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Complex web benefits foundation founder

Set up to give to charities, the Picower Foundation indirectly enriches a drug company.


© St. Petersburg Times,
published July 8, 2001

A decade ago, a wealthy Palm Beach investor met a world-renowned scientist for dinner at an Italian restaurant on New York's upper East Side.

They were celebrating a promising new partnership.

Jeffry M. Picower had decided to endow a non-profit medical research institute. His Florida-based foundation would give $10-million in initial funding to find cures for the maladies that afflict humankind. Dr. Anthony Cerami, internationally acclaimed inventor of a revolutionary diabetes test, would run it.

"My mother suffered from diabetes even before my birth and died at an early age of it," Picower told the New York Times. He pledged that profits from new drugs discovered at the institute would flow back into its coffers to pay for more discoveries.

"It's just for the benefit of science, and my family will not get anything back, no matter what happens."

Over the next 10 years, as the assets of the Jeffry M. and Barbara Picower Foundation swelled to $658-million, making it the second largest foundation in Florida, its benefactor was spinning an unusual web of business relationships between it, the Picower Institute for Medical Research and two for-profit pharmaceutical companies.

When the spinning was over, a for-profit drug company owned largely by Picower was left holding license to many of the most important discoveries of the Picower Institute.

Humankind, it seems, would not be the only beneficiary of the spending and investments of the non-profit Jeffry M. and Barbara Picower Foundation.

Jeffry M. Picower would, too.

Because Congress wants to encourage charitable giving, it has given foundations significant tax advantages. Donors can deduct the amount of their gifts from their taxable income, an important incentive for wealthy people to establish foundations. And foundations pay virtually no tax.

The law forbids people who create or manage foundations from profiting, even indirectly, from the endowments.

"The sweep of the self-dealing rules captures direct as well as indirect business relationships," said Marcus Owens, former director of the IRS's tax-exempt organizations division. "With private foundations, the self-dealing proscription is very tight."

The penalty for self-dealing is a 25 percent tax on the amount of money involved in the improper activity and return of the money.

But if you are a wealthy person running your own foundation, the chance you will face scrutiny is practically nil. The IRS regularly audits less than 1 percent of private foundation returns; of 61,185 returns filed in 1998 for foundations that held about $390-billion in assets, the IRS audited 191.

Neither is the public likely to question the work of a foundation such as Picower's, whose gifts have included $533,000 to the Intracoastal Health Foundation in West Palm Beach, $2.3-million to New York public libraries, $200,000 to Teach for America -- and at least $22.5-million over the years to the Picower Institute.

But behind the velvet drape of Picower's philanthropy is a story different from the usual script. The backstage is cluttered with angry lawsuits, cowed scientists and bitter former business partners. It is the turmoil left behind when one man plays all the leading parts in and directs his own charitable production:

Picower runs the Picower Foundation.

Picower runs the Picower Institute.

The Picower Foundation funds the Picower Institute.

Researchers at the Picower Institute discover a drug that they hope will alleviate the suffering of a whole universe of people: victims of arthritis, multiple sclerosis, stroke and inflammatory bowel disease.

A deal is cut. A merger creates a for-profit pharmaceutical company that gets the license to develop this potential blockbuster drug and other promising Picower Institute discoveries.

This company's largest shareholder? Jeffry M. Picower.

A low profile

In the age of the celebrity businessman, 59-year-old Jeffry Martin Picower is an anomaly. There is only one record of his giving a newspaper interview, and that was 10 years ago, after he founded his medical institute.

A lawyer and certified public accountant, Picower made his fortune through company buyouts and takeovers. In the mid 1980s, he acquired an office equipment company called Monroe Systems for Business in a leveraged buyout.

Last year, Picower was among a group of directors that paid $21-million to settle allegations that their firm, Physician Computer Network, had filed false documents with the Securities and Exchange Commission that overstated earnings.

Picower splits his time between his office in Manhattan and his home in Palm Beach, assessed at $8.7-million. Through his foundation, he and his wife, Barbara, have given generously to charity. Yet newspapers have rarely published his photograph.

"He's a very private man," said Richard Storm, president of Cytokine PharmaSciences Inc., a pharmaceutical company in Pennsylvania in which Picower is the largest shareholder. "It's going to be hard to reach him."

It was. Picower chose not to be interviewed for this story.

Likewise, more than a dozen current and former Picower associates did not return phone calls or, when reached, nervously declined to comment.

"I could talk to you, and I could get sued," said Dr. Kevin Tracey, a prominent neurosurgeon who helped discover CNI-1493, the scientific name for the promising drug Picower's company is developing.

"At this point we have no comment," said Elaine Wohl, a spokeswoman for North Shore Hospital in Manhasset, N.Y., the Picower Institute's affiliate where Tracey works.

