the SEC get involved. "Now that's a classic, isn't it? A conspirator complains to the SEC," MacAniff quipped. He believes that Barron's and other financial media have failed to report this because "it doesn't fit" the story they want to print.

On the other hand, the company's critics, some of whom admit they have lost money shorting the stock, continue to fire away. Some suggest that company officials have been party to a well organized stock rig. They point to Quigley's 1-for-10 reverse stock split of January 1996 as a classic maneuver used to "box" a stock so that it can be controlled by a handful of traders. These critics highlight other factors they say are consistent with a stock manipulation, such as Quigley Corp.'s issuance of millions of new shares and warrants; the professional status of the company's now former auditor Blumenfrucht; or trading conducted for individual accounts held by members of the Bloom and Quigley families and, until recently, managed by the same broker at a small firm called Empire Securities.

The company's critics also make a series of diverse arguments about the legitimacy of the science supporting the Cold-Eeze product, the security afforded by the company's patents, and the company's ability to produce the kind of sales that it has recently reported.

The more one listens to both sides, the more it becomes clear that there are more than two sides to the story. It's even possible to imagine that Quigley may have been set up as a stock rig by parties who never imagined Cold-Eeze might really work or perhaps didn't really care if it did as long as the story sold. It's also possible to imagine that Quigley Corp. is simply under attack by desperate short-sellers who have simply lucked out in finding a cast of shady, but in this case honest, characters connected to the company.

In failing to address the overall accuracy of these diverse accusations, and thus the credibility of the short story overall, the Barron's article presents a potentially misleading perspective. There is, for example, no way for Alpert to know what the SEC investigation will uncover or whether it will implicate Quigley officials in securities violations or harm Quigley's stock. Indeed, there are few better examples of offline hype.

On the other hand, Quigley Corp. does have some past and present relationships that should give investors serious pause. "If someone wants to accuse us of being naive and/or stupid, I can understand that criticism," General Counsel MacAniff said.

But investors' real worry is that company officials may be guilty of more than poor judgment or inadequate due diligence when choosing business associates. A related concern is that Quigley has been issuing stock, stock warrants, and stock options at a torrid pace. Even if these activities are not part of a stock rig, as the company's critics suggest, they do mean that Quigley insiders and certain undisclosed investors have generated some rather astonishing paper profits as the stock has risen, even as other shareholders have seen the value of their shares diluted.

The Short Story

"I've got to be honest with you, I've never seen a manipulation work this well."
-- Anthony Elgindy on Quigley

To take Anthony Elgindy at his word is to believe that you're talking to one of the last honest men on Wall Street. As president of Key West Securities (KEYZ), a Fort Worth, Texas firm that makes a market in Quigley, Elgindy says that he's seen his share of conflict and has risen to the occasion to do the right thing -- even when it's meant facing down the Mob or losing money on a position while he made others aware a fraud was afoot.

In Gary Weiss's Business Week story on the Mob, for example, Elgindy was mentioned as the one market maker who refused to cease trading in First Colonial Ventures when threatened by parties who had physically assaulted other market makers in an effort to "persuade" them to back off. Elgindy told Rogue that he has served as an expert witness on securities fraud and is currently a federal witness and informant on three ongoing cases. He said he's been sued "maybe 20 or 30 times" for slander but never lost a case, even beating Bear Stearns.

"I really stress the accuracy of the information above all else. If you can't put your phone number and your name to it, then don't bother writing about it," he said.

Elgindy is one the most vocal critics of Quigley Corp. His posts on The Motley Fool message boards using names such as "Stock Dung" and "DntWstMyTm" have been merciless. He's also believed to be one of the main sources providing information to Jonathan Levy, the chief investigator in the SEC's regional office in Miami and the man leading the probe into trading in Quigley's stock. Elgindy is also the only trader willing to be quoted on the matter.

In a phone interview the day the Barron's story broke, Elgindy said that he had turned over to the FBI and the SEC over 30 tapes his firm had made in accordance with federal protocol allowing traders to tape phone conversations. He said these tapes included threats and trash talk from, among others, Jerry Rosen, a former associate of Carousel Consulting's Joe Radcliffe and currently a trader at J. Alexander Securities, the most bullish market maker in Quigley.

