Blowing The Whistle On A Famous Whistle Blower

Whistle-blower. To Raymond L. Dirks, Wall Street's most storied securities analyst, the whistle-blower holds a special place of honor. No wonder. In 1973, while much of the Street looked on in derision--and the Securities & Exchange Commission cried foul--Dirks warned investors of a fraudulent stock, Equity Funding. In the years to come, Equity Funding went bust and Dirks was victorious, though it took a long and costly battle all the way to the U.S. Supreme Court. In the end, Ray Dirks, whistle-blower, was cleared of spreading inside information.

This new episode of the Dirks saga involves whistle-blowers. But this time, other people are blowing the whistle--on Dirks--and some of their accusations are as grave as stock manipulation. And this time, it is Dirks who is trying to discredit his most visible adversary--even as some of his closest associates seem to be taking sides against him.

Such is the latest, increasingly curious chapter in the story of the 60-year-old Dirks, one of the Street's most widely quoted stock-pickers. Today, ever more serious questions are being raised about Dirks, his firm Ray Dirks Research, and RAS Securities Corp., the Manhattan-based underwriter from which Dirks is about to part company.

This tale is multifaceted but has a common thread: Ray Dirks's most beloved stock, OXiGENE. It is the story of his effort to discredit Susie Niess, a former Dirks analyst who has no love for OXiGENE. And it's the story of Michael M. LeConey, Dirks's star biotech analyst and OXiGENE's main champion, who Niess maintains improperly traded in stocks he recommended through an account in another person's name.

STOCK DIPS. Apparently the SEC is examining some of the goings-on at RAS. According to sources at RAS, the SEC has launched an inquiry into trading at RAS of shares of OXiGENE. RAS Chief Executive Robert A. Schneider declined comment, and Dirks denied knowledge of the probe. (The SEC would not say if it is conducting an inquiry.) The probe is said to have begun on July 1, the day an article appeared in BUSINESS WEEK about Dirks. The article explored accusations that current and former employees had leveled against him, Dirks Research, and RAS Securities. Some of those allegations maintained that Dirks had gone overboard in promoting OXiGENE, his largest holding, and other stocks. The sources maintained that RAS had engaged in improper trading practices to boost the price of stocks RAS took public. The allegations were denied by Dirks and Schneider.

In the weeks since then, the accusations have become even more serious. Among the questions being raised:

--What explains the decline in OXiGENE stock from June 28 to June 30, just prior to negative publicity? OXiGENE plummeted 20% prior to a June 29 broadcast by Dan Dorfman of CNBC, who was downbeat on OXiGENE. Dorfman mentioned speculation about an impending BUSINESS WEEK story, which appeared on July 1 and was also negative. According to trading records, a 50,000-share block of OXiGENE stock was traded over the counter at 11:44 a.m. on June 28, some two hours before Niess says she was interviewed by Dorfman, who quoted her in his broadcast. A RAS source says the shares were bought by a Swedish institution, but it could not be determined who the seller was or if the timing was related to the impending negative publicity. Dirks says OXiGENE shares were under attack by short-sellers who, he adds, have amassed a giant short position.

--Did Dirks artificially inflate the price of OXiGENE stock in mid-July? This allegation is stunning because it asserts that Dirks attempted to manipulate the price of OXiGENE shares after the SEC launched its inquiry on July 1. According to a source at RAS, in recent weeks Dirks inflated the price of OXiGENE by buying shares for accounts that did not order the stock, with the idea mf moving the shares to other unwary account-holders when the transaction was discovered. Such phony orders, or "wooden tickets," would help artificially sustain the price of the stock. The aim would be to eventually unload the stock on the open market at a higher price. Dirks denies he wrote wooden tickets.

