Muddy Waters Capital should be spiking the ball on OSI Systems right now.
Last Thursday, the security company disclosed it was being investigated for FCPA (Foreign Corrupt Practices Act) violations not just by the Securities Exchange Commission but also by the Department of Justice. The fact that OSI felt the need to disclose the existence of the probe in the first place (many companies don’t) means it’s serious and material to their business. That’s not surprising given that criminal authorities are involved. We’re not just talking about a big fine here, but executives could possibly go to jail. OSI hasn’t yet been accused of any wrongdoing but the stock dropped nearly 18% on Friday wiping out nearly $200 million of the company’s value.
The company also said the authorities were also looking into unspecified trading in its securities and a senior-level employee had been dismissed.
Muddy Waters’ allegations centered on bribery and corruption in Mexico and Albania, but the DOJ might be taking this matter extra seriously given that OSI makes screening systems at airports and ports – obviously something that is extremely important for national security. If OSI is truly “rotten to the core” as Carson Block told the Wall Street Journal, it’s hard to see how the company can retain any of its contracts in the U.S. These investigations typically take years, so we’ll see what happens but airports and ports across the country have to question whether they can use a company for such an important job while it’s under investigation for bribery. Indeed, in 2013, the TSA ended its contract with OSI’s Rapiscan unit over controversy with the software in its body scanning machines.
This could get ugly, but thanks to again to the activist shorts, a government investigation is under way.