Hedge funds destroyed a company trying to cure cancer – chapter  3

Hedge funds destroyed a company trying to cure cancer – chapter 3

This is Chapter 3 of a 15 chapter series. The entire series is listed here

The first of the seven “colorful” hedge funds that held Dendreon put options (right when Provenge
appeared on the fast track to FDA approval) was Bernard L. Madoff Investment Securities, managed by
the Mafia-connected criminal who orchestrated a $50 billion Ponzi scheme while helping the SEC write a
naked short selling loophole that came to be known as the “Madoff Exemption.”
According to SEC filings, Madoff owned put options on 180,000 shares of Dendreon as of March 31,
2007, which was two days after the FDA’s advisory panel voted in Dendreon’s favor. That is fewer than
the numbers of put options bought by the other six hedge fund managers, but again, the SEC does not
require hedge funds to disclose their short selling, so we do not know whether Madoff had a larger short
position in Dendreon, along with these puts.
In any case, Madoff’s bet against Dendreon was significant. Given the positive data Dendreon had
released and the subsequent vote of the FDA advisory panel, the trading position was not only
counterintuitive, it was also (given some strange events which occurred shortly thereafter), prescient to a
degree one could only describe as “improbable.”
It has been widely reported in the media that Madoff’s criminal activity was confined to his fund
management business, and that this business did not execute any real trades — that Madoff merely
pocketed the money of his investors, all of whom were “victims.” According to the media reports, Madoff’s
market making operation was legit.
These claims may well be false. Again, the fact that Madoff was one of only ten people on the planet who
owned large numbers of put options in Dendreon suggests a certain degree of foresight (especially when
one understands those subsequent strange occurrences, which we will be getting to in due course). The
trade was so counterintuitive, and timed so precisely to coincide with Dendreon’s triumphant news (and
the brutal naked short selling attack that accompanied it), that the claim that Madoff was merely pocketing
investors’ money and falsely reporting random trades seems unlikely, given how remarkable this one
trade turned out to be.
The only other plausible possibility is that Madoff had information to make a bet against Dendreon at a
time when there was every reason to be optimistic for the company. And if Madoff thought about making
this long shot bet against Dendreon enough to report it in his SEC filings, it is likely that he did, in fact,
place the bet. That is, he probably purchased those put options. If so, the theory that his Ponzi fund did
not execute any trades is false.
A Deep Capture source who has seen some of Madoff’s records says that Madoff’s fund management
business was, in fact, executing a great number of trades. According to the source, the fund would place

buy orders, and these orders would be filled by Madoff’s market making operation, which would sell stock
to the fund without first borrowing or purchasing it.
In other words, it is probably correct to say that Madoff stole a lot of his investors’ money, but he seems to
have used at least some of that money to generate phantom stock. Why would he do this? There is one
obvious explanation: to drive down prices, adding to his short selling profits, and contributing to the profits
of his short selling friends.
It is reasonable to speculate that Madoff’s market making operation derived business from executing
manipulative naked short sales for unscrupulous hedge funds. After all, remember, the SEC’s so-called
“Madoff Exemption” allowed market makers, such as Madoff, to engage in naked short selling. Madoff
had a reason for helping write this SEC loophole that bears his name. Perhaps he knew that the loophole
would allow him to help high-paying hedge funds create married puts – the phantom stock “bullets” that
market makers and hedge funds have used to obliterate stocks.
Consider also that Madoff’s prosecutors note in their case that Madoff funneled at least $250 million from
his investment fund to his market making division. I can think of only three reasons for his doing so:

