Paging the SEC: Investigate Advanced Cell Technology

August 28 Follow-up post –
An Across-the-Board Chorus Blasts Advanced Cell Technology’s Claims

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NOTE: The post below, which originally went up at 4 PM on Saturday, has been carried forward, and will stay near the top for the rest of Sunday.

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Was Advanced Cell Technology Inc.’s Embryonic Stem-Cell Announcement
a Political Ploy, a Financing Gambit, or “Pump and Dump”?

OVERVIEW: Advanced Cell Technology’s Wednesday announcement that it had generated human embryonic stem cells without harming embryos appears to be suspect, and to fit the company’s historical pattern of overhyping things that turn out to be minor developments or non-developments. This time, though, as a publicly-traded company, its announcement, if debunked or deeply discounted (there are many signs that is indeed taking place), may not only impact the ongoing debate over the relative merits of embryonic vs. adult stem cell research, but may put the company in financial jeopardy.

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This brief news item was posted yesterday in the San Francisco Bay Area’s weekly business paper, The East Bay News Business Times (bolds are mine throughout this post):

Advanced Cell Technology raises money after stem cell news
East Bay Business Times – 1:55 PM PDT Friday

Just two days after reporting it had developed a new way to generate human embryonic stem cells, Advanced Cell Technology Inc. said it had commitments to raise about $13.5 million.

The Alameda company (OTCBB: ACTC) said most holders of debentures and warrants to buy its stock agreed to exercise their options to buy more. Advanced Cell Technology will raise about $8.5 million that way.

The company will also exercise some of its outstanding warrants to raise another $5 million.

Because of the new agreements, Advanced Cell Technology canceled a proposed private placement through which it had hoped to raise about $11.3 million.

The company said Wednesday that its scientists generated human embryonic stem cells without harming embryos.

Earlier this week, Advanced Cell Technology Inc. (ACTC) announced that:

“….. company scientists have successfully generated human embryonic stem cells (hES cells) using an approach that does not harm embryos.”

….. “Until now, embryonic stem cell research has been synonymous with the destruction of human embryos,” stated Robert Lanza, M.D., Vice President of Research & Scientific Development at ACT, and the study’s senior author. “We have demonstrated, for the first time, that human embryonic stem cells can be generated without interfering with the embryo’s potential for life. Overnight culture of a single cell obtained through biopsy allows both PGD and the development of stem-cell lines without affecting the subsequent chances of having a child. To date, over 1,500 healthy children have been born following the use of PGD.”

Current technology derives hES cells from the inner cell mass of later-stage embryos known as blastocysts, destroying their potential for further development. ACT’s approach generates human embryonic stem cells from a single cell obtained from an 8-cell-stage embryo.

If those making the financing commitments haven’t finished their due diligence yet and still have time and the ability to back out, they might consider reading what Wesley Smith (bio here; blog here), a senior fellow at the Discovery Institute and a special consultant to the Center for Bioethics and Culture, found and reported in his most recent Weekly Standard column (HT Life News):

Science by Press Release
More hype from stem cell entrepreneurs

“NEW STEM CELL METHOD avoids destroying embryos,” the New York Times headline blared. “Stem cell breakthrough may end political logjam,” chimed in the Los Angeles Times. “Embryos spared in stem cell creation,” affirmed USA Today. Reporting the same supposed scientific achievement by Advanced Cell Technology (ACT), the Washington Post quoted the company’s bioethics adviser Ronald Green: “You can honestly say this cell line is from an embryo that was in no way harmed or destroyed.”

Unfortunately, you can’t “honestly” say that. The above headlines–like Green’s statement and innumerable similar press accounts around the world–are just plain wrong. While ACT did indeed issue a press release heralding its embryonic stem cell experiment as having “successfully generated human embryonic stem cells using an approach that does not harm embryos,” the actual report of the research led by ACT chief scientist Robert Lanza, published in Nature (abstract is here; page also contains link to report, which costs $30, and which I did not purchase — Ed.; Aug. 30 update — Just to be clear, SMITH DID read the Nature report, and I’m relying on his work and considerable reputation), tells a very different story. In fact, Lanza destroyed all 16 of the embryos he used, just as in conventional embryonic stem cell research.

And that’s not the only facet of Lanza’s work that the press got wrong. The ACT team did do something new: It worked with very early embryos, of 8 to 10 cells each, rather than the 100- to 200-cell blastocysts usually used in such research. From each of these early embryos, the scientists removed not one cell–as several press accounts reported–but 4 to 7 cells. This misreporting is important because it creates a materially false impression.