"I know some market makers who are involved in Quigley who have received dead fish in the mail," Elgindy said. "The message is, get out of the stock... Whatever you can imagine, it's absolutely there [on the tapes], from 'You're going to die' to 'Your family is going to die' to 'Your cattle are going to die.' "

Elgindy said he's concerned for his safety, but he's also full of casual bravado. "Mob guys really look out of place among the cattle and the fields [of Texas]. They pull up in their Cadillac, I don't know, they just don't blend in. There might be four Italian guys in the whole state."

In Elgindy's view, "Quigley was a rig from the very beginning. It most definitely was... If you know anything about stock fraud, what they will do is that they'll do a reverse split. They take over a company that's got nothing."

The reverse split reduces the number of shares outstanding so that a company can then be less conspicuous in issuing new shares and reducing the stake of the old stockowners. Elgindy believes that's what happened with Quigley. "They issued new shares, brand new shares to themselves. Then they issued themselves a series of options. Then they issued stock to offshore entities. Then they issued stock to their brothers, their families, their wives... You have a situation that's set up to benefit the insiders."

Thoroughly skeptical of the Cold-Eeze product, Elgindy said that Quigley's stock has risen mainly through skilled promotion and manipulation by market makers such as Rosen. He said that when the SEC gets all the trading records together, "they'll see there's a big giant circle where all the shares are changing hands among the same people all day long." That is, he believes that a covey of market makers working together pushed the stock higher, through coordinated efforts to push up the bid. "There is no real market [for Quigley]. J. Alexander and Jerry Rosen dominate the market... And when you have a rigged market, the stock needs to be pulled."

Elgindy clearly thinks that Quigley officials have participated in the alleged rig. For example, he claimed that someone with the company actually sent the phony press releases to Bloomberg. "Jerry Rosen was calling market makers [on January 10th] and telling them that there was going to be a false press release on Quigley, and the company's upset -- before the press release even came out."

He said that these false press releases serve two purposes. They allow Quigley to "blame it on the shorts, to play victim" while also trapping the shorts. "They like to send out information which would cause people to get more short because they know they got the stock logged.... Everybody who's in this stock who's short is just holding their breath."

At the time, Elgindy said he had no position in Quigley. "When an investigation is initiated, I usually try to flatten out. I don't want there to be a conflict. I don't want to impugn or detract from my credibility." He also makes no secret of what his position had been. "I was short the stock, and I lost the money."

Though American brokerage houses do not allow individuals to short stocks traded on the OTC Bulletin Board, anyone willing to put up a 200% cash reserve can do so through Canadian firms. Still, the largest short-sellers of Quigley are likely the market makers themselves making very active bets against the stock. Indeed, market makers in these stocks, and even stocks listed on Nasdaq's Small Cap market, do not have to follow the normal Nasdaq rules requiring traders to short only on an uptick. They also do not have to settle a short position within the otherwise typical 10-day period. That is, these traders can establish naked short positions and hold them indefinitely, or until shareholders call for physical delivery of shares, which puts pressure on the clearing firms to produce the stock certificates.

As Elgindy and others attest, many markets makers have been forced by their clearing firms to cover their short positions in Quigley. One trader said that on January 8th, a day the stock soared, total forced buy-ins hit 150,000 to 250,000 shares. Knight Securities (NITE), M.H. Meyerson (MHMY), and Key West were all said to have been bought-in that day. As Barron's suggested, the bullish market makers knew there were forced buy-ins coming, so they simply moved their bids out of the way, allowing the stock to soar. The huge swings in price during this period suggest the shorts were being squeezed in waves, and Quigley shares simply traded much lower again after each wave.

For his part, Elgindy denied that his firm was ever bought in. He also said that the short sellers involved in Quigley have deep pockets and that "they're not going to go anywhere." In fact, he said many simply re-established their positions after being bought in.

If Elgindy's conspiracy theory is wrong, he'll obviously be involved in some serious litigation down the road. For someone who says he prides himself on his credibility and accuracy, though, Elgindy offers some rather dubious arguments.

For example, on January 2nd, Quigley Corp. announced preliminary results for the first quarter of fiscal '97, which ended December 31st. Revenues were $3.9 million with "anticipated net earnings" of $1.8 million. Elgindy and other critics or short sellers don't see how a company with merely $370,000 at the end of September could even produce such sales. Moreover, they note that while the company registered fiscal '96 sales of $1.05 million, $607,000 of that figure showed up as receivables, meaning the company wasn't getting payed in a timely fashion.

"They don't have a credit line; no one is financing the receivables," Elgindy said. "I don't see any kind of financing activity. How is this stuff being manufactured and sent out without money?" Indeed, he wondered if the lozenges actually were being sent out, and if so, where, since retailers didn't seem to have the product.