  1. the money was used to buy securities — trades that weren’t executed, according to the press; or
    phantom stock, according to our source;
  2. the money came from hedge funds who, far from being victims, were paying off the market maker
    for helping them generate phantom stock; or
  3. the money was used to buy stock that Madoff used to cover some of his open naked short
    The authorities have been slow to provide details of Madoff’s fraud, but there is other evidence to
    consider. For example, Madoff’s secretary recently wrote in Vanity Fair magazine that Madoff’s stock loan
    operations (the division of his brokerage responsible for locating and borrowing shares to be sold short –
    or, more likely, responsible for not really locating or borrowing those shares) — was segregated in an area
    that Madoff called “the cage” – on the 17th floor of the Lipstick building.
    Stock loan operations are integral parts of brokerage businesses. One would normally expect Madoff’s
    stock loan operations to be housed in his brokerage. But Madoff’s brokerage business was on the 14th
    floor of the Lipstick building, separate from “the cage” on the 17th floor, which was home to Madoff’s
    “Ponzi” fund management business.
    Multiple reports (including a recent story in Fortune magazine) state that Madoff was maniacally secretive
    about the activities on the 17th floor, and kept the employees who worked there strictly isolated from
    visitors and other employees. This is because the 17th floor was the heart of Madoff’s criminal enterprise.
    The secretary’s information seems to indicate that this criminal enterprise involved both the fund
    management business and the stock loan cage (i.e. the division that helped manufacture phantom stock
    by not actually borrowing shares that were sold short).
    As for Madoff’s “victims,” it is clear that some of his investors and “feeders” were to a significant extent
    participants in his fraud. As Madoff’s chief lieutenant, Frank DiPascali, seems prepared to testify, Madoff
    conspired with a few “special” clients to alter the returns that they received on their “investments.”
    However much the “special” clients wanted to earn in a given month, Madoff would give it to them.
    DiPascali identified one particularly “special” client: Jeffry Picower, who seems to have netted around $5
    billion from the Madoff scam. Picower gained some renown in the 1980s. At the time, nobody had any
    idea who he was or where he got his money. He was a big mystery.

Then, one day, it was learned that he was the single largest limited partner in the arbitrage fund run by
Ivan Boesky, who was later jailed for being a principal co-conspirator in the stock manipulation frauds of a
famous criminal.
That famous criminal is now a “prominent philanthropist,” too. And his name is Michael Milken.

By most accounts, Madoff had just a few key “feeders”– hedge funds and individuals who raised money
to “feed” his $50 billion Ponzi scheme. For some time, the press suggested that these “feeders” were
“victims” of Madoff’s fraud, but in an increasing number of cases, authorities are suggesting otherwise.
A lawsuit filed by the State of Massachusetts against “feeder” fund Fairfield Greenwich makes it clear (by
supplying copious transcripts of phone conversations, etc.) that Fairfield had more than an inkling of what
was going on in Madoff’s shop. And on June 22, 2009, the Securities and Exchange Commission charged
several Madoff “feeders” with securities fraud related to their participation in the Madoff Ponzi. One of
those charged was Robert Jaffe, who was also a partner with Madoff in a brokerage called Cohmad
Securities. Earlier in his career, Jaffe was found to be running money for the Anguilo brothers, the Boston
dons of the Genovese Mafia family.
Madoff’s other key “feeders” have not yet been charged with wrong-doing. Perhaps, they will never be
charged. But it is interesting to note that a number of them were close associates of a famous criminal
and “prominent philanthropist” named Michael Milken.
One of the most important Madoff “feeders” was Rene Thierry Magon de La Villehuchet, a French
aristocrat who worked on deals in the 1980s with Drexel Burnham Lambert, which was the headquarters
of Milken’s junk bond and stock manipulation empire. During this time, Monsieur Rene Thierry Magon de
La Villehuchet came to know not just Milken, but also Leon Black, who was the head of Drexel’s mergers
and acquisitions department.
Most every account of those days suggests that Black was Milken’s closest ally at Drexel. Black argued
vehemently that Drexel should not cooperate with Milken’s prosecutors and he defended Milken to the
end. Today, there are few people closer to Milken than Leon Black.
After Milken’s crimes bankrupted Drexel, Black joined forces with Monsieur Rene Thierry Magon de La
Villehuchet to launch an investment fund called Apollo Management. As you will recall, a certain Apollo
Medical was one of the ten hedge funds that owned large numbers of put options in Dendreon. I have not
yet been able to determine whether Apollo Management is affiliated with Apollo Medical. Neither Black
nor Apollo Medical manager Brandon Fradd returned my phone calls seeking comment.
But we do know that Monsieur Rene Thierry Magon de La Villehuchet provided the initial capital to Leon
Black’s Apollo Management. And in its early years, the French aristocrat was Apollo’s biggest fundraiser.
Indeed, it is correct to say that in addition to being one of Madoff’s most important “feeders,” Monsieur
Rene Thierry Magon de La Villehuchet was Milken crony Leon Black’s single most important business
Unfortunately, in December 2008, days after the Mafia-connected Madoff turned himself in to the
authorities, Monsieur Rene Thierry Magon de La Villehuchet was found in his Madison Avenue office –
They said it was a suicide.

