|BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE|
Did a Specialist Break the Rules?
A honcho at GHM may have traded covertly
A Philadelphia-based company by the name of Hemispherx Biopharma Inc. (HEB) is the center of the perennial struggle between ''longs,'' who favor its stock, and ''shorts,'' who wager on the shares' decline. But there has been an intriguing, covert element to the often dreary Hemispherx controversy--one unknown to longs and shorts alike.
At issue is GHM Inc., the specialist in charge of trading in Hemispherx stock. According to current and former associates intimately familiar with his activities, the head of GHM, Joseph Giamanco, has for years traded for his own profit in shares of stocks in which his firm specializes--including Hemispherx. He stopped only recently, these people say.
These are grave allegations. As a specialist firm, GHM has a duty to make a ''fair and orderly market'' in stocks traded on the floor of the Amex. Specialists have unique access to order-flow information via the ''limit order book,'' which shows outstanding orders to purchase the stock at a specific price. Thus, Amex and New York Stock Exchange rules prohibit specialists from short-term trading for their personal profit in the stocks in which their firms are specialists. If nonpublic information is used, such trades could violate federal securities laws.
Responding to questions from BUSINESS WEEK regarding Giamanco, his attorney, Gary Naftalis, released a statement that did not directly respond to the allegations. It noted that ''Mr. Giamanco is a respected member of the American Stock Exchange who enjoys a well-earned reputation for integrity in all of his business dealings. He has fully complied with all applicable regulations and rules.''
The 53-year-old Giamanco is surely one of the most prominent specialists at the exchange. When the Amex appointed a ''blue ribbon'' panel in 1991 to select companies for its Emerging Company Marketplace of small companies, Giamanco was one of the ''venture-capital and growth-company experts'' selected. Indeed, Giamanco's prestige in recent years has grown to the point that he--and his partner Ronald Menello--have become floor officials, charged with enforcing securities rules on the exchange floor.
But it is just those rules that Giamanco is alleged to have violated. One longtime former employee maintains that Giamanco's trading was widely known among Giamanco's employees and that Giamanco would ''move money out of the company'' into a trading account that he covertly owned and controlled--something that apparently caused some animosity among the people who worked for him. ''Then they tell you how broke they are,'' says one former employee.
According to these sources, Giamanco traded for ''upstairs'' accounts--off the Amex floor--using names other than his own. A current Giamanco associate says that the trading in Hemispherx ended only recently. The identity of other stocks in which Giamanco allegedly traded could not be determined.
WINDFALL. Another connection between Giamanco and Hemispherx is also troubling, though it is perfectly legal. For years, he has been a recipient of lucrative private-placement shares, beginning in November, 1995, when the company was brought public by Stratton Oakmont Inc., the notorious penny-stock firm. While the terms of all the private placements could not be determined, at least one was extremely profitable for Giamanco.
According to SEC filings, in March, 1997, Giamanco was among a small group of people allowed to purchase preferred stock in Hemispherx. Giamanco purchased 275 preferred shares at a cost of $1,000 each, or $275,000. Each was convertible into 500 shares of common stock, meaning that Giamanco's preferred stake translated into 137,500 shares of Hemispherx common stock, at a cost of $2 a share. In addition to Giamanco, his close friend Joseph Roselle received the convertible preferred shares--in Roselle's case, convertible to 25,000 shares of Hemispherx--all in the months before Giamanco's firm was selected by Hemispherx to be its specialist on the Amex floor. Efforts to reach Roselle, whose phone number is unlisted, were unsuccessful.
Giamanco's purchase proved propitious. In October, 1997, Hemispherx was listed on the Amex--and selected Giamanco's GHM as its specialist unit. The company's shares were trading at $4 by the end of 1997. During 1998, Hemispherx shares--traded out of Giamanco's post on the main trading floor of the Amex--traded at an average price of $5.50 a share, rising to as high as $12 and never falling under $2.75 a share. Thus, Giamanco's preferred-stock windfall is likely to have reaped him a gain of more than $400,000, while his friend Roselle would have received a smaller chunk of change, perhaps $75,000 or so.
