Editor

"Half-truths, misinformation and other nonsense."

The phrase has a "lions, tigers and bears, oh my" ring to it, suggesting Wizard of Oz-like forest evils that may or may not threaten. But there was no doubt something happened late last month to shares of Immtech International Inc., which in a press release blamed the stock hit on an "irresponsible opportunist" aiming to benefit short sellers by dispensing "scurrilous" falsehoods. A Vernon Hills, Ill.-based firm focused on a new class of oral drugs to treat infectious diseases, Immtech saw its stock fall by almost 30 percent Nov. 20, losing $7.24 to close at $17.76.

In another press release, on Nov. 21, the company said it is "on track with its progress and knows of no business developments that would account for the recent decline in its share price." But Immtech's shares lost another $3.76 that day, or 21.1 percent, to close at $14.

The culprit, Immtech said, was www.stocklemon.com, which ran an article about the company that was preceded by "substantially increased short selling." Lashing back, Immtech repeated a quote from financial columnist Tobin Smith, who called the website "nothing more than a mouthpiece for short-selling hedge funds or syndicates of individuals" with an interest in driving stock prices down.

"Bio-Tech [sic] has become the sacred cow of the stock market," the Stocklemon article began. "Companies with no revenues have been granted large market caps based upon the promise for the future. Therefore, deciding what is a lemon and what is lemonade is a difficult task. Fortunately, one stock has made it easy for us."

That stock is Immtech, Stocklemon said.

Formed in 1984, the company is focused on drugs for fungal infections, malaria, tuberculosis, hepatitis C, Pneumocystis carinii pneumonia and tropical medicine diseases, including African sleeping sickness (a parasitic condition also known as Trypanosomiasis) and Leishmaniasis (a parasitic disease that destroys the liver).

Immtech's dicationic platform yields drugs that work by blocking life-sustaining enzymes from binding to key sites in the "minor groove" of an organism's DNA. Structurally, dications are chemical molecules that have two positively charged ends held together by a chemical linker. Positive charges on both ends allow dications to bind to the negatively charged key sites of an infectious organism's DNA, thus killing that organism.

The company's first oral drug candidate, DB289 for Trypanosomiasis, is in a 350-patient, open-label Phase IIb trial. Assuming results consistent with prior trials, Immtech has said it will be able to sell the drug in certain African countries in the fourth quarter of 2003 or first quarter 2004.

Article Deceptive, Unwarranted By Facts': Immtech

Stocklemon seemed less than impressed.

"It was almost one year ago today that shares of Immtech got delisted from the Nasdaq for failure to meet listing requirements," the website's story said. "One year later, and the stock is trading with a with a market capitalization that is north of $350 million on the AMEX. But what really has changed?"

The article pointed to a rather complicated entry by Immtech into what Stocklemon calls the "dark zone of stock promotion" - a zone regarded by the website's writer as no less black than many on Wall Street regard the zone occupied by short sellers.

According to the company's latest quarterly report, from which Stocklemon quotes, Immtech in March 2003 entered into media production agreements with Winmaxmedia, an operating division of Winmax Trading Group Inc., to "produce materials to be used in connection with equity fundraising efforts." As consideration for services, Immtech issued 100,000 shares of its common stock and paid about $100,000 in cash.

Also in March, Immtech signed an investor relations agreement with Fulcrum Holdings of Australia Inc. for "financial consulting services and public relations management to be provided over a 12-month period." As consideration for services, Immtech said it would issue to Fulcrum 100,000 shares of common stock and warrants to purchase an additional 350,000 shares of common stock at prices ranging from $6 to $15 per share.

Winmax and Fulcrum have the same principal owner, the Stocklemon story noted: Gerald Sklar, who in 1989 was banned for three years from the British Columbia Securities Commission for putting out false information on two (non-biotechnology) companies. The Stocklemon article went on to explore Sklar's background and Immtech's relationship with him.

In one of its press releases, Immtech said the company believes "Stocklemon's deceptive article is totally unwarranted by the facts and circumstances of the company's business, which have been fully disclosed as required by law." Immtech vowed to "defend against any malicious acts by considering all available actions, including contacting the Securities and Exchange Commission to request that an investigation be opened."

