Biotech Pirate Sacane Pleads to Stock Fraud

Updated from 3:25 p.m. EST

Scott Sacane, the hedge fund manager who once claimed to have "inadvertently" become the biggest stockholder in two small healthcare companies, pleaded guilty Wednesday in a Connecticut federal court to securities fraud.

The guilty plea comes more than two years after Sacane's bizarre trading activity shined an unwelcome spotlight on his Durus Capital Management hedge fund.

Sacane, 39, pleaded guilty to one count of violating the federal Investment Advisors Act, an offense that could get him five years in a federal prison and a $250,000 fine. The former manager entered his plea before U.S. District Judge Alan Nevas.

Kevin O'Connor, the U.S. attorney for Connecticut, said in a statement that Sacane's "manipulation of the stock market injured both investors and the companies involved."

Sacane's attorney, Matthew Dontzin, could not be reached for comment.

Sacane's plea comes two months after Douglas Schmidt, Durus' former chief operating officer, pleaded guilty to a lesser charge of aiding and abetting the filing of a false regulatory statement.

Sacane's $500 million hedge fund empire began to unravel in July 2003 when he belatedly disclosed that Durus had obtained a 77% ownership stake in Aksys(AKSY - Cramer's Take - Stockpickr), a dialysis machine manufacturer, and a 33% stake in Esperion, a drug manufacturer. He also revealed significant equity stakes in several other small bio-techs.

The disclosures stunned the biotech world. Until then, Durus had been mum to regulators on its big purchases, all of which occurred in thinly traded stocks. In a series of subsequent regulatory filings during the summer of 2003, Sacane offered flimsy-sounding explanations for how he came to own the positions.

Sacane claimed his fund "inadvertently" acquired the shares, and decline to explain further. He also never explained how or why Durus continued to keep buying shares even after cutting agreements with Aksys and Esperion to halt the purchases.

The strange tale led some to wonder if Sacane had fallen asleep with his finger on the "buy" key. But many saw a more sinister strategy at work, attributing it to either outright stock manipulation or gross incompetence.