Advisor or Hedge Fund
Flack?
As the saying goes, you can fool some
of the people all of the time. Asensio certainly has. For years,
countless people have bought his story--hook, line and sinker. But what a
fish story it is turning out to be.
According to Asensio, his three-person company "advises its [institutional] clients on securities it believes are overvalued." In line with this, a typical news release will say that the firm "has a short position in XYZ stock" and has "advised our clients to sell XYZ shares short."
Which begs an obvious question. Why do Asensio's hedge fund clients need stock-picking advice from him? Do these funds employ portfolio managers who can't make investment decisions on their own?
A Case in Point
To put the question in perspective, consider client Blue Ridge Capital (also known as JAG Holdings). Its owner, John Griffin, is vice-chair of the board of trustees of the University of Virginia's McIntire School of Finance, where he teaches investment techniques. He and two Blue Ridge analysts are also on the faculty of Columbia University. Their course description reads:
Seminar in Advanced Investment Research: The Analyst's Edge, developed by Professor John Griffin, president of hedge fund Blue Ridge Capital, will be offered this spring. Two of Blue Ridge Capital's senior analysts, David Greenspan and Steven Marks, will lead instruction with Professor Griffin providing facilitation and guidance. . .
This course will help students generate superior investment ideas by conducting creative, value-added research. Students will act as hedge fund analysts by working through the investment process: idea generation, analysis, and presentation. The professors (analysts at Blue Ridge Capital) and guest investment professionals will discuss student ideas and share their investment philosophies . . .
But we're to believe that they need help picking stocks for their hedge fund. And that of everyone available, these university-affiliated experts turn to someone with two fraud verdicts and a checkered regulatory history.
Does this pass the laugh test?
Who Advises Whom?
Actually, there's nothing funny about the way that Asensio has apparently mischaracterized his role. Testimony from his two recent trials
is difficult to square with the notion that he advised his clients to short the stocks in
question. To the contrary, it sounds like clients advised him.
As Judge Albert Sheppard, who presided over the Hemispherx case, explained:
. . . Dr. Judy Stone [and] Parker Quillen of Quilcap and Michael Wilkins [of West Highland Capital] . . . at the time they spoke with Mr. Asensio about [Hemispherx] had each taken substantial short positions [in the stock] . . .
Similarly, in the South Carolina case, Asensio acknowledged that client Quilcap was already short Chromatics Color Sciences (CCSI) when he first discussed it with a member of its staff.
Plaintiff's attorney: And at the time you spoke to her about CCSI, Dr. Stone wasn't a practicing doctor at all, was she?
Asensio: No, that's correct.
Plaintiff's attorney: In fact, she was a stock analyst, wasn't she?
Asensio: She was a short seller of a hedge fund, shorted Chromatics Color Sciences stock.
Asensio did not say whether West Highland Capital had also shorted CCSI before
discussing it with him. However, Bill Wexler, rumored to a portfolio manager
there, did urge readers to short CCSI three
months before Asensio started coverage. Client
Blue Ridge also held a position in CCSI during the first quarter of 1998--again, several
months before Asensio attacked.
These are not the only stocks
in which clients had positions before Asensio intiated
coverage. In one case, West Highland's
position preceded him by almost three years. Which is not easily
reconciled with the idea that Asensio recommended the stock to the client rather
than the other way around.
What Did He Really Do?
Many assume that Asensio executed trades for these clients. Available information says otherwise. Former SEC accountant Robert Lowry reported that all hedge fund clients used other brokers to handle their HEB short sales in 1998. It seems doubtful that things have changed since then. Sometime in 2003, Asensio told NASD that he devoted only about 20 hours a month to trading activities--surely too few to be responsible for hedge fund clients. Now that he is no longer registered, he cannot perform stockbroker work himself.
So what has been going on here? Clearly it involves communication with
investors and the media. As well as two very troubling
facts.
The first is the extreme
secrecy that Asensio and his clients have maintained about their relationship.
