Paper No. ______
`
` Filed: August 12, 2015
`
`
`
`UNITED STATES PATENT AND TRADEMARK OFFICE
`____________________
`
`BEFORE THE PATENT TRIAL AND APPEAL BOARD
`___________________
`
`
`COALITION FOR AFFORDABLE DRUGS VI LLC
`
`PETITIONER,
`
`V.
`
`CELGENE CORPORATION
`
`PATENT OWNER
`
`___________________
`
`CASE NO.: IPR2015-01102
`PATENT NO. 6,315,720
`FILED: OCTOBER 23, 2000
`ISSUED: NOVEMBER 13, 2001
`INVENTORS: BRUCE A. WILLIAMS, JOSEPH K. KAMINSKI
`
`TITLE: METHODS FOR DELIVERING A DRUG TO A PATIENT WHILE
`AVOIDING THE OCCURRENCE OF AN ADVERSE SIDE EFFECT KNOWN
`OR SUSPECTED OF BEING CAUSED BY THE DRUG
`___________________
`
`DECLARATION OF
`JUAN (JULIE) WU, PH.D, M.S.
`
`CFAD VI 1054 - 0001
`CFAD VI v. CELGENE
`IPR2015-01102
`
`
`
` Filed: August 12, 2015
`
`
`
`UNITED STATES PATENT AND TRADEMARK OFFICE
`____________________
`
`BEFORE THE PATENT TRIAL AND APPEAL BOARD
`___________________
`
`
`COALITION FOR AFFORDABLE DRUGS VI LLC
`
`PETITIONER,
`
`V.
`
`CELGENE CORPORATION
`
`PATENT OWNER
`
`___________________
`
`CASE NO.: IPR2015-01102
`PATENT NO. 6,315,720
`FILED: OCTOBER 23, 2000
`ISSUED: NOVEMBER 13, 2001
`INVENTORS: BRUCE A. WILLIAMS, JOSEPH K. KAMINSKI
`
`TITLE: METHODS FOR DELIVERING A DRUG TO A PATIENT WHILE
`AVOIDING THE OCCURRENCE OF AN ADVERSE SIDE EFFECT KNOWN
`OR SUSPECTED OF BEING CAUSED BY THE DRUG
`___________________
`
`DECLARATION OF
`JUAN (JULIE) WU, PH.D, M.S.
`
`CFAD VI 1054 - 0001
`CFAD VI v. CELGENE
`IPR2015-01102
`
`
`
`
`
`
`
`I, Juan (Julie) Wu, Ph.D., M.S., hereby declare as follows:
`
`I. Introduction
`
`1.
`
`I am over the age of eighteen and otherwise competent to make this
`
`declaration.
`
`2.
`
`I have been retained as an expert witness on behalf of the
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`COALITION FOR AFFORDABLE DRUGS VI LLC (“CFAD”) for the above-
`
`captioned inter partes review (IPR). I am being compensated for my time in
`
`connection with this IPR at my standard consulting rate, which is $400 per hour.
`
`My compensation is not contingent on my reaching any particular findings or
`
`conclusions, or on any particular outcome in this matter.
`
`3.
`
`I understand that this declaration is being submitted in support of
`
`CFAD’s Opposition to Patent Owner Celgene’s Motion for Sanctions.
`
`4.
`
`In preparing this declaration and formulating my opinions, I have
`
`reviewed and considered Patent Owner’s (“PO”) Motion for Sanctions and
`
`exhibits, as well as each of the documents cited herein. I have also relied upon my
`
`knowledge, research, and experience, described in further detail below.
`
`II. Background and Qualifications
`
`5.
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`From 2008 to the present, I have held the title of Assistant Professor
`
`of Finance, at the Terry College of Business at the University of Georgia. As a
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`
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`2
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`CFAD VI 1054 - 0002
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`
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`finance professor, I teach Ph.D. level research topics in finance, as well as
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`
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`corporate finance theory at the undergraduate level.
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`6.
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`I earned my Ph.D. in Finance from Texas A&M University in 2007.
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`In connection with my Ph.D. studies, I taught managerial finance to
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`undergraduates and instructed incoming Finance Ph.D. students.
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`7.
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`I earned my M.S. in Sociology in 2002 and M.S. in Finance from
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`Texas A&M University in 2003.
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`8.
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`I earned my B.A. in International Finance and English In 1997 from
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`Xi’an International Studies University in China.
