- In over 100 articles I have seldom used the word fraud to describe concerns. I reserve that word for the very worst situations where I have the highest confidence.
- Within a few months after I expressed my fraud concerns on Osiris, we saw a CEO resignation, sweeping restatement of inaccurate financials and a criminal investigation.
- Last Friday (after market close) Osiris announced that it would finally be delisted to the pink sheets.
- I am short Osiris.
- Lessons from Osiris can help people avoid catastrophic losses elsewhere.
Note: This article represents the opinion of the author. Nothing herein comprises a recommendation to buy or sell any security. The author is short OSIR.
Over the past few years, I have written at least 100 articles in various places online which have voiced my concerns over problems I have observed at publicly traded companies. Even when these problems are very significant, I almost never come out and explicitly use the word “fraud”. I reserve the use of that word for the true “worst of the worst” situations and where I also hold the very highest confidence. I generally only use the word “fraud” prominently once or twice a year.
Osiris Therapeutics (NASDAQ:OSIR) was clearly one of those situations. Here is the article I wrote on Osiris.
Following my article on Osiris, the company’s problems became evident quite quickly. Within 4 months, we saw a CEO resignation, a sweeping restatement of inaccurate financial statements and a criminal investigation. Obviously that was all quite bad. But it wasn’t until last Friday (March 10, 2017) that we finally got full closure. Last Friday, Osiris announced that it would be formally delisted from that Nasdaq and begin trading on the Pink Sheets as of this coming Tuesday. (As is often the case, when companies choose to release bad news, Osiris released this news well after market close on a Friday when most investors were already gone for the day.)
Yes, I am short Osiris.
Here are a few lessons we can learn from Osiris to help avoid catastrophic losses elsewhere in the market.
Lesson #1 – The cover up is often worse than the original problem. Don’t expect them to admit it.
As my regular readers know, I refuse to be rushed to publish anything I write. After I publish an article, companies will frequently put out aggressive public statements “refuting” my research and trying to discredit me. Rather than engage in back and forth banter, I typically remain mostly silent.
I act this way according to two very deliberate strategies.
Strategy #1: “The best way to expose a liar is to just let them keep talking”.
Strategy #2: “Make sure to give the guilty party enough rope to hang themselves”.
Osiris’ response to my article
As expected, Osiris did put out a press release to purportedly address my concerns and tout their supposed recent accomplishments.
In addition, I also received some angry correspondence from the company which included denials of what I had said along with veiled threats of legal action against me.
Yawn. I was happy to say nothing and just let the waiting game begin.
That glowing and bullish press release was dated January 19th, 2016.
On February 4th, 2016, just two weeks after the glowing and bullish press release, Osiris CEO Lode Debrabandere abruptly resigned from the company citing unspecified “personal reasons”. Please note that he had been with Osiris for 10 years and then suddenly resigned just two weeks after issuing a press release to assure investors of Osiris’ bright future and recent “transformational” developments.
On March 14th, 2016 (just 55 days after our glowing press release), the audit committee then came to the conclusion that Osiris’ previously issued financial statements should no longer be relied upon. This is completely consistent with the concerns I had raised in my article.
On May 24th, 2016 (just 126 days after the glowing press release), Osiris finally announced that it was the subject of a criminal investigation by the US Attorney’s Office. The criminal investigation was regarding Osiris’ accounting practices, which again was exactly the focus of my article.
[Osiris is currently delinquent in filing its ongoing financial statements with the SEC. Since the time of the announcement of the criminal investigation, Osiris has not filed any 10Q or 10K filings and has not otherwise provided any update on the criminal investigation that I could find. So the current status of that criminal investigation remains unclear.]
So there you have it. In my view, 3-4 months seems like a pretty sensible amount of time to wait between the glowing press release from Osiris and the formal criminal investigation. It’s all about being patient.
In general, it has been my extremely consistent experience that “the louder they protest, the guiltier they are”.