As time went on, Giamanco and Roselle's holdings in private-issue stock swelled--and other Giamanco associates joined in. A February, 1998, SEC filing registered for sale yet another 110,000 shares for Giamanco and 240,000 more for Roselle. It also registered shares for Giamanco's partners, 10,000 for Menello and 40,000 for Gary Herman. Many of these were shares underlying convertible securities. The degree to which the four men stood to profit, if at all, from the private placements was unclear from SEC filings. Calls to Hemispherx Chief Financial Officer Robert E. Peterson were not returned. Menello declined comment on his stake in Hemispherx, and Herman did not return phone calls.
FULL DISCLOSURE? According to SEC filings, Roselle recently participated in the private placement of two other companies in which GHM is a specialist: Fortune Natural Resources Corp. and Trinitech Systems Inc. (TSI). A Fortune attorney said the company was not involved in Roselle obtaining the shares, and Trinitech Chief Executive Peter Hansen said he was unacquainted with Roselle. Roselle also joined Giamanco in obtaining private-issue shares in three other small companies, including one whose shares trade on the OTC Bulletin Board, Automotive Performance Group Inc.
The presence of Giamanco, Roselle, and Herman in the Automotive filings is intriguing. According to the December, 1998, SEC filing registering the shares, Automotive disclosed that it had filed for listing on the Amex. But Automotive's income statement shows that it does not appear to meet Amex listing guidelines, because of operating losses. Does the involvement of Giamanco, his partner, and his friend bode well for Automotive's overcoming these obstacles? Automotive, at least, is silent on the subject. Its top executives did not return phone calls.
Giamanco is not the only specialist to receive shares in a company prior to being named as a specialist. Another beneficiary was Spear, Leeds & Kellogg, which, along with Giamanco, recently was included in the private placement of a company called Endorex Corp. (DOR)--not long before the firm selected Spear as its Amex specialist.
Amex Chairman Richard F. Syron says that there is nothing wrong with specialists' participating in often lucrative private placements by companies in which they later become specialists--so long as the exchange knows about it. ''These guys, they're independent businessmen, they're entrepreneurs, they're risk-takers,'' notes Syron. He notes that they may take a stake in a company before it goes public ''and naturally, as it gets to the stage of becoming public, they'd have an interest in where it trades.'' He sees nothing wrong there--as long as the exchange is informed. But the Amex did not respond to queries on whether it was, in fact, informed.
Other people familiar with the Amex are not so sanguine and believe that Giamanco may be getting the benefit of the doubt for a questionable practice. They note that he has been actively involved in recruiting OTC and NASDAQ companies for the Amex. One former Amex official who had compliance responsibilities expressed surprise at learning of Amex specialists' obtaining private-issue shares prior to becoming specialists in those companies' shares. ''I don't recall it being commonplace at all,'' he asserts. ''Yet it appears to be somewhat commonplace now.''
APPARENTLY LEGAL. Another former regulator agrees that the practice, while legal, is dubious. ''I'm pretty surprised that the American would allow you to have accumulated a position'' in cheap stock, he observes. The practice is troubling for several reasons. For one thing, an Amex listing holds considerable cachet for small, micro-cap companies, particularly OTC Bulletin Board stocks. Specialists play a major role in recruiting small companies to the Amex and in recommending that such listings be accepted. A grant of cut-rate stock to Amex specialists can have the appearance of being an inducement to get a stock listed. That question arises from the Giamanco involvement in Automotive Performance.
But at the Amex, potential conflicts of interest such as this are overshadowed by even more serious issues. There is, for example, the stance of the American Stock Exchange and law enforcement toward Giamanco. As was the case with Pasquale ''Pat'' Schettino (page 102), the Amex whistle-blower Edward R. Manfredonia wrote numerous letters to the SEC and the U.S. Attorney's office in Manhattan alleging that Giamanco had been trading shares for his own benefit. A spokesman for the U.S. Attorney declined comment, citing office policy, and an SEC spokesman said that the charges were taken seriously. But Giamanco's attorney Naftalis says he knows of no SEC or law-enforcement probe of his client--and floor sources concur.
All this raises yet another discomfiting question. If the Amex is not demonstrating sufficient will to police itself vigorously, are other regulators, or law enforcement, taking up the slack?
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