The so-called 'Trump of Georgia' is raining lawsuits on short sellers around the country
- Pete Petit, the CEO of MiMedx, which makes wound-care products, is filing lawsuits against short-sellers to try to learn the identity of a pair of anonymous bloggers.
- The bloggers published reports pointing to whistleblower allegations of fraud at MiMedx and what they claim are clues of government inquiries into MiMedx.
- The company says the allegations are meritless, and that short-sellers are sharing fake information in their campaign.
- Petit's tactics may backfire, says Erik Gordon, a professor at the University of Michigan's Ross School of Business: "Suing short sellers is unlikely to scare them away. It's more likely to attract more short sellers."
A flamboyant CEO critics calls the "Trump of Georgia" is engaged in a legal war with the nation's short-sellers - traders who bet a stock price will fall - and searching for the analysts who wrote anonymous blog posts about his small pharmaceutical company, MiMedx Group.
His name is Parker H. "Pete" Petit. He's a self-made millionaire with a university football field named after him and ties to high-level GOP officials.
Over the past few months, Petit has taken to conference calls and press releases to obsess over the idea that a "wolf pack" of "naked short sellers" is hell-bent on destroying his company. There's a section of the company's website dedicated to addressing claims and reports, and he's spending enough on legal fees that he had to acknowledge the rising expense to investors on the company's last earnings call. He wants to make sure his investors understand that short sellers have a vested interest in making his company look bad.
But of course that doesn't mean they're wrong.
One of the reports that set off this legal war was published on a site called Aurelius Value. It lists no author. It highlighted claims of "channel stuffing" - in this case, the practice of using distributors to artificially inflate sales - filed in a public whistleblower lawsuit last year. Another report, also anonymously authored, from a shop called Viceroy, suggested that the SEC is looking into the claims, something that's also claimed in another lawsuit against the company.
Not all critics of MiMedx remain anonymous, though. UBS, for example, told clients that the company's products - used to heal wounds - aren't as effective as the company says and face serious competition that investors aren't yet considering. UBS thinks the company is worth about 40% below its current stock price.
Regardless, it's the way Petit is hunting for the anonymous writers that has grabbed Wall Street's attention.
"It's unusual and it's dangerous because if you sue someone solely on the basis of finding someone else you could be countersued for abuse of process," said Erik Gordon, a lawyer turned professor at the University of Michigan's Ross School of Business. "You can't sue people and put them at the expense of defending themselves in court when you have no basis for suing them other than that you're looking for someone."
Aurelius and Viceroy
Everything you read about Petit is larger than life.
He flies planes. He is friendly with Georgia Sen. Johnny Isakson and former Health and Human Services Secretary Tom Price. The Georgia State University football field was named for him after he gave a $10 million gift to the university to support the athletics program. He donated $3.3 million to Georgia Tech, his alma mater, for an engineering building. He was Donald Trump's finance chair in Georgia too.
His critics have tried to make something out of his ties to Price, who was overseeing the FDA for a few months this year. It's fairly standard political brawling that's not so relevant now that Price has been sent packing.
MiMedx turns human placenta into wound-healing treatment, and, according to Piper Jaffray, it enjoys the largest share of the wound-healing market in the US at 27% of sales. Its shares were breaking records until August.
Then the short sellers began to pile in - as indicated by the blue line in the chart below.
After that, Aurelius and Viceroy showed up. They're anonymous bloggers with an unknown readership. On September 20, Aurelius, whoever he or she is, wrote a blog post titled "MiMedx: Flying Too Close To The Sun."
Aurelius went over some issues at MiMedx - namely, allegations of channel stuffing levied against the company by two former employees. The allegations weren't new. They were made in a lawsuit filed against MiMedx last December.
Channel stuffing is when a company moves a bunch of its inventory around, parking it with some unit that investors don't even know exists, and then books that hidden inventory as a sale. The former employees, Jess Kruchoski and Luke Tornquist, allege that MiMedx was doing this through a now shuttered distributor called AvKare. Allegedly, AvKare would "provide sales documentation falsely documenting the bogus VA sales."
That is, sales to hospitals belonging to the Department of Veterans Affairs.
Sometimes, according to the suit, MiMedx wouldn't even use AvKare. MiMedx employees would simply ship their product, EpiFix, to VA hospitals around the country "without a purchase order from the VA or the VA even knowing about the shipment. In some cases, the shipments were even unbeknown to the representatives covering the accounts."
All this is public record, and was so for nine months before Aurelius's report. But Aurelius went a bit further:
But our research has also identified deep undisclosed entanglements between MiMedx and multiple other distributors.