Once their actions come under public scrutiny, many troubled companies will often try their best to divert attention away from themselves and onto their critics. For example, many companies will often say that shorting stocks or writing short articles is somehow illegal. They will invent conspiracies to distract investors citing things like “illegal naked short selling” or invent various “organized conspiracy plots” which are supposedly acting to drive down their share prices. They will often claim that they are initiating legal actions either through the courts or through the regulators such as the SEC.
Forcefield Energy’s response to my article
With Osiris, it took around 4 months for the Feds to launch their criminal investigation. To some people, that might seem pretty fast.
But with Forcefield Energy (NASDAQ:FNRG), it only took a few days for the Chairman to be arrested and the stock to be halted and then delisted. Now that was really fast.
As with Osiris, my article on Forcefield was one of the extremely rare instances where I felt comfortable using the explicit word “fraud” in my article.
My article was published on April 15th.
The company put out its aggressive response, denials and threats of legal action against me on April 17th (just two days later).
And on April 20th (just 5 days after my article), the Justice Departmentannounced that it had arrested Chairman Richard St. Julien as he was about to board a plane in an attempt to flee to Central America. On that same day, Forcefield stock was halted and then eventually delisted.
It was subsequently disclosed by the Justice Department that 9 individuals were indicted on sweeping fraud charges totaling $130 million.
Sadly, the depth and extent of the fraud at Forcefield are pretty much identical with what we see at other stock promotions and frauds.
According to the DOJ:
They took a company with essentially no business operations and little revenue and deceived the market and their clients into believing it was worth hundreds of millions of dollars through a dizzying round of unauthorized trades and deceptive promotions. In the end, the deceived investors were left holding the empty bag,”
Again, the implosion happened in just 5 days and Forcefield went from $7.50 to zero.
I knew that Forcefield was going to be a homerun short trade as soon as I saw the public statements being issued by the Chairman. Again, “the louder they protest, the guiltier they are”.
The “rebuttals” to my article from Forcefield are worth looking at in more detail. The press release reads like a boiler plate script which has been repeated over and over again by numerous fraudulent companies as they seek to divert attention from their own impending calamities.
While the specific wording varies from case to case, the elements are always the same in these public denials.
First, highlight that the author is short. Imply that this is somehow bad or even illegal. (It is not). State clearly that the company is acting to protect its shareholders from short sellers. Standard stuff.
Second, flatly deny, deny and deny all content of any negative and say that it is inaccurate. Don’t worry about refuting specific evidence in the article. Occasionally provide a few clever obfuscations which, in reality, don’t directly address the actual original concerns raised.
Third, make high profile and scary sounding threats of legal action through the courts or the SEC. Clearly if the company were guilty, they wouldn’t deliberately seek to involve the courts or the regulators, right ? (Wrong. By this point, these companies have nothing to lose. I have observed that in most cases any threats of supposed SEC complaints or lawsuits by these fraudulent companies turn out to be either sham efforts or outright lies.)
The quote from the DOJ above shows just how empty and utterly fraudulent Forcefield really was. Yet here are a few very sincere sounding quotes from Forcefield which came just 3 days before the Chairman was arrested. You will often see nearly verbatim quotes from other fraudulent companies once they come under public scrutiny.
From Forcefield’s press release:
[Here is the standard part about blaming shorts and claiming information is wrong]
The opinion was written by an individual investor, not a registered financial advisor, who has disclosed owning a short position in the Company’s common stock… The Company maintains that the article contains material inaccuracies about its management, business and prospects.
[Here is the standard part about “protecting investors” and pursuing legal remedies]
Richard St. Julien, Forcefield’s Chairman stated, “We are not going to stand by and allow our Company, officers and directors, employees and shareholders to continue to suffer through what appears to be an orchestrated short selling attack based on misinformation. We intend to defend ourselves and pursue all possible remedies against the allegations asserted in the opinion. Further, we will provide our shareholders and investment community a business update in a release pre- market on Monday April 20, 2015.
[Here is the standard part blaming some supposed conspiracy or short sellers and the part about “initiating legal action”.]
In addition, Forcefield stated that it had “requested that a regulatory agency review the trading activity in its common stock in addition to any relationships, arrangements and commonalities between short sellers and others.