In response to requests for an interview made by BioWorld Financial Watch, Stocklemon sent an e-mail saying the site is "not a mouthpiece for anyone except the truth. Everything we wrote is true and the market acts according to ALL public information not just our website. You are giving us way too much credit and the focus should stay on the message, not the messenger. We do not comment on market price of the stocks we write about. The company registered millions of shares of stock prior to any report."

A second e-mail added, "We do not give financial advice neither did we comment on the Immtech technology. We hope they cure every disease [in] the world and we wish them the best. We just pointed out some odd things in their filings. Stocklemon does not have power over the markets, only the truth has power over the markets."

Whether or not "the truth" has ultimate power over the markets would likely be argued by many analysts, but there's no question that the Immtech case, because it allegedly involved a scheme for short sellers, brought attention to the practice.

"Tellingly," said Immtech, "buried at the end of the deceiving article, Stocklemon says: At any times the principals of Stocklemon.com might hold a position in any of the securities profiled on the site. Stocklemon.com will not report when a position is initiated or covered.'" Immtech did not return phone calls, but President and CEO Steven Thompson sent BioWorld Financial Watch a prepared quote.

"Immtech has provided full disclosure in its regular filings with the [SEC]," he said. "Our clinical trials of DB-289, Immtech's first oral drug candidate to treat infectious diseases, have been progressing and are on track with our business model. We continue to meet or exceed our expectations."

A third e-mail from Stocklemon said, "If you speak to Immtech you should ask them why they chose Gerald Sklar as their banker and not go with a traditional banker. There is a real story in there."

Naked' Short Selling Among Practices Targeted By SEC

In any case, the SEC already has its eye on short sellers. Until Jan. 5, the agency is taking comments on proposed rule changes that would adjust how short sellers conduct themselves.

Short selling - the "sell high, buy low" approach - involves selling a stock with a plan to buy it back later at a lower price, betting that the price will drop. A short seller borrows stock from a broker to sell short and pays for the borrowing by way of a set margin. If the price of the stock rises far enough, the short seller gets a margin call and must put up more cash.

The SEC itself, in proposing the rule changes, provides one of the more succinct explanations of how short selling works:

XYZ stock is currently selling at $50 per share. An investor anticipates that the price of XYZ stock will decline and wants to sell short 100 shares. The investor's broker borrows 100 shares for the investor and executes the short sale.

The $5,000 proceeds from the sale (plus, usually, an additional 2 percent) are posted as collateral with the lender and the investor must also post margin equal to 50 percent of the purchase price with his broker.

At some point in the future the investor must purchase 100 shares to return to the lender. If the investor can purchase the XYZ shares at a price below $50, the investor can cover the short position at a profit. If the price of XYZ shares rises above $50, the investor may have to cover the short position at a loss.

It's a game.

The SEC's "uptick rule" allows short sellers to sell only at a price higher than the most recent trade, the aim being to block them from driving down the price to their own benefit. One possible change in the SEC rules is to replace the uptick rule with a "bid test," so the seller can only sell short at a price above the current price people are willing to buy the shares in the market. Other proposed changes target "naked" short selling, which is the sale of shares that have never been borrowed, thus pushing down the share price. The new rule would force sellers to deliver the shares within a few days of making the sale - so they would have to be borrowed in order for the transaction to go ahead.

What does short selling have to do with Immtech's problems? Maybe nothing, maybe plenty. Depends on who you believe.

As for the practice of ordinary, legitimate short selling, biotechnology analyst Darren Mac with Fulcrum Global Partners LLC - like others, like the SEC - sees nothing objectionable.

"You have to differentiate between short sellers and people who put out short research pieces with the goal of assisting short sellers," he said.

"I don't know in particular what has gone on with Immtech," Mac told BioWorld Financial Watch. "But if people can find information that leads them to take a contrary opinion to what management is saying [and sells short as a result, in accordance with SEC rules], personally I don't have a problem with that."