Another of Madoff’s most important “feeders” was J. Ezra Merkin, who managed the Ariel Fund, which
seems to have been designed specifically to raise money for Madoff’s fraudulent investment business. In
this regard, the New York attorney general has described “Merkin’s deceit, recklessness, and breaches of
fiduciary duty…”
While Merkin was “deceitfully” feeding the Madoff Ponzi, he was also a co-owner, along with Steve
Feinberg, of Cerberus Capital Management, a fund named after the mythological three-headed dog that
guards the gates of Hell.
Previously, Feinberg was a top trader for Michael Milken at Drexel Burnham Lambert. After Drexel, Mr.
Feinberg moved (on Milken’s recommendation) to a brokerage called Gruntal & Company.
Gruntal owed its existence to the generous junk bond finance that its parent company, the Home Group,
received from Michael Milken. Its options department was founded by Carl Icahn, who later became a
“prominent” billionaire owing to the junk bond finance that he received from Michael Milken.
When Icahn left Gruntal, he was replaced by a Milken crony named Ron Aizer, who proceeded, on the
recommendation of Milken, to hire two traders.
The first trader hired by Aizer was, according to a reliable source, investigated by the SEC for trading on
inside information that he received from Milken’s operation at Drexel Burnham Lambert. This trader is
now a “prominent” billionaire and the manager of a well-known hedge fund. The second trader hired by
Aizer is now also a “prominent” hedge fund manager, though he is not quite a billionaire. Both of these
traders play important roles in the story of Dendreon. Carl Icahn, the founder of Gruntal’s options
department, has a cameo role, too.
So I will return to all three – the two former Gruntal traders and Icahn – in upcoming chapters.

I know people who used to work at Gruntal. They are honest people who have gone beyond the call of
duty to contribute to Deep Capture’s reporting. They also confirm that Gruntal’s New York operation (as
opposed to some of its offices in other states) was among the more disreputable brokerages in America.
As Fortune magazine once put it, Gruntal was firmly situated on the “shabby side of the Street.”
Gruntal’s senior vice president, Maurice B. Gross, was found to be running money for Thomas Gambino,
a capo in the Gambino Mafia family. Another New York Gruntal trader, Samuel Israel III, later launched
his own hedge fund, and in 2008, it emerged that this hedge fund was the then-largest Ponzi scheme in
history. Israel was charged on multiple counts of fraud, and briefly faked his own suicide before handing
himself over to the authorities.
Soon after this, the Mafia-connected Bernard Madoff admitted to running a $50 billion Ponzi scheme, so
Israel’s Ponzi scheme was no longer the largest in history. It was the second largest. The third largest
Ponzi scheme, remember, was orchestrated by Reed Slatkin, the criminal who was a limited partner in
Apollo Medical, which was one of those ten hedge funds that owned large numbers of put options in
It has been reported that Israel ran his Ponzi scheme with help from “feeders” who had ties to the
Genovese Mafia family. So it is perhaps noteworthy that after he left Gruntal, and before he started his
own criminal operation, Israel worked for JGM Management, a hedge fund owned by “prominent” investor
Michael Steinhardt. As Steinhardt belatedly admitted a few years ago, his father, Sol “Red” Steinhardt,
once worked for the Genovese Mafia family. Steinhardt Sr. spent a number of years in Sing-Sing prison
after a New York state prosecutor pegged him as the “biggest Mafia fence in America.”