--Did a star biotech analyst, Michael LeConey, engage in improper trading in stocks that he recommended? Niess, who once was LeConey's assistant, says she has supplied the SEC with trading records that show LeConey engaged in trades in 1992 and 1993 for an account that he opened for William O'Mahoney Jr., who was described in account documents as a 38-year-old man. In fact, LeConey acknowledges that O'Mahoney is a child, the stepson of his brother. Niess says the trades included three instances of front-running--illegal buying of shares prior to issuance of a favorable research report. And documentation she has supplied to the SEC appears to bear her out in one instance. According to internal RAS trading records, LeConey bought 8,500 shares of Premier Anesthesia Inc. on Sept. 3, 1992, six days before publishing a favorable report on Premier. The trading records indicate that LeConey bought 5,000 more shares after the report came out and sold all 13,500 at a profit over the following few weeks. LeConey vigorously denies that he engaged in front-running. He acknowledges the Sept. 3 trade but says RAS policy bans trades only within three days of a research report. Le-Coney maintains the account lost money and that any profits were to be set aside for his children, not himself. In 1983, LeConey was dismissed from Merrill Lynch & Co. for setting up a trading account at another firm. Two years later, he consented to $10,000 fines and suspensions by the National Association of Securities Dealers and the New York Stock Exchange. LeConey says that front-running was suspected at the time but that regulators investigated and cleared him.

--Has Dirks engaged in a smear campaign against a former analyst? Niess, the former RAS biotech analyst, has maintained that Dirks exaggerated the merits of OXiGENE, which is developing a product to prolong the lives of patients undergoing radiation therapy. Niess, who is setting up her own biotech stock newsletter, in recent months has faxed letters to money managers maintaining that OXiGENE's prospects have been exaggerated by RAS because OXiGENE's drug is based on a cheap, widely used generic medication. Immediately after Dorfman quoted Niess in his broadcast, Dirks faxed to money managers copies of internal RAS memos and correspondence from Niess, including a handwritten letter from Niess to Dirks bitterly complaining about her neighbors. A handwritten notation from Dirks on one fax calls Niess "a sick person mentally" (above). Dirks admits to writing that. Niess asserts that Dirks has falsely accused her of mental illness in an effort to keep her from speaking out about OXiGENE. She also says she has received a letter from OXiGENE Chairman Richard A. Brown that threatens "all legal means available to us to correct the situation, including litigation" if she doesn't cease what Brown describes as her "malicious assault on OXiGENE."

LITTLE ACCORD. In an interview, Dirks doggedly maintained that Niess was, in his words, "paranoid"--and he provided BUSINESS WEEK with copies of the correspondence and memos that he faxed to the money managers. All, he says, support his view that Niess cannot be believed. But believed about what? Dirks concedes that her main factual assertion--that OXiGENE's product is based on a cheap generic drug--is true and has not been disputed by the company. But he differs with her analysis, pointing to a series of favorable research reports written by LeConey. "You can believe anything he has to say," says Dirks.

So what does LeConey have to say? He agrees with Dirks about OXiGENE--and not much else. "Ray is one of the most maniacal people I have ever met," says LeConey. "He gets focused on things. He likes battles and controversy. The more you stir the pot, the more excited he gets." In recent days, Dirks Research has asserted in its 900-number stock-tip service that the short position in OXiGENE is a million shares--one-fifth of the company's market capitalization. If true, that would be very bullish because shares borrowed and then sold by short-sellers eventually have to be replaced. Dirks cites research on the subject by LeConey, who disavows authorship. "That's Ray, not me," he says. "I have no idea what the short position in OXiGENE is."

JOB CHANGE. What about the accusations of wooden tickets? Says LeConey: "I heard that something like that occurred. I have a habit in there of making no effort to find out about that kind of stuff, to distance myself."

Ray Dirks is doing a bit of distancing of his own. He is severing his connections with RAS Securities over the next few weeks. Why? Says Schneider: "I asked Mr. Dirks to leave five months ago. We have philosophical differences. Let's say I'm more conservative than he is. " No way, says Dirks. He maintains that he is pulling out because of a dispute over allocation of profits and because the firm is inadequately capitalized. Is that true? No way, says Schneider. Did Schneider order Dirks to cease his faxes to money managers regarding Niess? Schneider says yes; Dirks says no. And even though Schneider says that he has "shut down" the 900-number stock-tip service, it is alive and well--though in recent days has said it has no connection with RAS. The two men agree on one thing--that a dispute over wooden tickets was not a factor in the split, as claimed by sources at RAS.

As Ray Dirks faces a move to another, as yet unknown securities firm, he is, as usual, calm and unflappable. He only seems irritated--slightly--when comparisons are made between the Ray Dirks of 1973 and the Susie Niess of 1994. Ridiculous, he says. Why? "Because she's wrong," says Dirks.

But then again, that's what they used to say about Dirks in the days when he was blowing the whistle.

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