Shares in 22nd Century Group, the Clarence company trying to develop a line of cigarettes with either very high or low levels of nicotine, lost 15 percent of their value Wednesday after an investor who stands to make money if the stock falls published a lengthy article that cast doubt on the firm’s prospects.
22nd Century executives responded by labeling the article as “ridiculously disparaging,” saying it was riddled with “incorrect assumptions and false conclusions.”
The article, posted on the Seeking Alpha investor website by a Pennsylvania-based hedge fund that will make a profit on its investment in 22nd Century if the share price declines, questioned whether the company’s cigarettes will turn into revenue-producing products and notes that the firm is running so short of cash that it will be forced to raise additional funds from investors within a few months.
The article accused 22nd Century executives of enriching themselves by collecting hundreds of thousands of dollars a year in pay from the company while the business continues to lose money and generates little revenue.
It also criticized the company’s involvement with firms that it has hired to promote 22nd Century’s stock and cited several announcements from the company touting developments that failed to pan out.
“There have been a lot of promises in the past that haven’t panned out,” said Dan David, GeoInvesting’s vice president, in an interview. “The one thing that has worked out “is the executives enriching themselves.”
The article sent 22nd Group’s stock tumbling by 15 percent, shaving its share price by 49 cents, to close at $2.68. 22nd Century shares, which traded for as much as $6.36 per share in mid-March, are worth no more than 20 cents, GeoInvesting said in the article.
“It appears the company is only good at building false hope so it can continue to raise money,” GeoInvesting said in the
22nd Century executives said the Seeking Alpha article took them by surprise and they accused GeoInvesting of taking “kernels of truth” about the company’s operations and interpreting them in the most negative way possible to help drive down the price of the lightly traded stock.
“Writing a 29-page article, as negative as this one was, makes this a self-fulfilling prophesy,” said Henry Sicignano III, 22nd Century’s president, in an interview. “We think the company is in better shape than it’s ever been.”
The company issued a statement challenging the accuracy of some of GeoInvesting’s allegations, including a claim that 22nd Century was in default on an agreement with North Carolina State University. They also denied that the company’s officers and directors had engaged in stock promotion and said 22nd Century continues to work on the development of the X-22, a cigarette intended for use as a prescription smoking-cessation aid that GeoInvesting said had been abandoned.
Regardless, the steep drop in 22nd Century’s stock price was good news for GeoInvesting, which has a history of successful investments as a short seller. A database compiled by Activist Shorts Research found that GeoInvesting had launched 38 short-selling activist campaigns, earning an average return of 48.5 percent.
Unlike traditional stock investors who buy a stock and hope it goes up in price, short sellers profit when they invest in a stock that goes down in value. Short sellers typically bet against a stock by selling shares that they have borrowed, in hopes that they will be able to repurchase them later at a lower price.
The relatively low trading volume of 22nd Century’s stock made it especially vulnerable to big swings in price. The shares, which traded an average of about 516,000 shares a day over the previous three months, saw its volume top 5.5 million shares Wednesday, more than 10 times more than usual.
The shares, which had fallen to as low as $1.92 late Wednesday morning and spent most of the day down by about 25 percent, rebounded in late afternoon trading after the company released its response to the article.
David, of GeoInvesting, said his firm first noticed 22nd Century’s stock in the spring, when the company’s shares rose above $6 after the company had made a series of announcements noting progress in bringing its cigarettes to the market. The company said it had won permission from federal tobacco regulators to start making its own cigarettes and had spent $6.4 million to purchase a North Carolina cigarette factory and cigarette-making equipment.
But as the company continued to wait for final agreement that would make it a participating member of the 1998 Tobacco Master Settlement Agreement between the tobacco industry and 46 states, the stock quickly sagged back to the $3 level within a month.
“There is a real business here,” David said. “It’s just not really happening for them.”
The company uses proprietary technology that allows it to manipulate the levels of nicotine and other chemicals in tobacco. Its Spectrum brand of research cigarettes can have the same amount of tar as conventional cigarettes but nicotine levels that vary from very low to very high. It also has plans to produce its Red Sun and Magic super-premium cigarette brands.
GeoInvesting also noted that Joseph Pandolfino, 22nd Century’s chief executive officer, had agreed to a settlement with the Securities and Exchange Commission in 1992 on allegations that he fraudulently manipulated the price of two stocks by mailing anonymous letters urging people to buy shares in the companies.
Pandolfino agreed to pay about $26,000 – roughly the amount federal regulators said he made on the scheme while he was a 23-year-old graduate student at the University at Buffalo – to settle the charges.
“The issue I had with the SEC 23 years ago, when I was a kid in college, has given me the highest sense of awareness for securities laws and regulations,” Pandolfino said.
“I would hope that the SEC investigates the author of the disparaging article on 22nd Century and other ‘short and distort’ authors.”
“It is unfortunate that malicious articles by short sellers dupe and scare investors into selling,”he said.