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`9.
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`I have authored or co-authored the following publications:
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`• “Short selling and the price discovery process,” with Ekkehart
`
`Boehmer, Rev. Fin. Stud. 26: 287-322. (2013) Lead article.
`
`o Runner Up prize for the RFS Michael J. Brennan Best
`Paper Award, 2014.
`
`• “Equity short selling and bond downgrades,” with Tyler Henry and
`
`Darren Kisgen, J. Fin. Intermediation 24:89-111 (2014).
`
`• “High short interest effect and aggregate volatility risk”, with
`
`Alexander Barinov, J. Fin. Markets 21: 98-122 (2014).
`
`• “Merger arbitrage short selling and price pressure”, with Tingting
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`Liu, J. Corp. Fin. 27: 36-54 (2014).
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`3
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`CFAD VI 1054 - 0003
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`10.
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`I am an Ad Hoc Referee for the following finance publications:
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`Journal of Finance; Review of Financial Studies; Journal of Corporate Finance;
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`Journal of Financial Intermediation; Management Science; Journal of Empirical
`
`Finance; Journal of Banking and Finance; Financial Management; Journal of
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`Financial Research; Financial Review; International Journal of Managerial
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`Finance; Pacific-Basin Finance Journal; and Review of Financial Economics.
`
`11. My work has been presented at the following professional meetings or
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`conferences:
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`• Workshop on The Mathematics of High Frequency Financial
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`Markets, IPAM at UCLA (2015)
`
`• American Finance Association (2013)
`
`• 7th Singapore International Conference on Finance (2013)
`
`• Bachelier conference (2012)
`
`• Financial Management Association (2012)
`
`• American Accounting Association (2012)
`
`• World Finance Conference (2012)
`
`• Midwest Finance Association (2012)
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`• 3rd RMA/UNC Academic Forum for Securities Lending Research
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`(2011)
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`• Financial Management Association (2011)
`
`
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`4
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`CFAD VI 1054 - 0004
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`• Southern Finance Association (2011)
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`• Singapore Management University Accounting Symposium
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`(2010)
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`• 1st RMA/UNC Academic Forum for Securities Lending Research
`
`(2009)
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`• All Georgia Finance Conference (2009)
`
`• American Finance Association (2007)
`
`• Financial Management Association (2007)
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`• Q-Group Fall meeting (2007)
`
`• Workshop on the Microstructure of Foreign Exchange and Equity
`
`Markets (2006)
`
`12. My professional background is further detailed in my curriculum
`
`vitae, which is included with this declaration as Exhibit 1058.
`
`III. Short Selling is Legal and Regulated
`
`13. Short selling is a sale of a security that the seller does not own. It is a
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`common trading strategy in U.S. equity markets. As indicated in the diagram
`
`below, in one of its simpler forms, a short seller first borrows the security from a
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`broker-dealer or an institutional stock lender to immediately sell on the financial
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`market. The short seller later closes out the short position, typically by buying back
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`the security in the open market and returning it to the lender.
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`5
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`CFAD VI 1054 - 0005
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`
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`Borrower
`(i.e. Short
`14.
`
`Seller)
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`
`
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`Loan Fee
`
`Broker
`
`Lender’s Fee
`
`Lender
`
`
`Shares
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`Shares
`
`15. Short selling is conducted for a variety of reasons including an
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`investor’s belief that a security is overpriced, and for arbitrage, hedging or market
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`making duties. In recent years, about 1 out of 4 trades involves a short sale. See,
`
`e.g., Diether et al, “It’s SHO Time! Short-Sale Price Tests and Market Quality,” J.
`
`Fin., 64: 37-73, 38 (2009) (“Diether et al”) (Ex. 1059).
`
`16.
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`In current financial markets, it is more costly and risky to short than to
`
`long (i.e. buy). A number of regulations and procedures constrain selling a security
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`short. First, short sellers typically must leave the proceeds of their sale (plus a
`
`small percent more) to the lender as collateral for the borrowed security. In
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`addition, the borrower often must pay the lender a fee and this fee depends on the
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`demand and supply of the stock in the security lending market. Second, certain
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`trading regulations and procedures govern and constrain short selling. For
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`example, the Securities and Exchange Commission (SEC) “uptick rule” requires
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`that a short transaction be above the price prior to the short trade. Exhibit 1060 is a
`
`timeline summarizing the SEC’s short selling regulations. Third, short sellers face
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`additional implicit costs such as “recall risk” and “short squeeze risk.” Recall risk
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`refers to the risk that a short seller will be required to return the stock to its lender
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`
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`6
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`CFAD VI 1054 - 0006
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`
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`before the short seller intended to return to the stock. Short squeezes happen when
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`
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`a firm, in its attempt to resist short selling, asks shareholders to recall their shares.