Elgindy said that he has made monthly phone calls to George Eby, the holder of a method patent for the use of zinc gluconate as a cold remedy. Quigley Corp. gave Eby 60,000 shares plus a royalty of 3% of gross sales for the rights to his patent. Elgindy said that each month, he asks Eby about the size of his royalty check. For October, the check was about $5,000; for November, about $15,000.

Elgindy argues, then, that total Quigley sales for the first two months of the fiscal first quarter were around $660,000. That meant Quigley must have sold $3.24 million worth of lozenges in the final month of the quarter. "Yet the company in the same breath says, in January, they're not going to be able to send out more than a million and a half because they don't have the capacity to do more," Elgindy said. "So they had the capacity to do about $3 million in December, but they lost it in January?"

It's a creative theory based on an insightful research angle. Unfortunately, the theory seems to fall apart due to several inaccuracies. For one thing, Quigley's press release of January 2nd actually indicated that the company "was implementing its previously announced plan to increase manufacturing to approximately $1.5 million per week." The 10-KSB does say that for November and December, the company was manufacturing and shipping product "at the rate of approximately $500,000 per week." But Elgindy's other assumption is wrong too.

The 10-KSB states that Eby receives his royalty "on all gross sales (subsequent to the Registrant receiving payment upon such gross sales)." Considering the high level of receivables at the end of fiscal '96 and the inevitable lag in cutting checks to Eby, it's not at all clear that Eby's royalty figures, even if accurate, can tell an investor anything timely about Quigley's sales.

Elgindy and other critics also claim that transfer records confirm that the all-important Cleveland Clinic trial was sponsored and payed for by Quigley Corp. "Everybody was compensated through the issue of shares," he said.

Quigley's MacAniff denied that charge. "We paid them nothing for the study," he said last week. The company is "contributing" to the cost of the new Clinic study of children in the Cleveland area, but all Quigley provided for the first study was the lozenges.

In an earlier interview in December, Dr. Michael Macknin, the lead author of the Cleveland trial, said that the Clinic received no compensation from Quigley for the first study. "I'd have had them pay for the first study if I'd thought it was going to work. We ended up financing the whole thing." Macknin said that for the current children's study, Quigley was paying 10% of his salary, but that money was going into a research fund at the clinic, not directly to him.

On the other hand, public filings disclosed this past Thursday indicated that Macknin had filed to sell 9,000 shares of Quigley. Macknin's office referred all questions to the Clinic's media office, which did not respond to Rogue's inquiry. Friday's Washington Post reported that Macknin said he bought the stock from the company at market value after his paper had been completed but before it had been published in the Annals of Internal Medicine. Counsel for Macknin and for the Clinic cleared the purchase.

Though the issue raises certain ethical questions and is sure to further cloud the trial results, attorneys questioned by the Post said Macknin's purchase and sale does not constitute insider trading. Moreover, since the study was already completed, it's difficult to argue that his decision to purchase Quigley shares influenced his paper's findings -- though the company's critics will surely make that case.

On the other hand, an unconfirmed report circulating on the message boards said that Macknin had told Bloomberg News that in March of 1996, Quigley Corp. gave him options to purchase 10,000 shares at $1 a share. If this proves true, it would raise some more serious questions about the researcher's integrity and the company's honesty in addressing the issue of compensation.

The Company Responds

Quigley Corp.'s official view is that the company is under attack. In two long, occasionally tense interviews with Rogue, Quigley General Counsel Thomas MacAniff sounded like a man reluctantly making a list of people who might eventually need to be sued even as the company tries to remain focused on the key issue of increasing its manufacturing capacity. But he said, "I'm not going to sue somebody if I can avoid it. We're out to produce a product.... I've never seen a company in my life litigated into a success."

This past Wednesday, new Quigley CFO George Longo announced that the company was bringing in a Big Six accounting firm, replacing the controversial auditor Nachum Blumenfrucht. The previous Wednesday, however, MacAniff defended Blumenfrucht, giving no indication that the company had plans to replace him.

MacAniff explained that the company found Blumenfrucht in 1991 through their securities counsel at the time. "It was a small company, his price was right. He did a good job." MacAniff also focused on what he deemed the highly misleading reporting in the Barron's piece.

