Updated from 2:59 p.m. EST
Scott Sacane, the hedge fund manager who amassed huge stakes in a handful of biotech companies through supposedly inadvertent trades, may have blundered into a windfall when
agreed to spend $1.3 billion to acquire
With a 30% equity stake in Esperion, the stake owned by Sacane's
Durus Capital Management
is suddenly worth $350 million Monday, based on the $35-a-share purchase price Pfizer is paying in the all-cash deal.
The buyout represents a 54% premium to Esperion's Friday closing price of $22.70. But Durus investors are doing even better than that: Most of the 10.3 million shares they own were bought at a time the stock fluctuated between $9 and $15 a share.
Esperion was recently up $11.78, or 52%, to $34.48.
Of course, the big question is whether the Durus investors will get to keep the money. The
Securities and Exchange Commission
is still investigating how Sacane and his Connecticut-based hedge fund came to acquire all those Esperion shares without filing the proper disclosure statements. Esperion said no special discussions were held with Sacane or Durus about the Pfizer buyout.
The SEC launched its investigation in August, soon after Sacane belatedly disclosed that he'd acquired roughly a third of Esperion's stock and 77% of another small health-care company,
Sacane blamed the big stock purchases on "inadvertent buying" and said he hadn't meant to circumvent any stock ownership disclosure rules. But others saw something more sinister -- an attempt to quietly manipulate the price of two thinly traded stocks, both of which more than doubled in price earlier this year. (Aksys shares were up 72 cents, or 8.7%, to $8.99 Monday as investors evidently concluded Sacane's other favorite pick might be inadvertently prescient.)
Even Sacane's own investors turned on him. In September, Durus investors ousted Sacane's handpicked board of directors and installed their own to directors to keep the beleaguered hedge fund manager on a short leash. In effect, Sacane, whose management team has dwindled to less than a handful of people, was left with little more to do than answer the phones and sign the checks for the $500 million fund.
SEC attorneys in Boston who are conducting the investigation declined to comment on the status of the inquiry. But an SEC official in Washington said the deal to acquire Esperion doesn't end its investigation. The official, without commenting directly on the Sacane case, said the SEC has the authority to force an investor to disgorge an illegally obtained windfall.
Indeed, some of Sacane's many critics on Wall Street said it's only fair that the Durus investors are forced to give back some of their profits.
"My own personal view is they should not be able to keep these profits,'' said Frank Mazzola, a senior broker at Oppenheimer & Co. "If they allow Durus and Scott Sacane to keep these profits, it's a farce."
This summer, Mazzola had a number of customers who shorted Esperion shares, after the trading scandal broke. He said most of those customers closed out their short positions after the stock fell.
Overall, however, short sellers have taken a beating this year on Esperion. Sacane's unusual trading activities were quickly forgotten when Esperion announced this fall that its experimental drug to increase so-called "good cholesterol" in people had met with some positive results in early scientific tests.
Indeed, it was the results from those early tests that prompted Pfizer, which markets the best-selling bad-cholesterol-reduction drug Lipitor, to make a bid for Esperion.
The deal does resolve a big problem for Esperion's management: how to deal with one stockholder owning so many shares. With both Esperion and Aksys trading only a few hundred thousands shares each day, the management at each company feared its respective stocks would be swamped if Durus unloaded all its shares at once.
In the wake of the trading scandal, both Esperion and Aksys reached agreements with Sacane that prevented either him or the Durus fund from selling any shares for several months. Those lockup agreements are set to expire soon. The deal with Pfizer is a simple way for Esperion to dispense with the potential selling threat from Durus.
It's not clear what impact the Pfizer acquisition will have on a lawsuit Esperion has filed against Sacane and Durus, which seeks to disgorge any short-term trading profits the hedge fund made in its stocks. Esperion, along with Aksys and a third company,
, are suing Sacane and Durus under a seldom-invoked securities law, Section 16-b of the Securities Exchange Act of 1934, which prohibits big holders of a stock from profiting on short-term trades.
previously estimated that in the month of July -- a time when Durus was both buying and selling large blocks of shares in Esperion -- the hedge fund generated proceeds of $25 million.
Officials at Esperion did not return telephone calls, and a Pfizer spokesman referred all calls on the Durus situation to Esperion. Sacane and his attorney did not return phone calls. Harry Davis, the attorney who represents the Durus investors, declined to comment.
But in the end, a hedge fund manager who knows Sacane and has been critical of his trading activities, said the Durus investors will probably come out ahead.
"His investors are probably both sad and happy," said the hedge fund manager, who did not want to be identified and at one time was short Esperion shares. "They should pay whatever penalties are required under the statute. But it will pale in comparison to the money they will make.''