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`The amount of such a share recall could be sufficiently large that buying pressure
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`causes a spike in the stock price, resulting in a loss to the short seller. When a price
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`spike is very large, the short position can be forced to close due to collateral
`
`requirements.
`
`IV. Benefits of Short Selling
`
`17. Short selling is permitted in the U.S. because it provides the market
`
`with several important benefits, including correcting overpricing, providing greater
`
`price efficiency, uncovering fraud, providing liquidity, and disciplining
`
`management. In order to achieve such benefits while avoiding stock manipulation,
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`the SEC and other authorities have issued regulations that prohibit manipulative
`
`short selling that intentionally drives down stock price during periods of market
`
`volatility. See, e.g., SEC Final Rule on Amendments to Regulation SHO, 2010, Ex.
`
`1061. While some speculate that short sellers could drive down a firm’s stock price
`
`with false rumors and then cash out at a low price, such practices based on false
`
`rumors are illegal, and there is little academic evidence substantiating this
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`speculation.
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`18. Further, there is little reason to believe that short sellers are more
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`likely to engage in price manipulation than any other party related to a firm—
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`
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`7
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`CFAD VI 1054 - 0007
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`
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`given the potential for unlimited loss to a short position, short selling is less likely
`
`
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`to be manipulative.1 In fact, there is evidence showing that short selling actually
`
`helps to correct upward stock price manipulation by managers that manipulate
`
`earnings and can help to detect other fraud. See, e.g., Karpoff and Lou, “Short
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`Sellers and Financial Misconduct,” J. Fin. 65: 1879-1913, 1880 (2010); Fang et al,
`
`“Short Selling and Earnings Management: A Controlled Experiment,” J. Fin., at 4-
`
`5 (forthcoming, 2015) (Exs. 1062-1063). Enron is one well-known example
`
`showing how short selling can lead to the discovery of a firm’s earnings
`
`manipulation that was inflating the stock price.
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`19.
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`It is important for investors to get accurate price information for a
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`stock because prices affect the allocation of scarce resources. To get prices right,
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`both favorable and unfavorable opinions and research should be expressed and
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`disclosed. This helps ensure that stock prices have an opportunity to reflect both
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`1 For example, if an investor believes that security XYZ is overvalued at its current
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`price of $20 and expects a price drop in the future, the investor can borrow the
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`stock from a lender and sell it for $20 per share. If the price falls to $18 and the
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`short seller buys the security back and returns it to the lender, the short seller earns
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`a $2 per share gross profit. The maximum gross profits for the short sale is capped
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`at $20 per share. The loss can be unlimited because the stock’s price can always go
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`up.
`
`
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`8
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`CFAD VI 1054 - 0008
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`
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`positive and negative information. Short selling plays a crucial role to get the
`
`
`
`bearish information to the market and make the market healthier. Short sellers can
`
`discover negative information that would otherwise be overlooked. By trading on
`
`such information, short sellers help to better align stock prices with the
`
`fundamentals of a firm. See, e.g., Ekkehart Boehmer and Juan (Julie) Wu, “Short
`
`Selling and the Price Discovery Process,” Rev. Fin. Stud. 26: 287-322, 318 (2013)
`
`(“Boehmer and Wu”) (Ex. 1064).
`
`20. Short selling often not only helps to correct overpricing, it can also
`
`uncover fraud. Short sellers often face unfounded allegations of price manipulation
`
`from targeted firms. One well known example is Allied Capital, Inc., a mid-cap
`
`financial company. Short sellers believed the company had committed financial
`
`reporting violations. Share prices dropped when this information was revealed.
`
`Allied claimed that a well-known short seller was manipulating the market and
`
`requested an investigation from the SEC. The SEC found that the short seller’s
`
`information was correct and Allied did commit financial reporting violations.
`
`Another example occurred when short sellers found and revealed accounting fraud
`
`in Spain-based telecommunications company Let’s Gowex SA. Let’s Gowex
`
`accused the short seller’s report of defamation. However, within a week, the
`
`company’s management confessed that fraudulent accounting had been occurring
`
`for at least four years.