He said that Blumenfrucht did work as an auditor for Phil Abramo, but that the assignment involved auditing "one blind pool, that had $18 to $19 thousand in it, for one year." MacAniff said that Abramo has been around for years and "involved in God knows how many transactions," and yet Blumenfrucht was the auditor for one 1994 pool in which Abramo was merely one participant. The Barron's portrayal of Blumenfrucht as "Abramo's auditor" was "true as far as it goes" but completely misleading since it failed to address the context. "Is it actionable? No. The guy who wrote the article is clever."

A member of the New York State Society of Certified Public Accountants, Blumenfrucht is a licensed CPA in good standing with the state of New York. The State Education Department's Office of Professional Discipline said there had been no disciplinary actions against Blumenfrucht since his license was issued in April of 1981. He also has a clean record with the SEC.

On the other hand, Blumenfrucht, as the company's critics have charged, does not participate in peer review. Though the New York State Society of CPAs has no official position on the issue, Bill Pru of the Society's compliance staff said it was "very unusual" for a public company to be audited by a CPA who does not participate in peer review.

MacAniff noted that neither the SEC nor the NASD requires an auditor to be peer-reviewed -- which is true. But Nasdaq officially suggests that companies going public and joining either the Nasdaq national market or the small cap market -- though not necessarily the OTC Bulletin Board -- should "retain a national accounting firm or a firm that is a member of the American Institute of Certified Public Accountants (AICPA)." Blumenfrucht was not and could not be a member of AICPA because the Institute requires CPAs to participate in peer review.

MacAniff addressed other charges made by the company's critics. He said "it's correct" that Raphael "Ray" Bloom introduced Quigley Corp. to Diversified Corporate Consulting but that the company had never made any payment to Bloom. MacAniff also said that the company "had never heard of" Interactive Media Services. According to Elgindy, Interactive held 132,000 shares of Quigley at the end of December in an account at Empire Securities, a firm based in Syosset, New York. The account listed Bloom's New York address as the key contact. (Empire's president Robert Spitzer said that figure is "ridiculous" and "absolutely wrong.")

Diversified is a different issue. MacAniff said that Quigley Corp. signed an agreement with the financial consulting firm on September 3, 1996. "There was no contract between the company [and Diversified] nor any investment in Quigley by Diversified until Septemeber 3rd," he said. But the agreement signed that day "was the result of contracts that had been passed back and forth since, I think, early June."

Though the nature of that contract remains hazy, it appears to be the case that Quigley agreed to take on Carousel Consulting for its public relations and investor relations work at the same time that Diversified made an investment in Quigley, the investment being, according to MacAniff, "the main relationship." He said that Diversified purchased 300,000 shares in September. "There was another investment in October. They exercised some warrants at $3, or something like that."

Diversified's managing member is William A. Calvo, III, who was disbarred in 1988 for engaging in stock fraud in an offering for The Electronic Warehouse, Inc. Was Quigley Corp. aware of this in September? "Hell, no," MacAniff said. Neither he nor Guy Quigley nor securities counsel Bill Riley knew about Calvo's record at the time. "I thought we had him checked out, but I guess not. Frankly, it's water over the dam. As far as I'm concerned, they met the terms of their contract with us." MacAniff said the company had originally thought that Diversified could do more for them in terms of "getting the product introduced," but "the product introduced itself."

The company's critics suggest, though, that this deal with Diversified may have been part of a stock rig. Elgindy said that the people behind Diversified own SGA Goldstar, an online newsletter which the SEC has charged with engaging in a systematic practice of promoting small stocks, such as the now halted SYSTEMS OF EXCELLENCE (NASDAQ: SEXI), in exchange for shares which it would then sell into the buy orders it had helped generate. Around the time of Diversified's deal with Quigley, a poster to the AOL Investor's Network stock boards said that Quigley's home page was featuring a recommendation from SGA Goldstar.

MacAniff said that's untrue. "They never appeared on our Web site. The only knowledge we have of them is somebody faxed us an SGA Goldstar report that was totally inaccurate, and we wrote SGA Goldstar and told them that their report was inaccurate. But we don't know who they are."

Eric Schwartz, the SEC's lead attorney on the SGA Goldstar complaint, refused comment regarding any possible connection between SGA Goldstar and Diversified or SGA Goldstar and Quigley. In mid-December, the commission filed an amended complaint listing 10 companies, in addition to Systems of Excellence, which it believes SGA Goldstar promoted for cash or stock payments. Schwartz simply said that these examples were "not meant to be exhaustive."

