Culberson stock asset may prove political liability
Drug startup’s shares take a dive amid disappointing test results
By Kevin Diaz, June 27, 2017
WASHINGTON – When he bought a stake in a little-known Australian biotech firm five months ago, Houston Republican Rep. John Culberson entered a volatile world of financial risk, political suspicion and international intrigue.
On Tuesday, the stock took a dive amid disappointing test results for an experimental multiple sclerosis drug the firm has been developing in Australia and New Zealand.
The stock purchases by Culberson and a half-dozen other House Republicans – some within hours or days of each other – already has led to a congressional probe of possible insider trading.
The controversy followed an unusual price spike in January, one trading day before Culberson and Texas Republican Rep. Mike Conaway bought their shares, which also led to an inquiry by Australian regulators and a separate stockholder challenge.
Neither resulted in a suspension of trading in Innate Immunotherapeutics, a startup that counts as its biggest investor New York Republican Rep. Chris Collins – a congressional liaison to the Donald Trump campaign and now reportedly the subject of a probe by the Office of Congressional Ethics.
Analysts said Tuesday that the speculative bet on a still-unproven drug could go down to zero – a stunning reversal for early investors like Culberson, whose past investments have been limited to more sedate holdings like Apple stock and military collectibles. So far, Culberson is in the red on his investment, particularly after the stock fell from a high of AU$1.83 just before he bought in, to a price of less than 5 cents on Wednesday.
A final report on Innate’s clinical trials – meant to clear the way for approval in the lucrative U.S. market – was expected to be released later this year. But an initial analysis released by the company Tuesday showed that the tests so far have failed, a result that company CEO Simon Wilkinson called “a shock.”
But that is not the only test of Culberson’s unusual foray into an overseas stock market.
The chain of events that led to separate investigations in the U.S. and Australia already looms over next year’s midterm election in Houston. The 60-year-old Culberson, in his ninth term, faces an energized field of Democrats, one of them a research physician at MD Anderson Cancer Center who has raised pointed questions about Culberson’s Innate investment.
The physician, Dr. Jason Westin, has publicly questioned what prompted Culberson’s interest in the biotech stock, since at the time he bought it in January there had been no published research articles or significant clinical trial updates on the drug, known as MIS416.
‘Talking up’ Innate
Culberson says his interest in Innate was sparked by “press reports,” though he has declined to specify which ones. News reports in January – just before he and Conaway bought Innate stock – focused on the controversy surrounding the purchase of shares at discounted prices by Collins and then-Georgia U.S. Rep. Tom Price, now the secretary of health and human services.
An article in the New York Times in early January, two weeks before Culberson bought his stock, hardly inspired confidence. It described Innate as “a tiny pharmaceutical company from Australia that has no approved drugs and no backing from flashy venture capital firms.” The piece also noted that the company had run out of money “more than once” and nearly folded.
On Capitol Hill, the focus was on Collins, who was being accused by Democrats of promoting Innate stock to colleagues in the halls of Congress. Collins has repeatedly denied the charge.
Earlier this month The Hill, a Capitol Hill newspaper, published an “exclusive” report citing a half-dozen Republican lawmakers – all speaking anonymously – who said they heard Collins “talking up” Innate at various congressional gatherings.
Again, Collins denied it, telling The Hill, “I’ve never encouraged anyone to buy the stock. Ever.”
A number of ethics watchdog groups and legal analysts say that if Culberson and other lawmakers were steered into their Innate investments with non-public information, they could be in potential violation of the Stock Act, which bans insider trading by members of Congress – whether or not they make money.
Culberson has declined repeated requests from the Chronicle to talk about the details of his Innate stock purchase, including whether he was still holding on to the stock Tuesday when its price plummeted. He has relied instead on a written statement that his investment was motivated by the death of a family friend from multiple sclerosis. He also acknowledged in a statement that he “rarely” buys or sells stock.
That admission has deepened interest in his decision to buy stock in Innate, a struggling biotech company that generally has been trading for less than $1 on the Australian Stock Exchange.
“There’s a disturbing lack of transparency in Washington, D.C.,” Westin said.
Financial disclosure records show that Culberson bought between $1,000 and $15,000 of Innate stock Jan. 26. Congressional rules require only that lawmakers report their transactions within broad ranges.
His purchase came at the height of scrutiny over trading in the company – and during a steep swing in its stock price. Two days before, Price had faced questions about his own stock purchases before the Senate Finance Committee, which was then taking testimony for his confirmation as Trump’s health secretary.
One prominent Democrat, New York U.S. Rep. Louise Slaughter, had recently fired off a letter asking the Securities and Exchange Commission to investigate “whether the transactions were triggered by insider knowledge.”
Despite the bad press in the U.S., on the other side of the international dateline, Innate stock was going haywire in Australia.
It hit a 52-week high of AU$1.83 on Jan. 25 (Jan. 24 in the U.S.), more than double its price of AU$0.78 a share on Dec. 20. Trading volume also catapulted nearly tenfold.
The next day was Jan. 26, Australia Day, a national holiday. When the market reopened Jan. 27 in Sydney, it was still Jan. 26 in Houston, the day Culberson booked his purchase. At that point, the stock was sliding back down to $1.42, on its way down to 78 cents a share on Jan. 30.
It had been a wild bucking bronco ride, and Culberson had gotten in on the tail end of it – and, to date, on the losing side.
The spike, however short-lived, was enough to warrant the attention of the Australian Stock Exchange. Its compliance officials registered a formal price query with Innate, asking if the company was “aware of any information concerning it that has not been announced to the market which … could explain the recent trading in its securities?”
Innate’s response, supplied by company secretary Andrew Cooke, cited “a number of media articles in the USA that may have brought the company to the attention of new U.S. investors.”
Australian regulators were satisfied that while the January movement in the stock price was abnormal, the company was not hiding anything. “It’s not unusual for a company to receive multiple queries during a particularly volatile or active trading period,” Exchange spokesman Matthew Gibbs said in an email.
Two weeks later, James Wheeldon, a former lawyer with the Australian Securities and Investments Commission, filed a complaint with government regulators questioning whether Collins – Innate’s biggest shareholder with a 17 percent stake – had wrested “effective control” of the company through significant stock purchases by family members, friends and others with whom he has “business, financial or political relationships.”
Among those with significant holdings at the time were Collins’ two adult children, his chief of staff, several Buffalo business associates, a Washington lobbyist and at least seven members of Congress – including Culberson and Conaway.
Under Australian law, an investor must make additional market disclosures before obtaining control of more than 20 percent of a company, and Wheeldon believed that Collins had more than hit the mark.
“It strains credulity to suggest that these intimate allies would not accede to Mr. Collins’ wishes and instructions should a matter be put to a vote of the shareholders of this company located on the other side of the world,” Wheeldon wrote in his complaint.
Wheeldon’s complaint was dismissed.
Wilkinson, the CEO, did not respond to a Chronicle request for comment about the regulatory skirmishes. But in a New York Times interview in January, before the price spike, he expressed bemusement at all of the attention paid to a “little biotech at the wrong end of the world.”
Culberson’s fortunes, like those of other investors, will rest almost entirely on the results of the company’s clinical trial for MIS416.
But Tuesday’s announcement showed “no clinically meaningful or statistically significant differences” in test patients compared to a placebo. “These data will be as distressing to them as they will be for all the stakeholders who were relying on the outcome of this study,” Wilkinson said in a statement.
For Culberson, the Innate debacle could prove an unwelcome hit to a personal financial portfolio he valued last year at between $216,000 and $565,000, before he bought the company’s stock. To his critics, either way, it could prove a political liability.