`
`
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`9
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`CFAD VI 1054 - 0009
`
`
`
`
`
`
`
`21. Short selling also provides liquidity to the market. Research shows
`
`significant improvements in firms’ liquidity when the SEC suspended the tick test
`
`on a sample collection of firms in 2005. Diether et al. (Ex. 1059 at 71). And a
`
`recent paper shows that small firms subject to the short selling ban in September
`
`2008 experienced severe degradation in liquidity from transaction costs. Boehmer
`
`et al., “Shackling Short Sellers: The 2008 Shorting Ban,” Rev. Fin. Stud. 26: 1363-
`
`1400, 1381 (2013) (Ex. 1065). The evidence illustrates that short selling enhances
`
`firm liquidity. Better liquidity is desirable to firms because it makes it less
`
`expensive to raise capital in the equity market.
`
`22. Short selling also can affect the behavior of firm managers. Short
`
`selling functions as an external governance mechanism to discipline managers.
`
`Because short sellers have incentives to find unfavorable information about a firm
`
`and trade on it, managers can be disciplined to avoid business activity that would
`
`result in potential market punishment of their firm’s stock price. In this way, short
`
`selling can reduce temptations managers may have to manipulate accounting
`
`information. In fact, recent research shows that managers of firms with a higher
`
`threat of short selling are less likely to engage in financial misreporting or earnings
`
`manipulation. Massa et al., “The Invisible Hand of Short Selling: Does Short
`
`Selling Discipline Earnings Management?” Rev. Fin. Stud. at 29-30 (forthcoming,
`
`2015) (Ex. 1066).
`
`
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`10
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`CFAD VI 1054 - 0010
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`
`
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`23. The presence of short selling also improves the quality of internal
`
`governance by stimulating shareholders’ investment in internal governance. Massa
`
`et al., “Governance through Threat: Does Short Selling Improve Internal
`
`Governance?” (INSEAD Working Paper 2013/83/FIN) at 1-2 (Ex. 1067).
`
`24. The disciplinary role of short selling can also increase a firm’s
`
`innovations. He and Tian., “Short Sellers and Innovation: Evidence from a Quasi-
`
`natural Experiment,” (Kelley School of Business Research Paper No. 2014-14)
`
`(Ex. 1068). Since informative short selling, by its very nature, brings high quality
`
`information to the market for investors to analyze, firms with a solid business
`
`model in fact should welcome rather than discourage the practice of short selling.
`
`This is because short selling can help separate good firms from the bad ones. When
`
`short sellers target a firm due to its weak fundamentals, they express their negative
`
`opinion about the firm’s current business model. Dechow et al., “Short-Sellers,
`
`Fundamental Analysis and Stock Returns,” J. Fin. Econ. 61:77–106 (2001)
`
`(“Dechow et al.”) (Ex. 1069). This assessment can be valuable and help
`
`management learn why the firm is lagging behind its competitors. This can be a
`
`good thing to the firm’s operations if the management is truly committed to
`
`enhancing shareholder value.
`
`25. To go one step further, short selling a firm is not only a wake-up call
`
`to the firm, but also sends signals to its rivals. Recent research shows that short
`
`
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`11
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`CFAD VI 1054 - 0011
`
`
`
`
`selling a firm is good news for other firms that compete in the same product
`
`
`
`markets. Akbas et al., “Peer stock short interest and future returns,” at 1-2
`
`(Working Paper, 2015) (Ex. 1070). Accordingly, short selling a firm can also
`
`convey useful information to a firm’s competitors.
`
`26. Some contend that short selling harms the shareholders of a targeted
`
`firm. There are several reasons this is not necessarily accurate. First, shareholders
`
`can be better informed in the presence of informed short selling. They not only get
`
`favorable information from firm managers, they receive unfavorable information
`
`revealed by short sellers. This can help shareholders make decisions to help the
`
`firm improve if they decide to stay or vote with their feet by selling their shares.
`
`Second, because informative short selling helps to correct overpricing, it can
`
`actually protect shareholders from big losses. In the case of Enron, for example,
`
`had short selling been more aggressive, the firm’s fraud could have been
`
`uncovered earlier, and shareholders’ losses could have been much lower than the
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`reported $60 billion lost.