The key limited partners in Steinhardt Jr.’s first hedge fund, Steinhardt Partners, were the Genovese
Mafia family, Ivan Boesky, Marc Rich, and Marty Peretz.
Ivan Boesky, was, of course, the famous co-conspirator in many of Michael Milken’s stock manipulation
schemes. As noted, Boesky’s biggest investor and limited partner was Jeffry Picower, the mysterious
“special” client of the Mafia-connected Bernard Madoff — who authored one of the SEC’s naked short
selling loopholes, orchestrated the largest Ponzi scheme in history, and held 180,000 put options in
Steinhardt’s other key limited partner, Marc Rich, was indicted in 1983 for tax evasion and trading with
Iran and Libya. He fled to Switzerland, where he has lived ever since as a fugitive from U.S. law. Rich
later received a pardon from Bill Clinton for some of his crimes, but he remains in Switzerland, from where
he now runs a securities and commodities trading empire.
According to the Vanity Fair article written by Bernard Madoff’s secretary, Rich was one of the last people
with whom Madoff met before handing himself over to the FBI. Given that Rich avoids travel to the U.S.
for fear of certain arrest (for crimes not covered by Bill Clinton’s generous pardon), it would appear that
Madoff, in the days immediately preceding turning himself over to U.S. law enforcement, made time to
visit Rich in Europe. Apparently, before going away for what he likely knew would be the rest of his life,
Bernie Madoff had something important to discuss with Rich.
Steinhardt’s third key limited partner, Marty Peretz, was later a co-founder, along with CNBC’s Jim
Cramer and a certain hedge fund (which I will soon name), of TheStreet.com, a financial news website.
Cramer, a former hedge fund manager, once planned to run his business out of the offices of Milken coconspirator Ivan Boesky. When Boesky was indicted, Cramer instead ran his hedge fund out of the offices
of Michael Steinhardt.
A lot of names have been thrown at the reader. But stick with me, for I think you will come to see that
these relationships matter. And I think you will come to agree that most of these people –Bernard Madoff,
those two Gruntal traders (whom I will soon name), Jim Cramer, Michael Steinhardt, Carl Icahn, Marty
Peretz, the hedge fund manager who co-founded TheStreet.com, Michael Milken, and some folks who
are tied to the Mafia – deserve prominent mention in the story of Dendreon.

So, again, as far as we can ascertain from public records, there were ten hedge fund managers on the
planet who were betting heavily against Dendreon as of March 31, 2007, shortly after the FDA advisory
panel put Provenge on the fast track to approval, and during the time that Dendreon was under an
unprecedented illegal naked short selling attack, and right before Dendreon was derailed by strange
occurrences. Seven of those ten hedge fund managers are quite “colorful,” all are part of the same
network, and one of them was Bernard Madoff.
The second of the seven “colorful” hedge fund managers was…as a prelude to introducing the second
hedge fund manager, it helps to understand some things about a man named Felix Sater, who is alleged
(by a former business partner and other reports) to be affiliated with the world’s most murderous
organized crime outfit – the Russian Mafia.
In the early 1990s, Sater (who has since changed the spelling of his name to Satter) stabbed a fellow
broker in the face with the broken stem of a wine glass, an act for which he was charged with aggravated
assault. Soon after, he founded a brokerage called White Rock Partners, with the help of a man named
Salvatore Lauria.

