Fortress Biotech used its own in-house brokerage firm, National Securities, to raise at least $240 million from thousands of individual investors to support itself and its biotech subsidiaries—employing analysts bullish on its own companies’ prospects without fully disclosing their connections to their parent, according to a monthslong investigation by Reuters.
In addition, SEC documents showed deals underway that could total another $125 million, the report said. National maintains a sales force of about 700 brokers, with about a third previously flagged by financial regulators, to help raise money for nine development-stage biotechs under Fortress’ incubator.
While National disclosed its conflict of interest in its prospectuses, one analyst did not mention his role under the Fortress umbrella in his notes pushing “buy” recommendations for Avenue Therapeutics, Checkpoint Therapeutics and Mustang Bio.
Each of those companies’ shares have lost significant portions of their value in the months since, Reuters said, and the analyst’s notes have been removed from its website.
“I’ve never seen a firm that needs to raise a lot of capital acquire a brokerage for that purpose,” University of Nevada, Las Vegas associate professor of securities law Benjamin Edwards told Reuters. Fortress bought a controlling stake in National’s parent, National Holdings, in September 2016, following investments dating back to 2010.
Fortress, formerly known as Coronado Biosciences, is led by Chairman, President and CEO Lindsay Rosenwald and Executive Vice Chairman Michael Weiss—who have formed more than 50 biotech companies between the two over the past 20 years, including Zytiga developer Cougar Biotechnology, acquired by Johnson & Johnson for $1 billion in 2009.
“We are the most honest management team ever to walk through this biotech business,” Weiss told Reuters in an interview. Weiss served as chairman of National Holdings’ board after Fortress acquired the company, until he stepped down in June.
The report also detailed Avenue’s $38 million IPO last summer, originally set for $50 million, in which two-thirds of the offered shares were prearranged for National.
“The deal from the beginning was designed to be a National-led transaction for our clients,” Weiss said. Avenue’s single product, an intravenous formulation of the postoperative opioid painkiller Tramadol, is currently in clinical trials and is planned to be submitted for FDA approval in late 2019.