`
`27. Some targeted firms contend that short sellers may make their shares
`
`more volatile. The research, however, suggests the opposite. Informative short
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`sellers tend to be contrarians who sell more after periods of positive returns.
`
`Dechow et al (Ex. 1069). Dechow et al shows that changes in short selling are
`
`positively related to changes in prices. In addition, Diether et al., “Short-Sale
`
`
`
`12
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`CFAD VI 1054 - 0012
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`
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`Strategies and Return Predictability,” Rev. Fin. Stud. 22: 575-607 at 580, 604-605
`
`
`
`(2009) (Ex. 1072), shows that short sellers short more when recent prices were
`
`high and short less when past prices were low. The nature of short sellers’ use of
`
`contrarian strategies tends to contradict the claim that short sellers make share
`
`prices more volatile.
`
`28.
`
`In a world with limited resources, firms compete for resources and
`
`investors investigate in which firms to invest. The presence of short selling poses
`
`little, if any, harm to the investing public at large. In fact, it can help firms to
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`compete more fairly and help the investing public make more informed allocations
`
`of their scarce resources. Investors hope to invest in high quality firms, but find
`
`this task extremely difficult because there are such a vast number choices—there
`
`are over 5000 publicly listed firms in the U.S. Short selling helps investors become
`
`better informed in their investment choices.
`
`29. Rather than being somehow “nefarious,” it is actually when short
`
`selling is not sufficiently prevalent that the investing public is harmed. Had short
`
`selling been more prevalent during the tech bubble period from the late 1990s to
`
`the early 2000s, investors who allocated money to the tech industry would have
`
`avoided some of the billions of dollars lost. See, e.g., Prof. Lamont congressional
`
`testimony (Due to insufficient short selling during the Internet stock mania,
`
`“billions of dollars [were] wasted on uneconomic enterprises, millions of investors
`
`
`
`13
`
`CFAD VI 1054 - 0013
`
`
`
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`suffered losses, and hundreds of thousands of workers switched jobs only to see
`
`
`
`their new companies fail.”) (Ex. 1073).
`
`30. Short sellers invest in their ability to collect and assess superior
`
`information. For these reasons, while short sellers seek to profit from their
`
`investments, their short activist strategies can at the same time generate a positive
`
`social impact. In one recent example, a hedge fund shorted the stock of Lumber
`
`Liquidators because the hedge fund’s research raised questions about the
`
`sustainability of Lumber Liquidators’ high profit margin. Upon investigation, the
`
`hedge fund found that the company had been selling Chinese-made laminate
`
`flooring containing levels of potentially carcinogenic formaldehyde exceeding the
`
`legal limit in California. To raise public awareness, the hedge fund contributed to a
`
`segment run on the television program “60 Minutes.” While the hedge fund
`
`profited from the declining stock price of Lumber Liquidators, it also helped stop
`
`unethical business practices that were dangerous to the public health.
`
`31.
`
`In addition, research shows that most short sellers gain any
`
`information advantage they have by their superior ability to understand public
`
`information. Engelberg et al., “How are Shorts Informed? Short-Selling, News and
`
`Information Processing,” J. Fin. Econ. 105: 260-278 (2012) (Ex. 1071). The
`
`examples discussed above all show that short sellers get important information
`
`from their analysis of a firm’s public information. Short sellers do original research
`
`
`
`14
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`CFAD VI 1054 - 0014
`
`
`
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`of public information, combined with their insight about the industry, macro news,
`
`
`
`and knowledge of institutional details to inform the market of data points that
`
`should be reflected in accurate stock pricing. So while some argue that short
`
`selling is “nefarious” because short sellers can cause and profit from no-
`
`information price declines, empirical research reveals that short selling does not
`
`cause sudden and excessive price declines unrelated to information. Boehmer and
`
`Wu (Ex. 1064 at 309-314). Rather, short selling helps stabilize prices, because
`
`research finds that short trading activity is consistent with a short seller’s role of
`
`keeping prices in line and close to their efficient values.
`
`32.
`
`I declare that all statements made herein of my own knowledge are
`
`true and that all statements made on information and belief are believed to be true.
`
`I understand that willful false statements may subject me to fines, imprisonment or
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`both, pursuant to Section 1001 of Title 18 of the United States Code.
`
`
`
`Signed:
`
`
`
`Juan (Julie) Wu, Ph.D., M.S.
`
`Date: 08/11/2015
`
`
`
`15
`
`CFAD VI 1054 - 0015
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