David Blech, accused by former employees of running a"sleazy boiler room operation" at his failed New Yorkinvestment firm, is back in business with the sameswagger that earned him a white-knight reputation forpushing small cash-hungry biotechnology companies intothe big capital markets.
Insights into Blech's past management style at D. Blech& Co. and his present business status were culled fromtwo sources by BioWorld Today.
One source was Blech's testimony at a NationalAssociation of Securities Dealers (NASD) arbitrationhearing last month on a complaint filed by a formeremployee. The other is a tape recording of Blech and oneof his managers speaking over a "squawk box" to brokersat D. Blech & Co. offices in New York, Atlanta andFlorida last year before the investment firm crashed inSeptember 1994.
Blech earned his wealth and reputation as a white-knightfor start-up biotechnology companies by backing theirinitial public offerings (IPO) when other investment firmswould not and for supporting what he termed "fallenangels" _ struggling companies with tumbling stockprices.
In the year prior to the crash of D. Blech and Co. whencaution reigned on Wall Street because of adverse marketconditions for biotechnology companies, Blech boldlyexpanded his investment banking business. Heunderwrote seven initial public offerings and two follow-on offerings. However, by April 1994 the stock prices ofthose nine firms had dropped an average of 24 percent.
By Sept. 22, 1994, Blech, dubbed the nation's biggestseller of biotechnology stocks, faced a liquidity crisis thatforced him to cease trading activities and shut down hisfirm. Since then at least 21 complaints have been filedagainst him with the courts and the NASD. Peoplefamiliar with the cases told BioWorld Today Blech hasattempted to settle the disputes for much less than theclaims, saying neither he nor his company possessessignificant assets.
Among the NASD complaints are those filed by 10former D. Blech & Co. brokers in the firm's Boca Raton,Fla., office and one in Atlanta. West Palm Beach lawyerLloyd Schwed represents all the complainants.
The brokers are seeking a combined $22 million incompensatory and punitive damages based on allegationsof fraud, breach of contract and abuses of publicsecurities markets. They alleged Blech guaranteed theircontracts for salaries ranging from $228,000 to $1.2million and reneged on those agreements when his firmbegan to decline.
In addition to angering employees, the crash of D. Blech& Co. collapsed stock prices of biotechnology companieshis firm launched. (See the chart on p. 4.)
If Blech's confidence fell with his business, his testimonyat the NASD arbitration hearings in Florida indicates arecovery. The complaints were filed in October 1994.Blech is represented by Boca Raton attorney VanStillman, his third lawyer on the case.
A transcript of the Sept. 13, 1995, hearing, on thecomplaint of former D. Blech & Co. broker DouglasMisantoni, was obtained by BioWorld Today.
In it, Blech said of his present business: "I am an investorin the biotechnology field, the life sciences field . . . I amstill chairman of D. Blech & Co., although it has muchless activities than it did before . . . Most of my time isspent as a private investor."
Blech's Calls Have Gone Unanswered
The private investor reference apparently means Blechstill is attempting to negotiate the deals that made himfamous _ investing small sums as a venture capitalisthoping to cash in big profits later when the fledglingcompany goes public.
An industry source told BioWorld Today that Blech hasapproached numerous firms, but has had few, if any,return calls.
Blech, who testified by telephone from New York in theMisantoni case, was not content to just answer questions.He instructed his Florida counsel when to object to cross-examination and in one instance, his attorney had toremind him the arbitration panel already had ruled againstBlech.
"I think my counsel might object to that as it's relevant,"Blech told James Gatewood, the NASD arbitrationchairman.
"David, David," said Stillman. "I did object on therelevance and the panel ruled that you can answer thequestion."
In another exchange, Blech went on the offensive afterhis lawyer objected to Schwed trying to "pierce thecorporate veil" of D. Blech & Co. Schwed argued Blechis personally liable for contracts guaranteed by theinvestment firm because Blech used the company toenrich himself and his family.
"You operated D. Blech & Co. to the benefit of yourselfand your mother and your brother and your son, correct?"Schwed asked.
As Stillman objected Blech chimed in, "Throw rocks atme, OK, Mr. Schwed.?"
To follow up his contention that Blech dispensedcorporate assets to family members, Schwed asked ifBlech advanced his mother $109,000 after D. Blech &Co. had crashed.