Again, within 72 hours of making those strong and reassuring statements to the public, Chairman Richard St. Julien was sitting in the custody of the FBI and DOJ.
A response from Galena Biopharm
In February of 2014, Adam Feuerstein of TheStreet.com published a scathing article on Galena Biopharma (NASDAQ:GALE) describing undisclosed paid stock touting scheme which Galena insiders used to dump their shares at inflated prices. The authors behind these paid articles were assuming false identifies, often pretending to be doctors, biotech experts or hedge fund managers. Their supposed “expertise” always predicted in various articles that Galena would soar to new heights. This in turn did cause the stock to rise.
After Feuerstein’s article, the share price plunged and Galena was quick to issue a letter to shareholders which it said was being done (of course) “as a service to our shareholders”.
In Feuerstein’s article, he had cited online evidence of paid promotion behind Galena. But once highlighted, much of this evidence began to disappear from online locations.
Once the evidence disappeared, Galena then felt confident to describe Feuerstein’s writing as “tabloid like”, “accusatory” and “negative”.
The only facts in Mr. Feuerstein’s most recent article that are remotely accurate are that Galena previously engaged the DreamTeamGroup and that insiders at the company, including me, divested shares in mid January. All other accusations in this article – as with his prior reporting on Galena – are specious and conveniently arranged to create controversy.
As soon as I saw this public statement from Galena, I literally laughed out loud. I cackled. I guffawed. I chortled.
Once again, “the best way to expose a liar is to just let them keep talking”.
Unbeknownst to Galena or Feuerstein, at this very time, I was already elbow deep into my own investigation into the paid promotion behind Galena.
Shortly thereafter, I released the smoking gun documents obtained directly from the guilty promoters which described in detail the intimate involvement of Galena management in actually coordinating and even editing the undisclosed paid articles which were being published during an ongoing paid campaign using the Dream Team Group.
[In December of 2016, Galena announced that it had reached “an agreement in principle” to settle with the SEC. However, just a few weeks later in January of 2017, Galena then announced that it was now under criminal investigation by the US Attorney’s Office and the Department of Justice for separate issues related to the marketing and promotion of fentanyl.]
Prior to the scandal (and as a result of the paid promotion), Galena had traded as high as $8.00. Galena now trades for around 58 cents.
The aggregate lesson from these examples above should be simple. Once there are indications that a company has misled investors in the past, it should come as no surprise that they are willing to mislead investors in ongoing press releases. History has shown that fraudulent companies are more than willing to put forth massive and outlandish statements that are absolutely and utterly false. Oftentimes, they will literally say anything regardless of how ludicrous or unsubstantiated it might be.
Lesson #2 – Markets are rational in the long term but irrational in the short term
As much as I like to take credit for exposing Osiris, the fact is that I was not the first one to publish concerns about the company.
Prior to my article on Osiris, author Edward Vranic, CFA had published no less than 3 very concerning articles highlighting his own concerns about Osiris. I felt that his concerns were extremely valid and were very well articulated.
Despite the concerns raised by Vranic, the stock barely budged, sticking closely to a price of around $10. The market simply didn’t care. For the market to ignore such significant information was truly irrational.
Once I observed that the market didn’t care about Vranic’s concerns, I naturally assumed that it would also not care about any subsequent concerns that I might have just a few weeks later. But for the good of the market, I chose to publish my research anyway.
I was quite surprised to see the stock quickly drop by as much as 40% following my article. The concerns that I raised were entirely different than those raised by Vranic, but I felt that they were largely of the same magnitude.
The fact that the market reacted so strongly to one set of concerns while virtually ignoring the other again shows how irrational and unpredictable that markets for these small cap controversial stocks can be.
And then the mystery deepens even further.
Following the announcement of the financial restatement in March, Osiris plunged to a new low of $3.55. That seems pretty rational so far, although I would have possibly expected a bit of a deeper decline.
But then for some reason the stock steadily rebounded to prices well above $6.00. This was true even after the criminal investigation was announced.