MacAniff said that he did not know if Diversified still owned any Quigley shares. "I think they sold all of their stock between 4 and 6," he said. Indeed, "part of that [the October S-8 filing] was Diversified, if I'm not mistaken." If that were true, however, Diversified would appear to have less reason to complain to the SEC in December about fraudulent faxes harming Quigley, which MacAniff said they did. During his second conversation with Rogue, MacAniff said, "I don't feel that we have any ongoing relationship with Diversified. But they're our shareholder, and they hold a certain investment."

As for Carousel, Quigley is still paying the firm $3,000 a month to handle a limited amount of investor contact. "That will continue probably until August," MacAniff said. InFocus, based in Princeton, New Jersey, has recently been hired to handle all new or current investor inquiries or contacts with the media.

In terms of the basic question of how the company has been able to ramp up production so fast with so little cash on hand, MacAniff said simply that "there are a number of turns, and fortunately, the payment is prompt." Quigley now has "more than adequate cash." The company is continuing to work to expand production significantly beyond the current level of $1.5 million a week. He said that "in the very short term" the company hopes to double that. "We're trying to be very conservative about our capacity."

Additional capacity is necessary because Quigley currently has a $12.5 million order backlog, which MacAniff characterized as "stuff that should see delivery in the next 60 days or immediately, if possible." He also said that a $7.5 million purchase order from Zee Medical is not included within the above backlog since "that purchase order is not as firm as the others."

MacAniff also said that at least one post to the Fool folder concerning upcoming competition was inaccurate. "Hedgy1" had posted a message indicating that Don Lepone, president of leading private label lozenge maker NUTRAMAX (NASDAQ: NMPC), had told analysts in a conference call that his company was looking at marketing a Cold-Eeze knock-off product. Lepone was said to have indicated that he did not believe Quigley's patents were insurmountable. MacAniff said that Quigley Corp. had been approached by Lepone about doing contract manufacturing for Quigley and that the parties had met in December to discuss the matter.

Reached this past Thursday for comment, Lepone confirmed MacAniff's account. "Our relationship with Quigley is that we are having conversations, ongoing conversations, with them to become a contract manufacturer of their product."

Lepone said he never used the word "patent" in the analyst conference. "My statement of the conference call was that Nutramax was working on a zinc product, as well as everyone else that we know about. That was my statement of the conference call. And working on a zinc product could mean that we were working with someone on a zinc product or we were working to develop our own product and I never said one way or the other what that was."

Filing New Shares

Quigley Corp.'s critics do score some points in their critique of the company's public filings. Consider the rather arcane example of the private placement of shares under the SEC's Regulation D, the section of rules governing the limited offer and sale of unregistered securities.

In Quigley's 10-QSB quarterly filing for the third quarter of 1996, the company indicated that it "continues to offer shares under its 504 offering and is contemplating other equity offerings." Regulation D, section 504 permits a company to sell up to one million dollars in securities in a private placement. These shares can be resold without being formally registered, though the company must submit a Form D notice to the SEC that the sale took place.

The company's critics argue that offerings under 504 are not permitted for a company such as Quigley which files with the SEC pursuant to section 13 or 15d of the Securities Exchange Act of 1934. SEC spokesperson John Heine declined to comment on any specific case, but conversations with him suggest that a reporting company -- such as Quigley was in June of 1996 -- cannot rightfully offer shares under section 504. It's also unclear whether the company's January 1995 private sale (the last reported under section 504) of 1.6 million shares for $225,000 was proper. On the other hand, the company's proposed $6-8 million common stock offering mentioned in the subsequent 10-KSB would be legitimate under Regulation D section 506.

Other filing questions pertain to Quigley's liberal issuance of new shares and stock purchase warrants. Who received all these shares and warrants, and exactly how well do the numbers add up? (The following calculations do not take into account the recent 2-for-1 stock split unless otherwise noted.) At the end of the 1995 fiscal year on September 30, 1995, shares outstanding stood at 33,614,140 or 3.36 million based on the subsequent 1-for-10 reverse stock split which became effective on January 11, 1996. Subsequent 10-QSB filings show that number rising to 4.19 million by the end of June and again to 4.77 million by the end of the 1996 fiscal year on September 30, 1996. The company's recent 10-KSB indicates that there were 6,049,594 shares outstanding as of December 31, 1996.

The company's 10-KSB does account for the additional 1.41 million shares issued during fiscal '96. The largest allotments included 269,320 to pay for goods and services rendered (the majority for advertising & promotion); 530,000 shares to "various officers for past services rendered"; and 497,087 shares to "various individuals [who] purchased shares, options or exercised options in the Company."

