This could be one of the best things we’ve seen. Marc Cohodes, who has been going after biopharma company MiMedx for months, slipped into the JPMorgan healthcare conference and confronted the CEO and other management. It’s fun – check out the video from Adam Feuerstein via this link here. (sorry we can’t embed it)
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.
Marijuana stocks have been all the rage for the past several years as states have moved towards legalization. But the Trump Administration put a damper on that this week right after Andrew Left’s Citron Research blasted Aurora Cannabis (TSE: ACB) with a litany of claims including “Enron-type accounting” and no path to profitability.
Aurora VP Cam Battley said the company made a strategic choice to operate at a loss while it builds up production capacity, which is supposed to hit 250,000 pounds of marijuana per year by the middle of 2018. That’s a lot of weed! He added that Citron “doesn’t have a clue what he’s talking about.”
Aurora’s shares popped 20% on the day Citron came out with their thesis – not the best outcome on for an activist short seller on the first day. We’ll have to see where it goes from here, especially in light of the new Jeff Sessions-crackdown on the legal marijuana industry in the U.S.
CEOs who come under attack by activist short sellers often don’t know what hit them.
The guiltiest among them often lash out with personal attacks against their critics. In this case, Aurelius Value, an anonymous activist short seller known for its research on banks and other financial-sector firms, posted a scathing report on Washington D.C.-based Eagle Bancorp Inc. (EGBN) on Dec. 1 alleging bad loans, kickbacks to management and lack of internal controls. That dropped the stock by over 24% on the day of the report even though financial companies are typically hard for short sellers to get right. (See AIG, Lehman etc.)
Shares of EGBN have recovered somewhat but that didn’t stop the name calling by CEO Ronald Paul (not Ron Paul) and COO Michael Flynn (not the indicted Michael Flynn.)
“These are shrewd scumbags,” Paul told S&P Global Market Intelligence. Flynn called Aurelius “short-sale bandits” in the same article. Here’s how they are planning to combat the allegations.
From S&P Global Market Intelligence:
In the interview, Paul said Eagle is consulting with Wall Street experts and has hired a lawyer with special expertise in U.S. Securities and Exchange Commission matters to provide a playbook for the bank as it anticipates further attacks from Aurelius. Paul said that, “as hurt as I am” by the Aurelius allegations, Eagle does not plan litigation against the short seller. “That’s just not our style,” he said, but the bank does intend to be fully prepared to refute further allegations that it determines to be false.
Very interesting academic study on the limits of government regulation and how activist short sellers can motivate corporate ethical behavior.
Note the new buzzwords for activist short selling including “monetized self-regulation” and “inverted moral markets” or IMM.
To provide insight on internally driven controls, this article examines how a newer form of monetized self-regulation, referred to as inverted moral markets, might be leveraged to motivate corporate ethical behavior. Inverted moral market (IMM) operations target firms suspected of unethical action, providing a type of market whistleblowing.
Download here – Inverted Moral Markets IMMs as market regulators