Ultimately we can see that Osiris is now being delisted to the pink sheets. The stock will now grind down to well below $1.00 where it belongs.
The lesson to be learned here is this:
In the short term stock prices can remain irrationally elevated even in the face of bad news.
In the long term stock prices will eventually converge to their fair value.
The problem is that the demarcation point between “short term” and “long term” often happens in just an instant, leaving those who own the stock subject to immediate and unavoidable losses.
The lesson here is that holding on to shares of problematic and controversial small caps is demonstrably a very bad idea. Even if they seemed immune to their problems yesterday, they will often plunge suddenly and without any advance notice, leaving investors no opportunity to get out.
Lesson #3 – Sell side research is generally worthless
At the time of my article on Osiris, numerous concerns were already starting to leak out into the public domain. Ed Vranic had already been quite vocal and the concerns I had raised were all based on publicly available information. Clearly the stock was headed dramatically lower from its then level of around $10.00.
But for some reason Piper Jaffray continued to support the stock with a whopping $28 price target. Even without the baggage of obvious malfeasance, Osiris’ underlying business simply couldn’t justify such a lofty price target.
Piper continued to maintain bullish targets even after my article, and as the stock hit $5.00. Piper continued to maintain its bullish targets even after the CEO resigned. And somehow Piper continued to stay bullish even after the audit committee recanted the company’s historical financials as being inaccurate.
Only in June of 2016 (just days after the announcement of the criminal investigation) did Piper finally “suspend” its rating of Osiris. At the time, it had still maintained a $12 target on Osiris.
It continues to puzzle me how sell side analysts continue to have any impact on share prices at all. I really don’t know why anyone continues to listen to them. It is widely known that as much as 95% of sell side targets are with Strong Buy, Buy or Hold recommendations. The occasional Sell rating is hard to find and inevitably comes well after the share price has already plunged, making such a “recommendation” completely useless to investors. There is simply no incentive for sell side analysts to ever put a Sell rating on a stock. As a result, they just don’t do it, regardless of how horrific the stock has become.
And yet for some reason we can still see share prices often pop when some sell side analyst initiates coverage or raises his target.
Despite my general disdain for sell side analysts, there is one guy who deserves a special positive shout out.
Very early in the game, when the stock was around $15, Brean Capital analyst Jason Wittes downgraded Osiris to a Sell with a target of $8.00. He also cautioned investors that emerging concerns could send the stock to below $5.00.
Wittes deserves strong kudos for being right, for being early and for accurately predicting quite closely the near term impact on the share price. He also deserves extra kudos for demonstrating very rare courage in moving against the herd by actually putting out a Sell rating at all.
Sadly, coverage and analysis like that from Witte is the vast exception to the rule.
When looking at fraudulent companies, share price implosions often occur in stages.
With Osiris, the first phase only took a few weeks after my article to begin, starting with the resignation of the CEO. This intensified once we saw restatements of inaccurate financials and a criminal investigation a few months later.
All of this fallout occurred not long after Osiris put out a press release designed to reassure investors and “refute” critics like me. I hope that investors will learn the lesson that such press releases and the statements they contain should be viewed with a very large grain of salt. The lesson I have consistently observed is that “the louder they protest, the guiltier they are“.
In many cases, companies which demonstrate clear underlying problems will be headed for ultimate delisting and implosion. But in many cases their stocks will take a pause on the way down, typically after initial plunges of around 50%. The final plunge to the pennies will then come with little notice when the company is ultimately delisted.
Sell side research is generally not worth the paper it is printed on. In most cases, I ignore it completely. Although there are a few exceptions.
In the article above I only cited a few examples to support these lessons. Each of these were based on articles written by me.
But aside from Osiris, Forcefield and Galena, I have had similar experiences following many others of my past articles. After my articles are published, we have frequently seen some form of aggressive response and then some moderate level of share price decline. Yet ultimately we have consistently seen these stocks eventually plunge by 80-95% from their promotional highs and also become the subject of either SEC investigations, class action lawsuits or forced resignations of senior management.
Disclosure: I am/we are short OSIR.