"I'd rather not" comment, said George Todaro, a veteran pharmaceutical industry executive who headed the predecessor company to Cytokine PharmaSciences.

In a lawsuit now settled, Cytokine PharmaSciences accused Todaro, a member of the prestigious National Academy of Sciences, of "claiming expertise as a renowned oncologist" and generally neglecting fiduciary duties while he frittered time away on "horse racing and training."

"That's a period that's past for me. I'd rather not resurrect it," Todaro said.

This story is based on non-profit organization tax returns, lawsuits, SEC filings and other public records. It also draws from interviews with Dr. Glenn Rice, who was a vice president of the predecessor company to Cytokine PharmaSciences.

Rice said he agreed to speak publicly because he was disturbed by what he saw as conflicts of interest among Picower, his non-profit organizations and the pharmaceutical companies. Like Todaro, he settled allegations by Cytokine PharmaSciences that he breached his fiduciary duty to the company.

Rice's interviews took place before he settled the lawsuit on June 29. A confidentiality agreement prevents him from discussing settlement terms, he said later.

A billion-dollar drug?

Dr. Anthony Cerami was at the peak of his career in 1991 when he dined with Picower to celebrate his new job as president of the Picower Institute for Medical Research.

A dean at New York's Rockefeller University, Cerami had just been elected to the elite National Academy of Sciences, about the highest honor for a scientist short of a Nobel Prize.

"Dr. Cerami is what we call a giant in the scientific community, and he's also very well liked personally," said Michael Kent, a biotechnology investor.

Five years later, though, Cerami left the institute. Today, he will not return phone calls or answer a letter asking about his time there.

"After he (Cerami) resigned, there was some kind of -- I don't know how to characterize it -- some kind of negative feeling between Tony and Jeffry," said Charles Massey, who served as interim president of the Picower Institute after Cerami's departure. "What I was told was that Cerami had just resigned suddenly and left the Picower Institute hanging."

A colleague Cerami had brought with him from Rockefeller University, Kevin Tracey, led a team that discovered a small molecule it named CNI-1493.

CNI-1493 has shown great promise in reversing Crohn's disease, a devastating inflammation of the intestine that is treated, though not always effectively, by injections. A small molecule can be taken in pill form and is cheaper to manufacture.

The molecule might also work against arthritis, multiple sclerosis and other inflammatory conditions. In the risky pharmaceutical business, where millions can be sunk into clinical trials that are ultimately dry holes, a drug like this is a potential financial gusher.

"A lot of the big pharmaceutical companies have been looking for something like that. If a little institute got there first, that would be a big feat," said Dr. Charles Elson, a professor of medicine at the University of Alabama at Birmingham.

"If they've done that, they may have scooped the big pharma."

The "CNI" in the name shows who had development rights: a company called Cytokine Networks Inc.

Cytokine Networks held the rights to certain discoveries of the Picower Institute. In an arrangement common for non-profit medical research charities, it was set up in 1993 to commercialize science discovered at the Picower Institute.

"To bring science more quickly to the bedside -- that was their avowed mission," Massey said of the institute.

Cytokine Network's largest shareholders were the New York-based Picower Foundation and the Picower Institute, which had each invested $2.5-million in the venture and held a combined ownership stake of 62.5 percent.

Picower owned no shares of the company. And on paper, he was not even a board member. But he ran the board meetings, which were held at the New York offices of the JMP Group, Picower's investment holding company, said Rice, the former Cytokine Networks executive.

"He was involved with every major decision," Rice said. "He'd get into minutia -- the capitalization of the company, screening potential new investors, personally reviewing the clinical trials. Virtually everything a chairman of the board would do, he did."

After early tests of CNI-1493 produced promising results, Rice said he and other executives met with Picower in the JMP Group's New York office in 1997.

"I talked about it being a billion-dollar drug," Rice said. "He sat up. He leaned forward. He was incredibly interested. It was obvious to me it was the money."

At the time, the value of the Florida-based Picower Foundation was exploding. In 1997, the foundation's stocks in a variety of publicly traded companies were worth nearly $188-million. Two years later, they would be worth $658-million.

Picower's wife, Barbara, was active in determining the charities that received Picower Foundation grants. In 1999, the foundation gave $250,000 to the National Abortion and Reproductive Rights Action League, $700,000 to public television station WNET-Ch. 13 in New York, $120,000 to the Children's Aid Society and $107,000 to the Boys and Girls Clubs of Palm Beach County.

By far, though, its largest grant was to the Picower Institute. The foundation's $5.5-million donation was 41 percent of the $13.3-million in grants it made in 1999.

