It’s well known to experienced observers that much of the research published by Wall Street firms is corrupted by their desire to do banking business for the companies their analysts are rating. If a particular firm’s analysts write negative research reports on a company and slap a “Hold” (or, heaven forbid, “Sell”) rating on its stock, then the company is likely retaliate by looking elsewhere the next time it hires an investment bank to, say, lead a debt or equity offering. Thus, it’s little wonder that analysts generally pump stocks and rarely issue sell ratings.

In fairness, after the crackdowns by Eliot Spitzer and again after the Great Recession, I suppose that Wall Street research has become slightly less corrupt than it used to be (or at least analysts are more careful in what they put in emails!). But the conflicts of interest haven’t gone away so investors would be well advised to view analyst reports with a great deal of skepticism, especially in the seedy underbelly of the market where the diciest, most fraudulent and promotional companies are.

Sadly, in many cases, the analysts of reputable firms ignore countless warning flags and promote companies like this for a simple reason: greed. The worst companies are, by definition, almost always losing a lot of money and thus need to regularly issue debt and equity, making them lucrative banking clients.

A case in point is the pumping by the analysts at Jefferies of a stock I’m short, Unilife (NASDAQ:UNIS), which I think is an obvious promotion and likely a total fraud. It’s so egregious that I did something last October that I’ve never done before: I wrote to the analysts, calling them out, and sent a copy to the CEO of Jefferies, Richard Handler.

Three quarters have now elapsed since then (the company just reported earnings a week ago Monday) and everything I predicted has come true, as the company burns through cash at an incredible rate and spirals toward what I believe is inevitable bankruptcy – yet the Jefferies analysts are still pumping the stock, maintaining a Buy rating and continuing to preach the mantra of “continued patience” to investors. (Click here to read their report from last October and here for last week’s update.)

I’m sharing the emails I sent to Jefferies last October plus one on Tuesday because I’m disgusted with this kind of behavior (which is by no means limited to Jefferies) and I think shining a light on it might do some good.

Background on Unilife

Unilife describes itself this way:

Unilife Corporation is a U.S.-based developer and commercial supplier of injectable drug delivery systems. Unilife’s broad portfolio of proprietary technologies includes prefilled syringes with automatic needle retraction, drug reconstitution delivery systems, auto-injectors, wearable injectors, ocular delivery systems and novel systems. Each of these innovative and highly differentiated platforms can be customized to address specific customer, drug and patient requirements. Unilife’s global headquarters and state-of-the-art manufacturing facilities are located in York, PA.

While this sounds great, and there’s a thin veneer of legitimacy in the form of numerous deals with brand-name firms, they never seem to amount to anything, as the company hasn’t had a single dollar of product sales in years, despite endless promises.

In my view, Unilife is a pure promotion and likely a total fraud. I don’t have space here to make the full argument for why I believe this, so here are links to various articles that lay it out quite well:

• Shooting up on hype, They Sydney Morning Herald, 1/17/04.
• Unilife: History Of Missed Deadlines, Aggressive Cash Burn, And Vague Supply Agreements Suggest A 75% Overvaluation, Kerrisdale Capital, 12/4/13.
• Will Unilife Be A Tiny Unmet Needs Developer Or A Manufacturing Powerhouse?, Adam Gefvert, 12/19/13
• Why this hypodermic needle company keeps jabbing investors, StreetSweeper, 2/27/14.
• Behind The Scenes With Proactive, Inovio And Unilife, Richard Pearson, 3/27/14.
• Unilife: CFO Resignation And Usurious Financing Imply Substantial Downside, Kerrisale Capital, 4/21/14.
• Unilife Corp.: Current Law Enforcement Investigation And Fraud Allegations From Insider, The Pump Stopper, 4/22/14.
• Will Unilife Run Out Of Cash Before Year End?, The Pump Stopper, 9/5/14.

Emails to Jefferies Analysts Last October

After Unilife reported yet another quarter of dismal results and endless hype last October, the Jefferies analysts, Raj Denhoy, Anthony Petrone and Imron Zafar, reiterated their “Buy” rating, which led me to send this email to them on October 9th:

Subject line: UNIS a buy — really???

