Investigative Report Triggers Federal Probe, but It's Not Really Journalism – Or Is It?

D.C. DISPATCH-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 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 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.” 

This is “Real news” especially in SoCal where OSI Systems' security firm Rapiscan is well known and 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 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 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, and the Wild West world of activist investing here. 

This particular reporting, about the California company, 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 shorts 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, 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 taking notice 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 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. 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, if 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 activist reporting is evolving beyond the sort of socially focused reporting we've expected and into the Wall Street environment. Reporting with direct financial gain is certainly not the non-biased 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. It's one of the more reliable indications: They're banning it in China. 

 

(Sara Corcoran writes for CityWatch and is a correspondent and contributing editor, as well as founding publisher of the National Courts Monitor. She literally grew up in a “legal family.” She is the granddaughter of “Tommy the Cork,” who advised President Franklin D. Roosevelt and is considered an “author of the New Deal.” As a former Real Estate Executive, Sara was a VP at Remington Capital where she was responsible for originating and servicing the mid cap portfolio for a leading hospitality REIT. Concurrently, she did business development for Jack Kemp at Kemp Capital Partners. She received her MBA from the Antai School of Economics and Management in Shanghai, China, and a BA in Political Science from the University of Southern California. Sara also specializes in Forex, Merger Arbitrage, Cryptocurrencies, and Futures and Commodities.) Prepped for CityWatch by Linda Abrams.