When bombshell bribery and corruption allegations surfaced last December against OSI Systems, a 5,000-employee port-and- aviation scanning company based in Hawthorne, they arrived with all the earmarks of modern investigative reporting: anonymous sources identified as former employees offering detailed knowledge, links to public documents supporting the allegations, even a 13-minute website documentary illustrating why one expert felt the company was “rotten to the core.”
As you might expect, in no time the company’s stock plummeted, losing some 25 percent in a single day. By February, the Securities and Exchange Commission (SEC) and Department of Justice had taken notice and the company’s quarterly filings included a disclosure to investors. The stock-watching site SeekingAlpha reported that the investigation disclosure was “… that the SEC has launched an investigation into the company’s compliance with the Foreign Corrupt Practices Act. OSI says the U.S. Attorney’s Office for the Central District of California has also said it would request information.”
The scandal has played out over months, with OSI share prices swaying with the latest report and those pesky federal investigations looming. A good second quarter earnings report helped, revelation of federal investigations hurt and a disputed Mexican contract renewal helped, but terms are not entirely clear.
Many might agree that this is real news, especially in SoCal where OSI Systems is based and where its security firm Rapiscan is well known, providing security for, among other things, the Port of Los Angeles. It seems like the kind of reporting that’s hard to come by in this era of newsroom cutbacks and Trump-obsessed 24/7 analysis. It is also worth noting that, despite extensive coverage in the stock-watchdog mediascape, the story has still received little attention from “mainstream” business reporters.
There’s just one issue. The reporting did not come from journalists.
Instead, it came from a “short seller” firm, which means the reporters presumably had a very direct financial interest in negative reporting driving the stock value down. Short sellers make money by, in effect, borrowing shares in a company and selling them. They make money if they “repay” the shares at a lower cost than that initial loan, so clearly they have a direct financial interest in negative news about the targeted company. A New York Times story described the practice, and the Wild West world of activists investing here.
The Times magazine has reported on “activist investors” and their reporting campaigns, including that “… from 2006 to the 2015, the number of activist short campaigns rose by 1,300 percent, to 1.289. In the past three years [before 2007] the number of activist short-sellers working globally has nearly doubled, to 72 from 39…”
The reporting about OSI/Rapiscan came from just such an activist investor firm called Muddy Waters Research (or MWR – the name comes not from the father of Chicago blues but from the Chinese proverb about muddy water making it easier to catch fish). Muddy Waters is one of the better known American short-sellers and Carson Block, its founder, is a frequent cable news guest who rose to prominence, in large part, with a series of shorts involving shady practices by a few Chinese companies.
The MWR website is not shy about denouncing Wall Street, saying on its website that it “… peels back the layers, often built up by seemingly respected but sycophantic law firms, auditors, and venal managements.”
The SeekingAlpha stock-watcher website was among those noticing that the OSI/Rapiscan story had another staple of a news story: the non-denial denial. It reported that “… Not surprisingly, when Block’s revelations became public on December 6, 2017, OSI responded by calling the allegations ‘misleading’ and said the contracts in Albania and Mexico ‘were the result of public tenders’… the press release also stated how effective the contracts have performed. However, they did not categorically deny the charges.”
The story goes on, but the core reporting remains that original Muddy Waters investigation.
The Motley Fool stock website is among those following the saga, reporting that the Muddy Waters investigation “… launched serious accusations against the company, which the U.S. government is now taking seriously.” If OSI Systems did indeed use bribes to win those contracts, it could have “an enormous impact on OSIS’s profits… because of that risk, investors should avoid this stock until it’s cleared of all wrongdoing, because there could be significantly more downside ahead if it’s not.”
You have to wonder if, at a time when President Trump is promising fewer regulators and investigative news reporting is on the wane, this longstanding practice might become even more mainstream in its own right. The Law360 news website, a division of the very credible LexisNexis firm, covered the OSI/Rapiscan federal investigation revelation and referred to the Muddy Waters report as “a tip” to law enforcement.
Maybe what we’re seeing, at least in this case, is that the sort of point-of-view reporting we’ve grown accustomed to with Mother Jones magazine or Rolling Stone or even The Daily Caller is shifting into very direct reporting on the Wall Street environment. Reporting with direct financial gain is going to take some getting used to, but it seems like a clear trend. So, is a clearly disclosed financial interest all that far removed from other interests?
That remains to be seen, but I did notice a sign that “activist reporting” is starting to be treated as, at least, quasi-journalism. It’s one of the more reliable indications: They’re banning it in China.