Is It Possible to Drug a Stock?

(CN) - Galena Biopharma paid a stock promoter $50,000 to try to goose its share price while insiders dumped $14.6 million of their own shares, a shareholder claims in a derivative complaint.

Eleanor Werbowsky sued six members of the board, including the chairman and the CEO, in Portland, Ore., Federal Court. She sued derivatively on behalf of the company.

Galena for several years has been developing a vaccine called NeuVax, which it hoped would train T-cells in patients' bodies to terminate breast cancer cells.

But after an inconclusive initial trial a number of publications, including investment websites, questioned the viability of the drug and the impact its apparent failure would have on the company.

In response, Werbowsky claims, "In July 2013, Galena paid the PR firm, The DreamTeam Group ... a known stock-promotions firm with questionable marking [sic] tactics, $50,000 for 240 days of 'advertising, branding, marketing, investor relations and social media services,' according to evidence obtained by TheStreet."

TheStreet.com is a financial news website founded, in part, by Jim Cramer, host of CNBC's "Mad Money" television show.

The website's report noted that among other things, DreamTeam operates "multiple investor websites that entice investors with stock picks that can 'trade for at least a 100 percent profit,'" Werbowsky says.

These websites operate under names such as "Home Run Stocks," "Touchdown Stocks," "Quality Stocks" and "Tout Sheet," according to the complaint.

It adds: "Galena was promoted on many of the DreamTeam stock-touting websites to create 'market buzz about the company to a new group of investors,' according to a DreamTeam document, 'Galena Biopharma Case Study: Investor Awareness Campaign' obtained by TheStreet. Moreover, as part of the campaign, the DreamTeam published multiple supposedly independent articles on sites like Seeking Alpha under a list of pseudonyms, recommending an investment in Galena. ...

"As part of the promotional campaign, the DreamTeam hired writers to say positive things about Galena on blogs, investor websites, and social media groups but failed to disclose their financial relationship to Galena and/or the DreamTeam."

In all, 26 articles about Galena appeared on the website during the time DreamTeam was working for the company, Werbowsky claims.

Thanks to this campaign, Werbowsky says, Galena's stock price rose from about $2 per share to more than $7 per share between the summer of 2013 and January 2014.

During the same period, she says, "Based on their knowledge of the foregoing material nonpublic information regarding the company, the individual defendants, in contravention of their fiduciary duties, sold 2,709,265 of their personally held shares of Galena stock, garnering over $14.6 million in gross proceeds for their own personal benefit."

Ultimately, TheStreet got wise to the scheme and the alleged insider trades, and published an article on the situation, Werbowsky says.

"Telling, since the public reveal that Galena hired the DreamTeam for a promotional campaign and Galena insiders sold stock on that material nonpublic information, documents highlighting the DreamTeam's investor awareness campaign for Galena have been expunged from the DreamTeam's enterprise of web sites, blogs and Twitter feeds and the PR firm has refused to comment on the situation," Werbowsky claims.

Defendant CEO and President Mark J. Ahn tried to minimize the damage of the PR campaign's disclosure, issuing a press release and giving a smattering of interviews, Werbowsky says, but she says the interviews only served to raise more questions.

Werbowsky claims that Ahn has given conflicting explanations for the insider stock sales. In one article, she claims, Ahn said he and other officers could not disclose the activity because they were in the midst of acquiring another company.

In another interview, Ahn allegedly attributed his personal stock sales to a desire to diversify his portfolio for his family.

Werbowsky seeks disgorgement of ill-gotten gains, imposition of a constructive trust and damages for breach of fiduciary duty and unjust enrichment.

She is represented by Christopher Slater with Slater Ross in Portland, and Michael Hynes of Faruqi & Faruqi in Jenkintown, Pa.

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