Lauria had previously worked as a trader for Gruntal & Company. This was the brokerage that owed its
existence to generous junk bond financing from Michael Milken, and it was the brokerage whose options
department was founded by Milken crony Carl Icahn, later replaced by Milken crony Ron Aizer, who
quickly hired two Milken cronies, both of whom, we will see, figure prominently in the story of Dendreon.
In the mid-1990s, several of Gruntal’s top managers were accused of embezzling millions of dollars. The
managers were indicted and Gruntal agreed to pay $6.5 million in fines – one of the stiffest penalties that
had ever been levied by the Securities and Exchange Commission. Around this time, many of Gruntal’s
traders moved to White Rock Partners, the firm run by Salvatore Lauria and Felix Sater. According to
Lauria, former Gruntal employees accounted for much of White Rock’s staff, and became White Rock’s
top-earning traders.
This information can be found in a book called “The Scorpion and the Frog,” which was co-authored by
Salvatore Lauria himself. Also in this book, Lauria states that Sater – to whom Lauria gives a pseudonym,
“Lex Tersa” – is the son of a high level boss in the Russian Mafia. The name of Sater’s father is Mikhail
Lauria also writes about the time when he believed that Felix Sater might murder a man named Alain
Chalem, who was the boss of Toluca Pacific, a Mafia-controlled brokerage that was then one of the most
notorious naked short selling outfits on the Street. Toluca and White Rock had previously worked
together, but Sater was angry that Chalem had begun to sell short a stock that Sater was trying to pump.
Fortunately, says Lauria, Sater didn’t end up killing Chalem.
But not long after, several men arrived at Chalem’s New Jersey mansion. The men told Chalem to kneel
down on the floor. Then the men fired several rounds of bullets – one bullet into Chalem’s chest, one
bullet into Chalem’s forehead, one into Chalem’s face, and a number of bullets into each of Chalem’s
ears. According to a man who was with Chalem just hours before his death, the murder was the work of
the Russian Mafia.
And it involved a dispute over naked short selling.

In the late 1990s, the FBI launched Operation Uptick, which resulted in the arrest of more than 120 Wall
Street stock manipulators linked to organized crime – the biggest Mafia bust in FBI history. That effort led
to other operations and many more cases that collectively came to be known at the FBI as the “Mob on
Wall Street” campaign. In one such case, prosecutors charged that Felix Sater’s White Rock Partners
was tied to the Russian Mafia and the Italian Mafia and had engaged in multiple stock manipulation
According to the prosecution’s case (in which Sater was named as an “unindicted co-conspirator”), the
Mafia thugs who worked with White Rock included Frank Coppa, who was a capo in the Bonanno Mafia
family; Edward Garafola, a soldier in the Gambino Mafia family; and Ernest Montevecchi, a soldier for the
Genovese Mafia family. The prosecutors described White Rock as employing threats of physical violence
and other forms of thuggery.
Nowadays, Sater is the behind-the-scenes owner of the Bayrock Group, a real estate development
company. Among his 11 partners in this venture are a number of investment fund managers who are tied
to Michael Milken. Most notable of Sater’s business partners is Apollo Real Estate Advisors, which is run
by Leon Black.

As you will recall, Black was Milken’s closest ally at Drexel Burnham Lambert, and started Apollo
Management with considerable help from Monsieur Rene Thierry Magon de La Villehuchet, who was
(until he killed himself in December 2008) one of the most important “feeders” to the Ponzi scheme run by
the Mafia-connected Bernard Madoff (who authored the SEC’s naked short selling loophole and owned
180,000 put options in Dendreon).
In 2005, Deep Capture reporter Patrick Byrne began a crusade against the crime of naked short selling. A
few months later, while working as an editor for the Columbia Journalism Review, I began work on a story
about the naked short selling scandal, and started asking a lot of questions about the ties that bind
various hedge funds to Michael Milken and his famous co-conspirator, Ivan Boesky.
In the fall of 2006, I received several threats and was once ambushed by three men, punched out,
deposited on my doorstep, and told to stay away from Patrick Byrne. Soon after, Deep Capture reporter
Patrick Byrne met with an off-shore businessman who had once worked in the world of Mafia-controlled
brokerages, but had since reformed himself and begun to help with our investigation.
This businessman told Patrick that he had received a message. And the message was that the Russian
Mafia was going to murder Patrick, and possibly hurt those close to him, if Patrick did not end his crusade
against naked short selling.
According to the off-shore businessman, this threat was sent by Felix Sater – alleged son of a top
Russian Mob boss; former co-owner of the Mafia-infested White Rock Partners; and business partner of
Michael Milken’s closest crony, Leon Black.