Blech did not recall the specific payment, but added, "Ionly know that often my mother had loaned the companymoney at times."
Blech also acknowledged he and his family memberswere primary shareholders in some companies his firmtook public.
"On less than half of them I was a shareholder," Blechsaid.
Questioned about 1.8 million shares in LXRBiotechnology Inc., of Richmond, Calif., owned by theEdward Blech trust, David Blech said Edward was his 5-year-old son and the "trust" paid for the shares.
"Paid how much for them?" Schwed asked.
"I can't recall," Blech answered.
"Well was it substantially less than the [initial public]offering price?" continued Schwed.
"Perhaps," Blech said.
Selling Shares In Blech-Underwritten Companies
Among other allegations made against Blech by hisformer brokers are charges he ran "a sleazy boiler roomoperation," pressuring them to get clients to buy newlyissued shares in companies underwritten by Blech andurging them just as strongly to advise those clients not tosell if the price started rising.
"The reason," the brokers said in their NASD complaints,was that Blech "was profiting from the rise of his biotechstocks and did not want the prices to go down."
To motivate his charges, Blech spoke to the brokers at thecompany's offices in New York, Florida and Atlanta overa "squawk box."
A transcript of a tape recording made in Georgia of oneaddress prior to Blech's fall was obtained by BioWorldToday. Blech tried to convince his brokers to work hardat selling stocks of companies whose offerings weremanaged by the firm.
"It's not untraditional on Wall Street," he said, "forpeople who are the underwriters to get to be the mostsupportive market maker and company on Wall Street.So, you know, essentially the task at hand is to raise newcapital every few weeks for a new company withoutbecoming net sellers on the old companies."
Blech suggested if his brokers didn't like his businessphilosophy, they should leave.
"As people are looking to trade against the desk and toout-think what we are going to do with a certain deal,obviously this is not the right firm for them to be at."
After Blech's pep talk, Ross Mandell, a manager for thefirm, exhorted the brokers using language that was a bitstronger.
Mandell said he had experience with "three, four, sixplaces on Wall Street" and many brokers at other firmswanted to be part of D. Blech & Company.
"They say . . . we're doing a deal every two weeks, it'stoo much too fast," Mandell said. "I agree. However, thisfirm has an agenda that will be met. We are a deal firm.We hang paper. We are an underwriter of small biotechcompanies and some not so small. You're helping thefirm in a much bigger way if you are straight up and thetickets that you write are good tickets. We don't need ahundred tickets a day, thirty of which are going to be soldout. That's bullshit and we do not need guys writingwooden tickets."
Good tickets were those that represented transactionsbeneficial to D. Blech & Co., while wooden tickets didnot advance the firm's agenda.
Mandell also provided brokers with an incentive for thehard work Blech was asking of them.
"This is not fun and games," Mandell said. "You canhave fun when you work, but for me, this is the pursuit ofcash. I want to be wealthy."
Blech, in his testimony at the NASD hearing onMisantoni's complaint September 13, 1995, said hedidn't "pressure" brokers.
It Was Just `Encouragement'
"I don't know really what it means in a legal context," hesaid. "I encouraged them to market our product. Ibelieved in our product. I still do. I think our track recordspeaks for itself. But I take issue with the word pressure."
Blech testified that at one time he had "several hundred"employees, but now has two. He added that he has movedfrom 15,000 square feet of office space to 1,000 squarefeet. His former offices were at 599 Lexington Ave. inManhattan and he now lists a business address of 225Lafayette St.
To date, Blech has testified in three NASD hearings inFlorida, answering all questions by telephone because hehas a "lingering respiratory infection." He apologized fornot attending the Misantoni proceeding, his third round oftestimony, saying he had "an ear infection" and that hewas "sipping some soup as we go."
Stillman did not return calls for an interview withBioWorld Today. Blech could not be reached forcomment.
Schwed said Blech has not provided any records from D.Blech & Co. despite repeated orders and sanctions fromNASD arbitration panels.
"This is extremely unusual to refuse to comply with threeorders from arbitrators," Schwed said.
Hearings in Florida on the individual cases began inAugust and the first ruling is expected later this month orby mid-November. n
-- Charles Craig Staff Writer
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