Investigative Report Triggers Federal Probe, But Is It Really Journalism?

Carson Block, founder of Muddy Waters Research.
Carson Block, founder of Muddy Waters Research.

When bombshell bribery and corruption allegations surfaced this past 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 with detailed knowledge, links to public documents supporting the allegations, even a well-made 13-minute documentary illustrating why one expert felt the company was “rotten to the core.”

Shortly thereafter the company’s stock plummeted, losing some 25 percent of its value 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 SEC … 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.”

This is real news, especially in Southern California where OSI Systems has a subsidiary firm called Rapiscan. Rapiscan a well known firm that provides security for, among lots of other places, the Port of Los Angeles. It was the kind of reporting that’s hard to come by in this era of newsroom cutbacks and Trump-obsessed around-the-clock 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 original 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 in the wild west world of activist investing. 

The documentary that lead to the SEC filing charges against OSI Systems came from Muddy Waters Research (the name comes not from the father of Chicago blues but from the Chinese proverb about muddy water making it easier to catch fish), which is one of the better known American short-sellers. Carson Block, its founder, is a frequent cable news guest who rose to prominence, in large part, with a series of short sales involving shady practices by a few Chinese companies. In fact, one of the other ways that short-sellers resemble journalists is that China has begun censoring their reporting, issuing its first Hong Kong ban last December, according to the South China Morning Post.

Muddy Waters Research is not shy about denouncing Wall Street. On their website, the research firm says 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 that took notice of OSI’s non-denial denial response to Muddy Waters allegations made in the short documentary.

“… 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,” reported.

The scandal has played out over months with OSI share prices rising and falling with every report and 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. The story goes on, but the core reporting remains that original Muddy Waters investigation.

Motley Fool Stock Advisor, another stock watching website following the saga reported that the Muddy Waters documentary “… launched serious accusations against the company, which the U.S. government is now taking seriously. If OSI System’s 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.”

At a time when President Donald Trump is promising fewer regulators and investigative news reporting is on the wane, it’s reasonable to question whether this longstanding practice might become the norm rather than the exception.

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 activist reporting is evolving beyond the sort of socially conscious reporting we’ve come to expect is being injected into the Wall Street environment. Reporting with direct financial gain is certainly not the unbiased journalism of lore, but what about reporters and outlets with their own goals, albeit non-financial? Is a clearly disclosed financial interest all that far removed from other conflicts of interest?

That remains to be seen, but I did notice a sign that “activist reporting” is starting to be treated as quasi-journalism: China has banned short seller reports.