Dear Raj, Anthony and Imron,

I normally don’t waste my time writing to analysts, but your report this morning on Unilife really takes the cake.

Let me get this straight… the company just reported the following:

*$8.4 million in unrestricted cash

*$55.4 million in debt

*Not a single dollar in product sales (that’s right, when costs of goods sold is zero, that means they didn’t sell a single syringe (and it’s not just last quarter – this has been true for the entire trailing 12 months)

*Net debt skyrocketed from $18 million to $47 million in three months

*By your own projections, they will continue to burn $12-15M/quarter for the foreseeable future (I promise it will be a lot higher)

It is blindingly obvious that this company is teetering on bankruptcy and, barring a miracle, the equity will soon be worthless.

Yet you have a BUY rating on the stock, based on a valuation of 4x your revenue estimate (which I promise they won’t hit) three years out?

Look, I get it: to stave off the inevitable a little while longer, the company will have to do a big equity offering, irrespective of price, which will crush the stock – but generate a lot of fees for the bankers – and of course you want to be at that table as long as possible. But a “buy” – really???

I think you’re knowingly participating in a scheme that is incinerating (and will continue to incinerate) retail investors (the only ones foolish enough to own a dog like this), and I think that’s wrong. In fact, I think this is a telling case study of so many things that are rotten, both on Wall Street and in the sleazy corners of our markets. I’m going to do my best to let as many people as possible know what you’re doing.

Best regards,

Whitney Tilson

Managing Partner

Kase Capital

Full disclosure: of course I’m short this – very profitably – and am quite certain that I will never have to cover.

Emails With Jefferies’ CEO Last October

I also forwarded this email to the CEO of Jefferies, Richard Handler, with the following note:

Subject line: Your analysts’ shameless pumping of Unilife

Dear Mr. Handler,

I thought you might be interested in the email below that I sent last night to your team of analysts who have shamelessly pumped a well-known promotion, Unilife (a Jefferies banking client), which is truly one of the most ridiculous and worthless companies I’ve ever encountered in my 16-year career as a hedge fund manager.

Perhaps I should be thanking them for helping to give me a better entry point on the short side last December at $4.55 (I have yet to cover a single share and hope never to have to, as my price target is a penny), but what’s going on here is just so wrong – and so totally inconsistent with what you wrote in your recent quarterly letter:

“People who take short cuts, are political, prioritize themselves above others, take excessive risks for personal gain, don’t value capital, or are unethical are outright cancers. These types of people will not only flourish in the next crisis, but most probably they will cause it.”

Can you not see that this type of behavior by your employees and your firm, which, sadly, is all too common on Wall Street, is just the kind of cancer that you’re (correctly) railing against?

Sincerely yours,

Whitney Tilson

To his credit, he and, later, Jefferies’ General Counsel, Mike Sharp, both replied promptly and courteously and said exactly the right things. (You’ll have to take my word for it, as I asked Sharp for permission to share the emails he and Handler sent me, but he declined.)

I replied to Handler:

Thanks for your reply. I know you’re not going to get into an email discussion with a short seller, but if you want, I can send you plenty of background material.

This isn’t a good company doing pioneering, innovative work that, like many early-stage companies, has missed some deadlines; rather, it’s a pure stock promotion (and, in my opinion, likely a total fraud if the history of the CEO and a former employee whistle-blower are to be believed).

The history here is instructive: the CEO is Australian and he ran the exact same scam in Australia roughly a decade ago, in which the stock skyrocketed 10-fold and then collapsed. So now he’s brought his bag of tricks here – and your analysts are falling for it hook, line and sinker (or at least pretending to, in order to support the banking relationship).

The attached Forbes article from a year ago, How Is A $329M Syringe Company Still Unprofitable After 11 Years?, lays the story nicely (it even quotes your analyst). Here’s an excerpt:

Unilife is a parable of broken promises, Keystone Kop-like execution, self-enrichment by top executives-and the triumph of story over substance. “Shortall doesn’t have any medical background. He’s not a technical guy. He doesn’t have a finance background,” says a former Unilife executive. “His position is as an entrepreneurial sales guy getting out there and selling the dream.”