During in vitro fertilization of an egg, a single cell can be removed from a very early embryo like those Lanza used in his research. Usually this is done for genetic testing, before the embryo is implanted in the mother, and the embryo remains viable–unlike Lanza’s embryos. Lanza did, however, derive two lines of embryonic stem cells from some of the early cells he had removed. Maybe one day someone will succeed in making stem cell lines from an early embryo that survives, but Lanza didn’t. ACT and the media–in their desire to boost popular support for embryonic stem cell research–simply took a leap of faith and portrayed an experiment showing that something might be possible as if the feat had already been accomplished.

….. Lanza’s experiment does demonstrate that stem cell lines can be obtained earlier than previously thought. But that wasn’t good enough for ACT’s publicity office or the lazy reporters who regurgitated the press release. The failure to report this story accurately amounts to massive journalistic malpractice–and once again ACT is laughing all the way to the bank.

Elsewhere in his column, Smith chronicles ACT’s sordid history of faux breakthroughs:

• A December 3, 2001 cover story by US News that ACT had cloned human embryos, when all it had done was to divide a human egg a few times without getting it to the point of being a viable embryo.

• A mid-2002 story in Atlantic Monthly about ACT’s attempts to “create a cloned embryo of a young boy named Trevor,” in the hopes of curing a rare disease in the boy. Says Smith: “In reality, of course, there was never any hope of treating Trevor with cloned embryonic stem cells.”

• In January 2004, Wired Magazine reported that led readers to believe that ACT’s Dr. Lanza “had successfully grown cloned human embryos to the 16-cell stage.” Says Smith: “This would have been big news–if it had been verified. But it never was. To my knowledge, Lanza never subjected his work to peer review or published a report of it in a respected science journal.”

Additionally, I located this CNN story from November 25, 2001, published shortly after “cloned human embryos” announcement (the “December 3″ issue of US News would actually have been published about two weeks earlier). Among other things, it chronicles a four-year history of press releases and announcements that, in retrospect, look more than a little dubious.

Let’s say that ACT is indeed conducting overhyped (and worse) “Science by Press Release,” as Smith alleges and as it appears to have done in the past. There are three big potential problems with what it is doing; one of them appears to be old hat to the company, but the other two represent problems that, because it is now a publicly-traded company, may threaten its very existence.

First, ACT, as it has been for many years, is feeding into what Smith, myself, and many others believe is the myth that life-destroying embryonic stem cell research (ESCR) has potential for curing disease that non-life-destroying adult stem cell research (ASCR) won’t achieve. The contention that ESCR will in the long run accomplish more than ASCR is being proven more tenuous almost with each passing day. In fact, it can fairly be argued, based on this report from last year (”Adult cells found in mice can transform like embryonic ones”) and this one from just a couple of days ago (”Researchers create adult stem cells with embryonic cell features”) that ASCR is moving out of what I referred to in late 2005 as “blocking-and-tackling,” or addressing diseases one at a time, to something with every bit of the potential that ESCR cheerleaders, without substance, still try to claim as their own. By feeding what I believe are the false hopes for ESCR, ACT and other boosters are causing companies, politicians, and voters (see California) to misallocate money to the “Hail Mary pass” that ESCR represents that could have been more productively spent achieving speedier and genuine results with ASCR. It’s not too much of a stretch to say that some people may die needlessly and/or prematurely if funds continue to be misallocated; just because we can’t find the specific bodies doesn’t mean that it isn’t happening, or might not happen.

The poisoning of the stem-cell debate with false hopes for ESCR is bad enough. But the second problem goes back to the beginning of this post, to that $8.5 million the company just announced that it will raise from holders of its debentures and warrants. If those holders are putting in their money based on the company’s press releases and the subsequent hyped-up reports in the press that are not supported, there would seem to be three parties with the potential to take legal action. The holders themselves could claim deception, though presumably, as accredited investors, they’re supposed to be big boys and girls and have the responsibility to do all the necessary digging before investing. Existing public shareholders who are being diluted could take also action if they feel that the company’s hype falsely induced the debenture and warrant holders to dilute shareholders’ interests. Finally, the Securities and Exchange Commission (SEC) might decide that the entire matter requires investigation for all the reasons I just described.

Speaking of the SEC — The third potential problem is one that, if there is reason to suspect it, you would normally expect the Commission to take a very keen interest in — namely, whether ACT’s announcement, if debunked, represents a PR- and news-driven example of “pump and dump” designed to benefit insiders and perhaps others “in the know.”

On the surface, the evidence looks, to put it delicately, less than pristine:

The last few day of the graph are tough to read, so let’s look at the numbers (you can click on the graph at the link to see this at NASDAQ’s site):

The press release was issued on August 23. The stock went up over 50% the day before and volume doubled, indicating that a number of people may have been given the scoop about the pending announcement. The stock went up over 350% ($1.43) on the 23rd, opened another 57 cents higher ($2.30) on the 24th, peaked slightly above that opening, and fell with a thud to $1.60 by the end of the day. The free-fall continued on Friday, to the point where by Friday’s close the stock was down 59% from its Thursday intraday peak. I don’t have a crystal ball, but given the snowballing skepticism, I’d say the chances that the slide will continue on Monday are pretty high.