In their case against Felix Sater’s White Rock Partners, prosecutors noted that the firm not only employed
threats and had ties to the Mafia, but also manipulated stocks in close cooperation with other Mafiaaffiliated brokerages. According to the prosecutors, White Rock was tied directly to two specific Mafiaaffiliated brokerages – A.R. Baron and D.H. Blair.
Again, I apologize for throwing so many names at the reader, but it is worth remembering this name: D.H.
D.H. Blair was perhaps the dirtiest operator on Wall Street. In various indictments and investigations, the
SEC and the U.S. Attorney’s Office in Manhattan determined that D.H. Blair was at the center of a
network of Mafia-affiliated brokerages that included not only Felix Sater’s White Rock Partners, but also
Toluca Pacific (the brokerage run by the naked short seller who had bullets shot into both of his ears) and
notorious Mafia outfits such as A.S. Goldmen, J.W. Barclay, F.N. Wolf, Stratton Oakmont, Parliament Hill
Capital, J.T. Moran, and R.H. Damon.
The founder of D.H. Blair was a man named J. Morton Davis. In his heyday, Davis was known as a
“prominent” investor and the “king of penny stocks.” He has yet to be convicted of a crime. But given the
subsequent revelations about his firm, it is not surprising that some people now call him the “king of stock
fraud.” D.H. Blair was eventually indicted on 173 counts of securities fraud.
Until 1995, the president of D.H. Blair was a man named Richard A. Maio. Prior to joining the Mafiaaffiliated D.H. Blair, Maio was a top employee of Michael Milken, the famous criminal and future
“philanthropist.” Maio’s deputy at D.H. Blair, Eric Siber, was also a former employee of Milken. At various
times both Maio and Siber had been national sales managers for Milken’s operation at Drexel Burnham

In 1998, as the FBI was closing in, D.H. Blair went out of business. In 2000, not only was the firm itself
indicted on 173 counts, but some of its top executives pled guilty to additional counts of securities fraud.
These included two D.H. Blair vice chairmen — Alan Stahler and Kalman Renov — both of whom were
sons-in-law of Davis, the founder.
But by then, the Milken boys had scooted. Another top executive of D.H. Blair also avoided prosecution.
His name was Lindsay Rosenwald.
Rosenwald was the third son-in-law of D.H. Blair’s founder, J. Morton Davis – the so-called “king of stock
Rosenwald was also the third vice chairman and director of finance of D.H. Blair – that is, the third vice
chairman of the dirtiest Mafia-affiliated brokerage on Wall Street.
And in March 2007, Rosenwald was the second of those seven “colorful” fund managers who were
positioned to profit from the demise of Dendreon, a little company with a promising treatment for prostate

Lindsay Rosenwald may be the son-in-law of “the king of stock fraud.” And he was once the vice
chairman of D.H. Blair, a firm affiliated with the Mafia – a firm that was run by two former top lieutenants
of Michael Milken before it found itself at the center of one of the biggest Mafia investigations in the
history of the FBI and on the business end of a 173-count federal indictment.
But never mind — Mr. Rosenwald is now a “prominent investor.” In fact, he is not just a “prominent
investor”— he is one of America’s biggest biotech investors, if not the biggest biotech investor.
D.H. Blair was known for investing in biotech companies, pumping their stocks, and then short selling
them out of existence. Many of those companies were frauds that were nowhere close to producing any
Rosenwald is more sophisticated. He invests in companies that have real scientists experimenting with
real drugs. But in an overwhelming number of cases, these companies prove to have nothing to bring to
market. The companies churn out lots of press releases heralding medical breakthroughs, and their stock
prices soar. But ultimately they announce that, in fact, their experiments have failed. By the time the bad
news hits, Rosenwald will typically have sold all of his stock.
While Rosenwald promotes medical companies that are nowhere near delivering real medicines, hedge
funds affiliated with Rosenwald sometimes bet heavily against competing companies that do have
medicines. The hope seems to be that the demise of competing companies with promising treatments will
increase the market value of Rosenwald’s not-so-promising companies.
That may partly explain Dendreon’s tribulations.
With the exception of big pharma, there are only a few biotech firms that have received significant
publicity for developing treatments for prostate cancer. One of these companies, Cougar Biotechnology,
was, until last month, controlled by this Lindsay Rosenwald, who aside from running D.H. Blair in cahoots
with people tied to the Mafia and Milken’s former national sales managers, is also a close friend of Milken
himself. While Rosenwald was in control, Cougar Biotechnology’s scientific advisory board included four
individuals affiliated with Milken’s Prostate Cancer Foundation – Dr. Eric Small, Dr. Michael Carducci, Dr.
Philip Kantoff, and Dr. Howard Scher.