Yet, these shares are now worth 1,000% to 2,000% more than they were worth when the company issued them. In retrospect, then, Quigley Corp. appears to have used undervalued stock to pay its key officials and promoters even as it sold such low-priced shares to "various individuals" in transactions that, all total, added 42% more shares to the total outstanding.

Given Quigley's shaky financial condition in recent years, these transactions are perhaps not very surprising. The company may have had no other choice than to use its stock to keep afloat. Still, the company has continued to issue shares, options, and stock purchase warrants, often at exercise prices that now look awfully sweet. There are so many currently exercisable options and warrants that it's difficult to determine precisely how many fully diluted shares of Quigley there are.

When asked to explain these matters, Quigley general counsel MacAniff referred Rogue to Robert Friedman of New York's Olshan, Grundman, Frome and Rosenzweig. Friedman has only recently begun working as a securities attorney for Quigley. He said he could not speak to the specifics but that the company had assured him that all the "share ownership and option and warrant issuances that are required to be reported" have been. "I think you can assume, then, that the publicly available documents speak for themselves," he said.

Yet exactly what they are saying remains both a bit unclear and potentially troubling to investors. Footnote 14 of the 10-KSB indicates that as of September 30, 1996, there were 800,000 Class D stock warrants outstanding (the last issued in February 1996) exercisable at $1.00 and 850,000 Class E warrants issued in July of 1996 exercisable at $3.50. The filing shows that 585,000 of these various warrants are held by Quigley officers or directors, including 250,000 held by Guy Quigley.

Item 5 of the 10-KSB shows that as of December 26th, an additional 700,000 Class E warrants exercisable at $3.50 had been issued. Since these exercisable warrants do not appear in the table of beneficial owners, it would appear that Quigley Corp. issued these warrants to an outside party sometime in the first quarter of fiscal 1997. At the recent post-split price of $10 per share, these warrants could now be exercised for a quick $11.6 million profit.

Footnote 14 also says that Quigley Corp. "sold incentive stock options to various salesman [sic]." For $960, the company handed out options for 140,000 shares exercisable in the $1.25 to 1.50 range "upon reaching certain sales goals."

In addition, the previously mentioned sale of 497,087 shares during fiscal '96 went hand-in-hand with the sale of options. Footnote 10, part t says, "By agreement with the optionholders, 1,250,000 shares of common stock underlying the purchase options were registered pursuant to Form 8-A in Agust [sic] and October 1996." The S-8 filing of August 13th shows that one million of these options could be exercised at $2.50 while the S-8 of October 25th registers 250,000 shares exercisable at $3.00.

The 10-KSB filing, then, suggests that Quigley has about 8.54 million shares outstanding on a fully diluted basis if one takes into account the currently exercisable options and stock warrants. Aside from 250,000 Class D warrants issued in December of 1994, the rest of the actual or potential share expansion occurred in the 15-month period that included fiscal '96 and the first quarter of fiscal '97. During this period, the company effectively expanded the shares potentially outstanding by 4.93 million, or 147%.

The Short Story Continued

Quigley's massive share expansion does, at the very least, dilute future earnings. For example, the company's anticipated first quarter earnings of $0.30 per share really amount to just $0.21 per share on a fully diluted basis. The share expansion also offers at least circumstantial support for the story told by Elgindy and others who believe Quigley is a stock rig.

In addition to the 530,000 shares and 585,000 warrants that have gone to officers and directors, more than 300,000 shares are believed to have been sold to Diversified at perhaps $3 per share or less, based on public filings and MacAniff's comments. Also, 300,000 stock warrants exercisable at $1 were issued to Pacific Rim Pharmaceuticals. As the company's critics are quick to point out, and MacAniff confirmed, Guy Quigley's brother Gary is one of the principals in Pacific Rim. Still, both MacAniff and the SEC filing indicate that Pacific Rim received these warrants for developing the Far East market for Cold-Eeze. Based in London, Gary Quigley is also working to market Cold-Eeze in Europe through Scanda Systems Ltd. Exactly who received all the other shares and warrants isn't public knowledge.

One of the shorts' more provocative claims is that the presumably orchestrated run-up in Quigley shares has been accompanied by discrete Quigley sales by insiders or outside conspirators, often through "nominee" accounts. Empire Securities in Syosset, New York is alleged to be one center of such trading. The SEC's Jonathan Levy has requested Empire's account records for anyone who traded in Quigley from January of 1996 to January 10, 1997. Levy also asked to see the firm's own trading records in Quigley, for which the firm did serve as a market maker.

