Betting On A Fall

<b>Lesley Stahl</b> On One Company's Lawsuit Against A Hedge Fund

And Darryl Smith says the hedge fund SAC knew what they wanted the report to say.

"They practically wrote the reports themselves," he says.

"I expected our guys to start talking about what they saw in Biovail. But, no. It was just a one-way download from SAC talking about all the dirt that they dug up and they wanted to get out there. And, as I said, just the analyst furiously writing down notes," says Smith.

"So it's like taking dictation?" Stahl asked.

"Practically, yes," Smith replied.

"From the client?" Stahl asked.

"Yes," Smith answered.

"These are all negative things?" Stahl asked.

"Right, absolutely," Smith said.

Asked if what the analyst wrote down got into the report, Smith says, "No question. Because at that point, a day or two later, the report was compiled. They're, they give me the report. I review it and I see, yeah, that's everything that was talked about in the conference call."

"That's everything SAC wanted in the report?" Stahl asked.

"Right," Smith replied.

The report was replete with comments like this: "history of unusual … aggressive accounting;" "earnings overstated;" "severely negative free-cash flow."

"They were basically a shop for hire. If you pay them a certain amount of money they'll form whatever opinion you want on a stock," says Mark Rosenblum, who was another salesman with the stock analysis company Camelback.

Asked if he had ever heard of anything like that before, Rosenblum said, "No, not in my 14 years of work experience involved in the equity markets."

Camelback not only sold itself as a firm that disseminated impartial, unbiased reports, it also said that the people who wrote those reports were experienced, with sterling credentials. Two other former salesmen, Robert Ballash and Demitri Anifantis, say that was far from the truth.

"Most of 'em straight out of college. No Wall Street experience. Did not understand sectors or industries that these specific companies were in," says Anifantis.

"I'd call 'em monkeys on a typewriter, 'cause they'd just take the information and just process it through and not really analyze it," says Smith.

The lawsuit charges that in addition to influencing the content of the report, the hedge fund SAC weighed in on when it would be published.

"SAC said 'Can you just wait a few more days? We want to be able to get into this,'" says Smith.

"So they chose the timing of the release on top of the wording of the release?" Stahl asked.

"Right. Exactly," says Smith.

"What does it mean that SAC was asking you to hold the report?" Stahl asked.

"What it means is they need some time. As a big hedge fund you need several days to get your position in," Smith replied.

Smith says SAC needed more time to make its bet even larger that Biovail's stock would go down.

"So they were just waiting to get the optimum time to do this selling-short transaction?" Stahl asked.

"Right," Smith answered. "Because these are big, big hedge funds. And they have to make some big trades. And they can't do them all in one trade without the market seeing that. So, they have to move into the stocks over a period of a few days."