Cougar’s prostate cancer treatment was and is in the early stages of development. It is nowhere close to
receiving FDA approval. I believe that the scientists and doctors whom Cougar hired to conduct trials into
its treatment are earnest about their work. But judging from Rosenwald’s record, it is possible that
Cougar’s business model was not to bring a treatment to market – but rather to exaggerate the
importance of data obtained in trials, pump the stock, then sell before the trials proved that the drug did
not work.
This plan would benefit from forming a scientific advisory board comprised, with help from Milken’s
“philanthropy,” of illustrious medical scientists who might not understand how the stock market game is
In any case, Cougar has been promoted (by Milken’s Prostate Cancer Foundation, and Cougar) as
having a treatment that is a preferred alternative to Dendreon’s. Any Dendreon achievement would
negatively affect Cougar’s stock price. Which might explain why a Rosenwald-affiliated hedge fund
mauled Dendreon in the days before and after the FDA’s advisory panel voted that Dendreon’s promising
treatment should be administered to patients.
As of the end of March, 2007, a hedge fund called Perceptive Advisors held more than 600,000 put
options in Dendreon. Perceptive Advisors is run by a man named Joseph Edelman. As of 2008, Edelman
was still identifying himself (when donating to political campaigns, for example) as an employee of
Paramount Capital, which was founded by Rosenwald. To summarize: Lindsay Rosenwald founded
Paramount Capital, which had an employee named Joseph Edelman, who was simultaneously managing
Perceptive Advisors, so we can reasonably surmise that Perceptive Advisors is an adjunct of the
Rosenwald biotech trading empire.
SEC filings show that at the end of March, 2007, Perceptive Advisors not only held puts, but also held call
options on a whopping 6.2 million shares of Dendreon. Call options are usually a bet that a stock will
increase in value. But don’t let this fool you.
According to brokers familiar with his strategy, Edelman worked like this: He bought massive numbers of
call options at rock-bottom strike prices. When Dendreon’s stock began to soar in value, Edelman
exercised the calls, at which point his broker had to sell him an equally massive number of shares at the
rock bottom price. These Edelman would quickly dump, flooding the market with massive selling volume
and putting downward pressure on the stock. Meanwhile, according to the brokers, Edelman sold short
massive amounts of Dendreon’s stock, profiting from all the selling volume.
I called Edelman and asked him if he was short selling Dendreon while flooding the market with stock
from his call options. He did not deny that he was short selling the company, but he hung up on me
before I could ask any more questions.
In any case, the strategy I describe above is technically legal. It’s legal so long as Edelman was not
colluding with other hedge fund managers, all of whom happened to be generating massive selling
volume at precisely the same time. And it’s legal as long as he was not engaged in naked short selling,
or, equivalently, conspiring with a market maker to create married puts to synthesize those phantom stock
“bullets” that unscrupulous hedge funds spray into the market to drive down stock prices.
As to whether Edelman was in fact either directly naked short selling, or indirectly generating phantom
stock by colluding with his option market maker, the brokers are staying mum. The SEC is unlikely to say
much either.
Remember, as far as the SEC is concerned, illegal naked short selling is a big secret – a “proprietary
trading strategy.”

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