Individual account statements, or partial statements, obtained by Rogue show that Empire managed accounts for Quigley family members and some associates of the company, including Ray Bloom. As Quigley stock rose through the teens during December, some of these people were selling Quigley shares.

These accounts were all managed by the same broker, confirmed to be Rich Fredericks, who left Empire on December 27th to join Long Island-based Colin Winthrop Securities. That firm makes a market in Quigley and is one of several that Elgindy said is involved in the alleged rig.

The question is, what does such information really tell us? The shorts say that it establishes a link between Bloom and the Quigley family, and that Fredericks's oversight of these accounts allowed him to manage the collective sell-out even as manipulators drove the stock higher.

When asked to comment on these accounts and the stock sales in the mid-teens, Quigley's MacAniff said, "They sold them way too early, didn't they?" Indeed, Quigley shares tripled in the month after these sales began. MacAniff also noted that Guy Quigley, his wife Wendy, and his children are the biggest holders of Quigley stock, with about 1.3 million shares not counting purchase warrants, and that "not one damn share of that has been sold."

According to Fredericks, the Empire accounts with any sizeable holdings in Quigley had been under his care for five years; he previously worked with a firm that did underwriting for Quigley Corp. He dismissed the idea that these accounts were connected to a stock rig. "Since the people owned the stock for five years, I find that a long time to wait." When asked directly if he had been helping manipulate Quigley Corp. stock, he curtly replied, "What, are you crazy? Good-bye." And with that he hung up.

Empire President Robert Spitzer said, "There's really no story here." He said that one of the Quigley family accounts had held Quigley Corp. shares with Empire for at least 2 to 3 years. To say, as the shorts do, that these were "nominee" accounts, is preposterous, according to Spitzer. "What do you think, these accounts are trading millions of shares?" He said Empire had "nothing to do with all of this" and that his company was "a peanut" in the SEC's probe.

Spitzer said that Empire's customers traded only about 75,000 Quigley shares during the entire month of December, a drop in the bucket when daily trading volume was running at about half a million shares. He also said that the firm's own trading didn't amount to much either "We're very conservative. We watch the net capital very carefully. We were out of the way [on the bid and ask] almost all the time on this thing."

Spitzer said that Fredericks's departure from Empire had nothing to do with anything involving trading in Quigley. Rather, Fredericks left the firm after Spitzer had decided to get Empire out of the trading business altogether. "I didn't like that whole side of the business. I didn't understand it. I just didn't like it. I was uncomfortable."

What Spitzer would really like to know is who obtained the individual account records from Empire that are now circulating. Moreover, how did someone obtain a copy of the letter sent to him by the SEC's Levy. "The SEC wants to know also. I didn't send it to anybody.... You tell me who's behind this whole charade." Spitzer added that someone he knew had received a false letter, supposedly from the SEC, on falsified SEC stationery.

On the face of it, it's hard to see that there's much to make of the Empire connection based on the materials Rogue could obtain. The company's critics have woven a compelling story around this material, but the plot sometimes falls flat. For example, Elgindy thinks that one Empire account held by Robert Smith-Felver and Martha P. Smith-Felver is a nominee account, and he wonders exactly who these people are and from where they're getting their shares.

The 10-QSB for June answers the question. The Smith-Felvers, in April of 1993, exercised their options to acquire 25,000 shares, after adjusting for the reverse stock split. Since "they were owed money by the Company for advertising services," they applied the $2,500 as payment for the shares. In August of 1994, they exercised their remaining options, applying an additional $2,500 owed to them by Quigley as payment for 25,000 shares. These shares were restricted.

Back to the Product

"We cannot evaluate the truth of the implications on the second page. But on the first page, when they talk about the research, they're in gross error.... And I resent it. If they're as inaccurate on the second page as they are on the first page, then they're a bunch of clods."

-- Dr. Nancy Godfrey on the reporting by Barron's

When queried shortly after the Barron's article appeared, Dr. John Godfrey and his wife Dr. Nancy Godfrey, patent holders and paid Quigley consultants, were initially quite taken aback by the conspiracy theory Alpert suggested. They both said that none of the figures mentioned in the article were familiar to them aside from Blumenfrucht and that despite sometimes daily, wholly unannounced visits to Quigley, they had never seen any signs that Guy Quigley or other company officials were less than honorable people. They admitted they might be naive, but their initial reaction was that the short story of intrigue sounded "almost like a total fabrication."

