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David Blech Charged with Securities Fraud Charge, Arraigned

Monday, April 28, 1997

By Lynn Yoffee
Senior Managing Editor

David Blech's real troubles have just begun. The infamous "White Knight" of biotechnology has been charged with securities fraud and was arraigned in a New York District Court.

Reached at his office in New York on Friday, Blech told BioWorld Today that his attorney, Andrew Levander, advised him not to comment on the charges. Levander did not return calls for an interview.

In addition to the charges filed last week in the U.S. District Court, Southern District of New York, BioWorld Today learned that Blech has been negotiating with the District Attorney's Office and agreed to plead guilty to a violation of the antifraud provisions of the Securities and Exchange Act of 1934.

Also, Blech currently is appealing a decision by the National Association of Securities Dealers (NASD) in which he was censured, fined $20,000 and barred from associating with any NASD member firm for failing to respond to NASD requests for "documents and information in connection with seven customer complaints against various registered representatives of D. Blech & Co."

Blech's troubles began in September 1994 when his investment boutique, D. Blech & Co., suffered a liquidity crisis as capital reserves dipped below federally regulated levels and ceased trading activities on NASDAQ. The news sent the stock prices of numerous Blech-financed biotech start-ups spiraling down in an already bear market. His company's portfolio of 11 biotech firms lost more than $168 million in market capitalization in one day.

As of late, Blech has been trying to muster up a comeback, fighting a perceived credibility problem. Indeed, the latest news might not help that effort.

According to an affidavit filed in the Southern District Court of New York, Blech is accused of scheming to defraud Bear Sterns (which provided clearing services for securities transactions by D. Blech & Co.) and his company's customers.

In the summer of 1994, Blech was asked by Bear Sterns, of New York, to reduce his company's outstanding margin credit with Bear Sterns, according to the court documents.

Blech allegedly sold securities from the D. Blech account and from his personal account "in arms-length sales to third parties," by purchasing biotech stocks for his customers that were unauthorized or in excess of authorization and by opening "margin accounts in nominee names that were secretly controlled by Blech, and using those accounts to purchase biotechnology stocks from D. Blech & Co. proprietary accounts and from Blech's personal accounts in purportedly bona fide transactions," the affidavit stated.

When contacted on Friday, Bear Sterns spokeswoman Hannah Burns said she would not comment on the case or her company's relationship with D. Blech & Co.

Blech's Alleged Scheme To Cheat Bear Sterns

Blech is said to have engaged in fictitious sales of biotech stocks in an effort to create the appearance that his firm was reducing outstanding margin credit with Bear Sterns. He allegedly permitted a trader, dubbed John Doe in the affidavit, to purchase 20,000 shares of an initial public offering of stock for GeneMedicine Inc., of The Woodlands, Texas, in exchange for which John Doe agreed to purchase 5,000 shares of stock issued by two other companies, Hemisphere and Ecogen Inc.

"Rather than executing a trade for 5,000 shares of these securities, David Blech, without authorization from John Doe, executed a sale of approximately 48,000 shares of Hemisphere and Ecogen into an account controlled by John Doe." After that, the document states, Blech continued to purchase stocks into Doe's account.

A spokesman for GeneMedicine told BioWorld Today Blech currently owns 1 million shares of that company's common stock, but has no active involvement in its operation.

At an undisclosed point in time, Blech learned that Doe did not have sufficient funds to cover the trades, so Blech and Doe "agreed to engage in a scheme in which D. Blech & Co. would repurchase these trades from John Doe before settlement date."

Blech and John Doe continued with the scheme, according to the affidavit, in increasing amounts. "By doing so, Blech created the appearance that D. Blech and Co. had engaged in bona fide sales, when in fact these sales were made with an understanding that D. Blech & Co. would repurchase the securities from John Doe before the settlement, thereby obviating the need for John Doe to obtain sufficient funds to purchase the securities."

To further convince Bear Sterns that he was moving in the right direction, Blech is accused of opening "numerous accounts at various broker-dealers in the name of nominees, without the knowledge or authorization of the nominal owner of the account."

Public Information Officer Marvin Smilon, of the U.S. Attorney's Office, told BioWorld Today that a hearing is set for May 14 before Judge Kevin Thomas Duffy, in Manhattan District Court, regarding these charges. (Editor's Note: The hearing was postponed until May 29.)

What was unclear on Friday — because none of the contacted sources would comment — is how the charges resulting in Blech's arrest Thursday are related to the plea bargain for violation of antifraud provisions of the Securities and Exchange Act of 1934.

BioWorld Today discovered Blech had submitted this guilty plea in a Schedule 13D document filed with the SEC March 3, 1997, which reported the purchase by Blech of 274,500 shares of GeneMedicine stock in numerous transactions between Feb. 7, 1997, and April 4, 1997. That document said half of the $2.22 million used to buy the stocks came from Blech's personal funds and the other half from a broker.

This latest, and perhaps the most dire, update on Blech's troubles follows the March conviction of a Florida attorney who represented former D. Blech & Co. employees for obstructing the SEC investigation.

Lloyd Schwed, of Jupiter, represented the employees in complaints filed with the NASD against Blech and was seeking payments of NASD judgments won by four clients plus his legal fees. He told the unnamed target of the SEC probe that he would withhold damaging tapes from the agency in return for $1.45 million. The target of the probe became a cooperating witness with the federal prosecutors and informed the government of Schwed's shakedown attempt. At that time, the SEC would not confirm it was investigating Blech.