WASHINGTON _ The Securities and Exchange Commission(SEC) filed administrative proceedings on Tuesday againstChancellor Capital Management Inc. of New York, its starbiotechnology portfolio manager, Parag Saxena, and its generalcounsel, James Long, charging that Chancellor and Saxena failed todisclose conflicts of interest to clients and that Long failed to makecorrect filings with the SEC.Although Chancellor, Saxena and Long neither admitted nor deniedthe SEC charges, they agreed to accept financial and professionalsanctions: Chancellor will pay a fine of $500,000, Saxena will pay$250,000 and Long has been formally censured by the SEC.Chancellor also agreed to hire "outside expert legal counsel"acceptable to the SEC to review its policies and procedures and toensure future compliance with SEC regulations.Sparked by a 1992 story in The Wall Street Journal, the SECinvestigation that led to Tuesday's settlement focused on Saxena'spropensity to accept ultra-cheap "founder's stock" in start-upcompanies offered to him by biotechnology financier David Blech.Without properly disclosing his ownership of these shares toChancellor clients, Saxena would then recommend that Chancellorinvest in the same companies at much higher per-share prices inprivate placements and public offerings.Although the SEC filing does not mention Blech by name _ itrefers only to "an individual (`the Founder') who was active inorganizing and starting companies in the biotechnology and healthcare industries" _ it is clear from the companies involved and fromcircumstances that the "Founder" is Blech.SEC regulations require that fund managers, such as Saxena, fullydisclose their private ownership stakes in companies theyrecommend for purchase to their clients. According to SECdocuments, however, between October 1988 and August 1992,Saxena repeatedly failed to disclose that he provided ongoing"opinions and advice" to Blech in exchange for founder's stock inBlech-affiliated companies.The facts outlined by the SEC (many of which appeared in theoriginal Journal article) are as follows:u In February 1988, Saxena helped Blech recruit a CEO forNeurogen Corp. and was subsequently offered a chance to buy4,000 shares of Neurogen at two and a half cents per share (total$100). Eighteen months later, Saxena recommended that Chancellorpurchase on behalf of its clients 40,000 shares at $6 per share inNeurogen's initial public offering (total $240,000). In 1991,Chancellor again bought Neurogen shares on Saxena'srecommendation, this time 180,000 shares for $4 per share (total$720,000) in the firm's secondary offering.u In January 1990, Saxena assisted Blech in "selecting" a CEO forIcos Corp. (although the CEO selected, Robert Nowinski, wasalready well known to Blech because he had been at the helm ofBlech's first biotechnology venture, Genetic Systems Inc.). Inreturn, Saxena bought 10,000 shares of Icos at one cent per share(total $100). Eighteen months later, Chancellor purchased 200,000shares of Icos at $8 per share (total $1.6 million) in the company'sinitial public offering. In 1992, Chancellor purchased 150,000additional shares at $9 per share (total $1.35 million) in a secondaryoffering.u In early 1991, Saxena and Blech discussed general business issuesfor Blech's start-up, Ariad Pharmaceuticals Inc., as well as potentialcandidates for the firm's chief financial officer. Shortly thereafter,Saxena bought 25,000 shares for a total of $25 _ just a fraction ofa cent per share. Although Chancellor did not subsequentlypurchase Ariad stock, Saxena did recommend that the fund buy forits clients about $3.9 million worth of securities in other Blech-affiliated companies. Those companies included NovaPharmaceutical Corp., Bio-Technology General Corp., Ecogen Inc.,DNA Plant Technology Corp. and Liposome Technology Inc.In all of the cases listed above, the SEC charged that Chancellor,Saxena and Long failed to inform Chancellor's clients of thepotential conflicts of interest in the Blech-Saxena relationship. Onbalance, Saxena's investment advice to Chancellor regarding Blechcompanies was profitable. Indeed, Chancellor entered and exitedthe Blech company stocks quickly and strategically, rarely investingin the companies for more than a year. As of Sept. 30, 1994,Chancellor had realized and unrealized profits of approximately$2.98 million on investments in the seven firms named above.But the SEC noted that "although the investments that Chancellormade on behalf of its clients in issuers affiliated with the Founderwere generally profitable, that success does not excuse the failure todisclose the conflict of interest that existed at the time theinvestments were made.""Personal investments and personal business relationships withissuers or persons related to issuers, such as Saxena's relationshipwith the Founder, require particularly careful scrutiny anddisclosure by an investment advisor," the SEC document stated.In a prepared statement, Chancellor's chairman and CEO RobertWade said that "although the SEC raised significant concerns aboutthese pre-August 1992 practices, the SEC did not allege that weintended to act in conflict with our clients' interests and recognizedthat our clients profited from these investments." A Chancellorspokeswoman told BioWorld that both Saxena and Long willremain with the firm in their present positions.Tuesday's SEC filings did not charge Blech or his investment firm,D. Blech & Co., with any wrongdoing. A 1993 report in The WallStreet Journal revealed that Blech and his lawyers were questionedby the SEC during 1992, after the original article appeared. So far,nothing has resulted and Blech could not be reached for comment.The crux of the issue for Blech is whether SEC investigators canestablish that he extracted commitments for future investments inhis companies from fund managers or others to whom he gavefounder's stock. Such an arrangement would be illegal. ThomasNewkirk, associate director of the SEC's enforcement division,would neither confirm nor deny reports that Blech is still the subjectof an SEC investigation. "And don't read anything into that," headded.When asked if D. Blech & Co.'s financial collapse last monthwould lead to an SEC inquiry, Newkirk declined to discuss aspecific case. "I will say that, generally speaking, when a firmcloses its doors after falling below net capital requirements, theSEC will ordinarily take a look at the situation," he said. Blech'sNew York brokerage firm sunk below federally regulated netcapital requirements on Sept. 22 and has since shut its doors. n
-- Lisa Piercey Washington Editor
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