Cytokine Networks wasn't near as flush. It had lost millions on unsuccessful drug development efforts, said Barry Shalov, Picower's lawyer. Although he did not own any of the company, Picower agreed in 1998 to make a $1.9-million loan to keep it afloat, according to Shalov and a New York secretary of state filing.

The filing showed how entwined the company was with Picower: It listed the address for Seattle-based Cytokine Networks as "c/o JMP Group" at Picower's New York City office address.

In 1999, the company merged with another private pharmaceutical company, PharmaSciences Inc., in which Picower was the majority shareholder.

Shalov said the impetus for the deal came not from Picower, but from the executives of the two companies. The executives "thought a merger would be a great idea by putting a company, PharmaSciences, which . . . had a cash flow together" with the struggling Cytokine Networks.

Picower "didn't negotiate the merger," Shalov said. But he acknowledged that as the majority shareholder in PharmaSciences and as founder of the two non-profit organizations that owned Cytokine Networks, Picower "clearly could have kiboshed this merger."

When the merger was completed in 1999, Picower's non-profit organizations' equity stakes were diminished from a combined 62.5 percent of the old company to 24.5 percent of the new company.

Picower owned nearly 47 percent -- making him the largest shareholder in the company that had obtained the rights to CNI-1493.

An evaluation by Merrill Lynch put the merged company's fair-market value at $15 to $25 a share, making Picower's stake worth an estimated $40- to $67-million.

"Now, he has every intention of giving that -- at least he tells me he has every intention -- of giving that to charity," Shalov said. But he said action had been delayed by Picower's need to work through complicated tax considerations.

"What troubles me is, we're talking about one of the most charitable families in the country, and you're trying to connect the dots," Shalov said.

Conflict of interest?

CNI-1493 is in Phase II clinical trials. As things now stand, if the drug hits it big, Picower's charitable organizations will enjoy fewer profits than if Picower had not merged the companies. That would mean less money for charitable work to benefit the public.

Shalov said the institute gains in other ways. It is entitled to royalty payments under its grant and license agreement with Cytokine PharmaSciences. It also gets $500,000 a year from the company under that agreement, regardless of whether any institute patents result in commercial sales.

Still, Rice contends that by wearing all the hats in the merger, Picower had a conflict of interest.

In any business negotiation, each side tries to get the best deal. Yet in this merger, the interests of Picower's non-profit organizations were pitted directly against Picower's personal interests.

On one side were shareholders of Cytokine Networks, mainly the Picower institute and foundation. On the other side were the shareholders of PharmaSciences, primarily Picower.

Picower called the shots at the institute and foundation. So, Rice said, the question is this: On whose behalf was Picower working? His own? Or his non-profit organizations?

"The valuation here would be crucial," said George Cowperthwaite Jr., a certified public accountant who specializes in preparing private foundation returns and has no connection to Picower.

By that, Cowperthwaite means the relative values assigned to each company for purposes of the merger. The shareholders of Cytokine Networks would be expected to push for the highest value possible assigned to their company. A higher value would give them more ownership in the new, merged company.

Yet Rice, who also was a shareholder in Cytokine Networks, questioned whether Picower had any incentive to push for a higher valuation of Cytokine Networks because it would mean that he would end up owning less of the merged company.

Indeed, a 1997 valuation by Lehman Brothers concluded that Cytokine Networks shareholders should own 47 percent of the combined company. They ended up with 36 percent.

The deal might not pass muster with the IRS, Cowperthwaite said, "if as a trustee of the institute and the foundation, he (Picower) approves a merger" that benefits himself at the expense of his charitable organizations.

Cytokine Networks' cash problems would offer a legitimate reason to merge, Cowperthwaite said. But the $658-million Picower Foundation could have loaned the struggling company the capital it needed.

That arrangement, though not without risk to the foundation, at least would have preserved the foundation's claim to a larger share of any profits from drug sales. But it would have meant nothing for Picower personally.

"If you're saying it doesn't look good that Jeffry's sitting with that stock, I can't argue with you," said Shalov, who in addition to being Picower's lawyer is a non-shareholding director of Cytokine PharmaSciences and a trustee of the institute.

Shalov said that prior to the merger, a national accounting firm concluded the deal did not violate tax laws.

After several conversations with the Times, Shalov faxed a letter stating that Picower is "exploring ways" to donate his stock to the institute or another charity.

"Mr. Picower has informed me that my understanding is accurate, that he intends to donate his (Cytokine PharmaSciences) stock," the letter read.

That would be news to Rice.

"In all of my dozens of meetings with Picower, the words charity or donation were never mentioned once," Rice said.

"There's certainly no conflict," Shalov said. "We're all wishing for commercial success, not so much to enrich anybody, but because we'd like to do something for mankind."

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