Dr. Nancy Godfrey, in particular, was furious at what she deemed Alpert's "gross error" in discussing the clinical research. What it comes down to is that the Godfreys don't believe even Macknin's specific caveats are warranted, since, they argue, the data from the Cleveland Clinic's trial are actually stronger than Macknin's group represented them as being in the paper published last July in the Annals of Internal Medicine.

The Godfreys said they were originally set to have their names on the Macknin paper since they had helped the Clinic set up the protocol, but that they pulled their names from it because Macknin insisted on backing away from their original agreement on what patients would be included in the final comparison. That is, Macknin insisted that the study compare study subjects on an "intent-to-treat" basis. That meant that anyone who enrolled in the study would be included in the final numbers, regardless of whether they followed the protocol. Some patients failed to record their symptoms on a daily basis, as required. Others took little or none of the medication. Others were treated for flu or with antibiotics, suggesting that these patients were suffering from more serious infections than a cold virus.

Comparing subjects on an intent-to-treat basis is a perfectly reasonable way of conducting a clinical trial. But according to Dr. John Godfrey, it was not the criterion of "protocol-evaluable patients" used in all of the previous studies, including the Godfreys' Dartmouth College trial, which the Cleveland trial was attempting to replicate. Based on the original plan, then, none of these unassessable patients should have been included in the final comparison between the group receiving zinc gluconate glycine and the group receiving the placebo. That meant that data for 10 of the 50 patients on zinc and 7 of the 50 patients on placebo should have been omitted from the final comparison.

If one assumes that the zinc works, as the Dartmouth study showed, then it's clear why this methodological change would water down the final results. Ten patients who might have benefitted from the zinc likely did not because, for example, they didn't take the medicine at all or they had more serious ailments. On the other hand, the seven patients on placebo missed nothing, or nothing but the placebo effect. Thus in a November article in Alternative Therapies that re-analyzes the Cleveland Clinic's data, the Godfreys suggest that that trial actually showed a 48% reduction in a cold's duration rather than the 42% which Macknin reported.

Dr. John Godfrey also disagrees with Macknin's cautionary view that it's possible that there was one virus going around the Cleveland Clinic at the time of the study that just happened to be especially susceptible to Quigley's product. "Let us be realistic!" Godfrey said, in a written response to Rogue on the subject. He pointed out that the Cleveland and Dartmouth trials both showed remarkable efficacy for the use of zinc gluconate glycine lozenges. And these trials were conducted at sites over 500 miles apart; were separated by over 5 years; were conducted in different seasons (Dartmouth in April, Cleveland in October); were conducted by investigative teams who both expected a negative result; sampled different populations (mostly young male undergraduates at Dartmouth and mostly mature female staff at the Cleveland Clinic); and were conducted according to nearly identical protocols.

"Realistically," Godfrey wrote, "what do you think the odds are that the two near-identical results could be due to both populations being infected with one particularly zinc-susceptible virus or to some other artifact(s) at both sites?"

Barron's did not speak with the Godfreys, however. What's more, Alpert does not even include Macknin's own specific defense of his data in light of questions raised by Gwaltney concerning how adequately patients were blinded to whether they were getting zinc or placebo. That information is in the Annals paper and Macknin was perfectly willing to discuss the matter when Rogue caught up with him in December.

In medical science, what counts as sufficient proof that a treatment works is often contingent on the politics of the disease and the clinician's sense of patients' needs. There is no hard and fast rule. Certainly, clinicians would like to see several large clinical trials conducted at different sites, with perhaps more than a thousand patients studied, before they are willing to say that a therapy is truly effective. But that kind of caution is hardly equivalent to saying, as some of Quigley's critics do, that the Cleveland Clinic study was bogus and that no medical professional would accept it as legitimate. A close reading of the published research suggests that that is a completely untenable position. Based on the available evidence compiled on 173 patients, Quigley's Cold-Eeze actually does appear to work quite well. Further research needs to be done, but that research seems likely to confirm and even further extend the findings of the Dartmouth and Cleveland Clinic studies.

Of course, the current battle between Quigley Corp. and its critics ultimately has little to do with whether the Cold-Eeze product works. It's about the integrity of a company and the integrity of the marketplace. Ultimately, the matter is now in the hands of the SEC.

--Louis Corrigan (RgeSeymour)

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