What about those huge trading volumes on Wednesday, Thursday and Friday? Keep in mind that the company has, according to NASDAQ’s web site, only about 27.7 million outstanding shares. Even considering that some shares probably changed hands multiple times during those three days, the share volumes as a percentage of outstanding shares are extraordinary, especially when you see who owned most of the shares as of October 31, 2005 (link is to the Proxy Statement filed December 5, 2005; info pictured below is at Page 5; I did not see evidence that ownership has significantly changed since then, but I am not certain of that; I’d appreciate an e-mail from anyone who can point me to more current information):

Add the 22.1% of the company owned by officers and directors to the 51% owned by the the four investment funds, and you see that together they own almost 3/4 of the company. Trading volumes for ACT stock on Wednesday, Thursday and Friday were 32%, 56%, and 36% of the total shares outstanding, respectively.

If you think there’s more than a little reason to suspect that the investment funds, the officers, and/or the directors of ATC may have made a financial killing as a result of manufactured (and if Smith is right, now thoroughly punctured) hype at the possible expense of unjustifiably overexcited individual investors — well, so do I.

I will politely suggest that if the SEC isn’t curious about all of this, they’re not doing their job.

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UPDATE 1: Here’s another great example of adult stem cell progress.

UPDATE 2: There may be even more machinations involved than the body of the post indicates. First, ACT earlier this year opened a California R&D facility, because they hope to get some grant or venture funding from the $3 billion kitty California voters approved in 2004. Don’t ask me why, but an announcement like ACT’s, even if disproven, could still give the company visibility and credibility with those who are divvying up the money. Second, most of ACT’s principal executive officers have a large number of stock options, which, if exercisable (many appear to be) and actually excercised during the stock runup, could have personally benefitted them in very substantial amounts. There certainly may be other angles I’m not considering but don’t have the ability to investigate because of the company’s complex capital and financing structure.

UPDATE 3: The paragraph below the “daily details graphic” was added at about 5:30 PM on Saturday, and the percentages owned by the funds and all insiders were changed at that time to correct math errors.

UPDATE 4: In an article about the company after the markets closed on Friday, Steve Johnson at the San Jose Mercury News did not address any of the matters noted above, even though doubts had already emerged about the credibility of ATC’s announcement.

UPDATE 5: Yoo-hoo? SEC? — The Washington Post is reporting (HT Instapundit) on several objections from Richard Doerflinger of the U.S. Conference of Catholic Bishops, and that Nature Magazine “corrected wording in a lay-language news release it had distributed in advance and posted clarifying data it had asked the scientists to provide.”

UPDATE 6: Newsweek didn’t let concerns about the ATC announcement’s validity keep it from polling on the matter, including whether the President should “change his position given the new method.” Zheesh — Bush’s position, not specifically explained by Newsweek, is that federal funds should not be used to fund ESCR. The writing is typically ignorant and biased. The sub-headline is “NEWSWEEK Poll: A possibly revolutionary innovation in stem-cell research hasn’t changed American opinions on the topic.” As usual, no distinction between embryonic and adult. The word “embryonic” appears once. The word “adult” to describe stem cells or stem cell research does not appear at all. A less-than informed reader would concude that ESCR is the only kind.

UPDATE 7, August 28 afternoon: Mona Charen has a short post at The Corner on an e-mail she received from one Robert P. (Robby) George (July 6 WaPo co-authored op-ed here; HT Mirror of Justice), who she quotes thusly — “Unfortunately, just about none of this is true. First, the study did not involve the removal of one cell from an embryo that then continued to develop. Instead, researchers disaggregated 16 living embryos, killing them all, and took an average of six cells from each. The 91 resulting embryonic cells were then placed near one another in dishes and allowed to divide. Some divided, while others died, and from the cells that divided researchers were able to produce two lines of embryonic stem cells. In other words, this study does essentially nothing to prove the point that Advanced Cell Technology (the company that carried out the experiments) has argued in the press: that single cells removed from an early embryo and cultured by themselves can produce lines of embryonic stem cells.” Mr. George is McCormick Professor of Jurisprudence, a Professor of Politics, and Director of the James Madison Program at Princeton University.

UPDATE 8, August 28, 1AM: Life News — “Company Making Millions on Fake Embryonic Stem Cell Research Announcement”; also, here is a detailed, unfiltered report from Catholic News Agency of exactly what Doerflinger (mentioned in Update 5) said about ACT’s work. August 28, 2PM — Here is the USCCB’s official press release.