These funds have allowed other firms to list their names as customers, but not
Asensio. Nor have they voluntarily acknowledged their relationship with him. At a
University of Virginia symposium, client Griffin showed a
video clip of Asensio addressing his students,
but said nothing about being his client. He introduced Asensio not by name, but as a "Wall
Street guy who's a little controversial because he's a short-seller."
It may have sounded better than calling Asensio "a guy who is so controversial that his clients won't let their names be known." But how do they defend his failure to disclose their involvement? If a public company sponsored a positive recommendation without disclosure, Asensio would surely shout fraud. Hedge funds with pre-existing short positions are no less self-interested. Why is it not misleading for him to communicate negative sentiments without disclosing the role of clients who have shorted the stock and want his commentary to benefit their positions?
The Tape Tells All?
Even
more troubling are the price histories of the stocks in question. As noted
earlier, court documents reveal that some clients
shorted HEB and/or CCSI before talking to Asensio. Historical prices
suggest that these positions were very likely in the red when he was consulted.
During the months just prior to his attacks, both had seen prices trend upward. This was especially true
of HEB,
which jumped sharply during the few months before Asensio began coverage.
Price trends for other stocks
where clients positions preceded Asensio's coverage suggest that those positions
may have been in trouble also. Biovail
(BVF)
sued client Quilcap
in July of 1996. The
lawsuit accused the fund of spreading false rumors designed to
benefit its short position. BVF closed at $5.34
(split-adjusted) the day before the suit was filed.
By the end of the following month,
it had jumped more than 40%. It went higher still between August 30 and
September 13th, when Asensio attacked. Obviously, this sharp increase was not good for those who
were short.
More "Picks" to Ponder
Court documents are not the only source of information about the short positions of Asensio's clients. The long positions that hedge funds report to the SEC often reflect much larger short positions that they are not asked to disclose. When a client takes a long position and retains it after Asensio has attacked, it seems obvious that the shares are probably part of a long/short strategy.
Here are the price histories of three stocks fitting this pattern:
Parkervision. PRKR traded mostly in the teens during the third quarter of 1998, when Blue Ridge first reported a position. Asensio's first attack did not come until a year later. By then, the price had risen as high as the mid 30s and settled into the mid to high 20s.
Polymedica. PLMD traded lower when Asensio initiated coverage (October, 2001) than earlier in the year, when clients Blue Ridge and West Highland reported positions. However, short-sellers had been seeing a worrisome trend--a price that had been rising steadily off its summer lows (which it continued to do).
Blue Ridge also had a 1999 long position that it sold in 2000. It's anyone's guess whether these shares represented a true long position or were part of a long/short strategy.
Research Frontiers. REFR traded between 6 and 8 in the last quarter of 1998, when West Highland first reported a position. Almost three years went by before Asensio appeared. By then the stock was trading three to four times higher.
Performance of these stocks has varied from delisting (CCSI) to dramatic
defiance of Asensio (or more accurately, whoever actually picked them.) BVF went on to increase six-fold, while PLMD
has
tripled since his first short-sell recommendation. It has also declared a significant dividend.
Parting Words
Is there a pattern here? One in which clients made short picks, found price trends not to their liking, then called Asensio? Was Asensio's real role that of a PR man--called upon to spread innuendo, accusations, and dubious information on behalf of clients with problem short positions? Clients who were not willing to engage in such tactics themselves, so they turned instead to what might be called the Wall Street equivalent of a hit man?
We don't know his clients' side of the story. But even they would have to admit that the appearances here are not good. To put it mildly.
* * * * * *
Note: The video of John Griffin showing Manuel Asensio speaking to his class can be accessed on line at Virginia e-summit (requires Real Player). Griffin's talk begins about 6 minutes into the session; Asensio appears near the 10-minute mark. For other formats click here: scroll down to session entitled Teaching and Learning.
Page Created 10/03/03