He’s been chasing that dream for some time.

Best regards,

Whitney

I was impressed with both Handler’s and Sharp’s responses – they handled it perfectly – and at that time, Jefferies had not conducted any banking business with Unilife since 2012, so I decided not to write this article back then.

Email to Jefferies’ Analysts This Week

I’ve decided to write this article now, however, because two things have changed: 1) Jefferies has led a lucrative banking deal with Unilife; and 2) The company has reported three dismal quarters that affirm everything I wrote to the analysts last October, yet nevertheless they’re still pumping this stock with a “Buy” rating and urging investors to have “continued patience” so I sent them the following email last week:

Subject line: UNIS a still a buy – really???

Dear Raj, Anthony and Imron,

I’m the hedge fund manager and occasional short seller who appeared in the Lumber Liquidators (NYSE:LL) story by 60 Minutes – and I’m also short UNIS.

I last wrote to you on Oct. 9th last year, the day UNIS reported Q4 ’14 earnings, warning you that this company is “a pure stock promotion (and, in my opinion, likely a total fraud…).”

Let’s take a look at what’s happened in the three quarters since then, relative to the estimates in your Buy report on that day (9/9/14):

*Revenue in the first three quarters of FY 2015 has been a mere $9.7 million, 47% worse than the $18.3 million you projected.

*UNIS hasn’t booked a single dollar of product sales vs. your estimate of $7.3 million.

*EBITDA of -$52.6 million, 49% worse than your estimate of -$35.3 million.

*A net loss of $64.8 million, 31% worse than your estimate of -$44.9 million.

*Cash burn (operating cash flow minus cap ex) of $47.8 million vs. your estimate of “$12-$15 million/quarter.”

*Share count of 131.2 million, 29% higher than your estimate of 102 million.

*Despite hugely dilutive share issuances that raised $57.1 million, net debt has fallen by a mere $4.1 million (from $47.0 to $42.9 million).

It’s not like UNIS just had a bad nine months because these horrific results are consistent with what the company has been reporting for years. In light of this, it should have filed for bankruptcy long ago, but it so far has cheated fate thanks to a remarkable ability to fool enough analysts and investors to maintain a high enough share price to issue equity and keep the con going.

It’s clear that you’re worried – for example, the subtitle of your report is “Still Waiting on Those Commercial Sales” – yet you maintain a Buy rating and continue to preach the mantra of “continued patience” to investors.

You’re like Charlie Brown, with (Unilife CEO Alan) Shortall playing the role of Lucy, pulling the football away at the last minute, with you landing on your backs every time.

At what point are you going to wake up and stop being snookered by a master con man????

Best regards,

Whitney Tilson

Why Is Jefferies Sullying Itself?

I believe that Jefferies is a reputable firm, so why would it sully itself to even be associated with a company like Unilife, much less endorse it with a buy rating, much less actually raise capital for it?

In fairness, the main answer, I think, is that the Jefferies analysts may genuinely believe Unilife’s story. Reasonable people can disagree about controversial stocks and my views on Unilife are opinions, not facts. Thus, if you asked the Jefferies analysts, “Do you believe Unilife is a promotion and/or fraud?”, they’d of course say no – and I think they’d even pass a lie detector test to this effect.

But as Charlie Munger has often warned, self-interest bias is incredibly powerful. One of Munger’s favorite quotes, by Upton Sinclair, is: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

And there’s some powerful self-interest at work here: you need look no further than the equity offering Unilife did in January that raised $44.7 million for the company, which shows that Jefferies was one of two “Joint Book-Running Managers” – here’s the cover page:

Conclusion

I’m saddened by the heavy losses that inexperienced individual investors suffer when they get sucked into promotions and/or frauds like Unilife, and I’m disgusted by the fact that reputable firms like Jefferies facilitate this. That said, I don’t think Jefferies is doing anything illegal – rather, this is simply run-of-the-mill self-interest bias at work.

The real message here is that this kind of behavior is widespread on Wall Street, especially in the seedy underbelly of the market, so investors beware!