Sunday, March 06, 2011

Corrected: Star Scientific CEO And Others Put $9 Million Into Company

**I got someone's attention on the Yahoo Finance message board attached to CIGX and this post was linked there twice. Through one of the threads, I learned that I misread the summary 8K discussed here. $9 million was put into Star Scientific, but $1 million is the sum total that came from the CEO, Jonnie Williams. This doesn't change my conclusion as to the significance of the action, however. Added/altered text is in bold, retractions are struck out.

On Friday Star Scientific, Inc. (CIGX) filed an 8-K with the SEC detailing a very interesting insider transaction: the CEO, Jonnie R. Williams and others together purchased $9 million worth of company stock and warrants.

What's the significance? On the Yahoo Finance message boards for CIGX, there's been some back and forth on that. Some are calling this a desperate last resort financing tactic for a company out of gas, on the brink and unable to find a lender anywhere else. Others think this is a sign that good things are on the horizon.

Who to believe? I decided to do some research on Mr. Williams to try and figure that out. It turns out that Williams has been involved in very successful laser vision correction companies in the past. What does this have to do with Star Scientific? Nothing directly, obviously. (Vision correction and tobacco? What could possibly be the link?) It does suggest, however, that Williams successfully identified and backed a big winner in the past.

It's been in the news recently that a nicotine derived creation of Rock Creek Pharmaceuticals, a wholly owned subsidiary of Star Scientific, will be tested by the Roskamp Institute in a three month trial to study its usefulness in combating inflammation, and in particular Alzheimer's disease. But there's also older news out there about Star Scientific's efforts to get approval from the FDA to market its dissolvable tobacco products as being less harmful than other tobacco products on the market. Could those efforts be coming close to fruition?

It seems to me that there are several good things lining up for Star Scientific right now. The timing of all of these events together suggests to me that Williams and the other parties to this transaction didn't buy more company stock because Star Scientific had no other options. Mr. William's salary as the CEO of Star Scientific is reported to be slightly more than $1 million annually (as of 2009, by this source). If the company was doing poorly, it would make zero sense for Williams to put nine times his annual salary into it (not to mention the other parties, who contributed the other $8 million together). If Star Scientific were to become a buyout target, Williams would do much better owning more stock in the company than he would otherwise (especially if a buyout were to also end his $1 million annual compensation!). It certainly seems possible to me that such a thing could come to pass. If you were a giant tobacco company and a tiny rival managed to get the FDA to allow it to advertise its product as being less harmful than yours, how quickly would you move to acquire the rights to the process that creates that product and how much would you have to pay to outbid your rivals? Could be quite a bit!

I'm long CIGX in my speculation portfolio and plan to stay that way. I'm not recommending that you buy or sell CIGX. Do your due diligence and make up your own mind as to whether or not this investment makes sense for you.

Further reading, the full 8-K filing:

The other three parties to this transaction do not appear to be direct holders, which would further undermine the "CEO as lender of last resort" speculation since these are outside parties not drawing regular compensation from the company (not to mention the basic fact here, that the presence of the other three parties in the transaction makes that claim nonsensical). It cannot be the case that they're funneling money into the operation in a desperate move to keep their own meal ticket going.

Mr. William's personal participation in this particular transaction is vastly less than I mistakenly thought it to be initially, but his aggregate purchases of company stock over the last couple of years are greater than this transaction alone, and my thoughts on the question remain the same: unless good things are on the horizon, why keep buying in? Why would you put your entire annual salary back into the company you draw it from if things are bad when the company can attract $8 million of investment from others? Unless something good is coming, it wouldn't make any sense.

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