that the timing of the data release vis–à–vis the option grants was gamed this way. The question here is did the company’s management specifically wait until after the options arrived to release the data? That would be the worst-case scenario because I personally believe it would be akin to insider trading. Imagine if an investor had purchased options on hundreds of thousands of shares of CytRx stock the afternoon before the data was released. You can bet he or she would likely be receiving an interesting phone call from the SEC someday. To state the obvious, a company’s insiders have a lot more information than any investor ever would. I don’t see how the way they increase their ownership should be scrutinized much differently.
In this case, nobody outside of the company will likely ever know the facts of who knew what and when, but there are a few details that are highly coincidental and hard to ignore. For example, this was an open label trial, which means researchers on the study knew which patients were getting the CytRx drug and which were getting the standard treatment. Furthermore, CytRx had already presented preliminary data on secondary endpoints from the trial here as recently as October 31st, and earlier still here on September 30th. Therefore, they must have had, at a minimum, an inkling of how the trial results would look around the time the December grant was coming up.
The second thing it could mean is that the board of directors was simply asleep at the wheel and has no clue what constitutes best practices. Everybody knew this data was coming in December, because CytRx had already told investors to expect that. So why not hold off on the options and other compensation matters until after the binary event had passed? I bet if you took a poll of 100 boards of directors about what to do in that situation, almost all would have chosen to hold off until after the event had taken place in order to avoid the perception of a conflict of interest.
What does all this mean for investors? Well for me at least, it makes CytRx untouchable. It is just too big of a red flag. The problem is that in drug development the amount of information available inside and outside of the company is more asymmetrical than in any other industry, so you have to be careful when you are the person on the outside. If a company takes advantage of its informational edge once, investors cannot risk letting it happen again. Especially for a small company trying to break into the next level, it would have been best to proceeded with caution in order to gain long-term investor trust. Once you have lost that, it is hard to get back.
Disclosure: I have no position in CytRx. I never have in the past, and as I describe above, do not intend to in the near future.