Two of these distributors, CPM Medical and SLR Medical, are specifically identified in Florida court documents filed by one of MiMedx's whistleblowers as having special undisclosed agreements along with an unidentified third having a "house account".
The allegations (here) that MiMedx's channel stuffing scheme extends significantly beyond the VA appear to have gone largely unnoticed by investors.
Viceroy's post - titled "MiMedx's ... employment of kickback & bribery scheme inducers makes it uninvestable" - is pretty self-explanatory. In it, Viceroy claims evidence that the SEC may be conducting an investigation into MiMedx, something that has also been raised in legal filings.
Viceroy's evidence for this is that the SEC responded to a Freedom of Information Act request from Viceroy by claiming, as it's allowed to, that it doesn't have to release records that are being collected for "law enforcement" purposes or if the release could "interfere with enforcement proceedings."
Petit responded with a press release the very same day Aurelius published his or her report:
"The articles include several items that have virtually no basis in fact, are littered with innuendo and contain many statements that are simply not correct. This has all the markings of a concerted short seller attack by numerous entities attempting to short our stock and profit from fictitious information and innuendos."
"We believe that Viceroy Research and Aurelius Value are relying on misinformation from former MiMedx employees terminated for cause. Unfortunately, neither organization appears to have done adequate due diligence and fact-finding before publishing their so-called 'research reports.'"
Earlier in the year, he told Kaiser Health News that Kruchoski and Tornquist were "lying." He has also released letters written to one short-seller in particular, in which he claims what the sellers are doing is unlawful and unethical.
There are a few parts to that claim. One is that they're releasing bad, even false, information into the market to manipulate the stock price. In particular, Petit claims that a letter from a Mimedx employee one short seller released is actually fake.
The other claim is that short sellers are doing what's called "naked short selling" - which is selling shares you don't own, without borrowing them from someone who does own them first. It is, in fact, illegal.
Sue. Them. All.
After all that, Petit began to sue a bunch of people, and that's when people on Wall Street took notice, because it's not every day a CEO sues a lineup of hedge funds and a research group to find two anonymous bloggers.
Now, before I continue, I need to make some disclosures. Within one of the press releases railing against a short seller named Marc Cohodes, MiMedx claimed I interviewed Cohodes at a conference (I did not, but I've published his ideas before).
In response to my questions about the allegations in the whistleblower suit, Petit declined to address any of the specifics and instead took to calling me a "shill" in a colorful letter that you can find at the end of this article. I do often speak to short-sellers, and sometimes give air to their ideas when I think they're smart. I don't know who Aurelius and Viceroy are, though.
Neither does New York-based firm called Sparrow Fund Management, which was forced to respond to MiMedx's request for request for emergency discovery with a 30-page motion to dismiss that said, basically, "We're not Aurelius, and even if we were, Aurelius' speech is protected under the First Amendment."
From the motion:
The crux of MiMedx's complaint targets a variety of statements made by named and unnamed defendants-none of which is actually Sparrow-conveying opinions about MiMedx and discussing various widely disseminated public reports.
But as Sparrow has repeatedly informed MiMedx since the filing of this lawsuit, including by sworn affidavit, MiMedx's claims against Sparrow are wrongly premised on a simple yet dispositive defect: Sparrow is not behind the anonymous blogger "Aurelius Value." That being the case, and with no factual allegations to support any connection between Sparrow and "Aurelius Value," MiMedx's case against Sparrow evaporates at the pleading stage.
MiMedx's lawsuit against investigative research firm The Capitol Forum (TCF) is a bit different.
TCF is a DC outfit known for its deep dives into potentially fraudulent companies. In August, it published a note on the channel-stuffing allegations against MiMedx. Then in September, after Aurelius and Viceroy published their pieces, Capitol Forum published the government's response to an FOIA request it filed requesting information on MiMedx and the VA.
The government responded, saying, "The records you requested are part of an ongoing law enforcement investigation and are not releasable at this time."
MiMedx issued a press release in September saying that it was aware of a VA investigation but that it was not the target and said it had told The Capitol Forum as much.
"To the extent there has been any innuendo by The Capitol Forum or others that somehow MiMedx is a target, that is simply incorrect based on available information," the release says.
Anyway, now MiMedx is suing The Capitol Forum for libel - not in its story, but in an email to MiMedx.
"Defendants' conduct herein, and specifically, the false and malicious statement in the August 21, 2017 e-mail concerning Defendants' article of the same day and allegations of wrongful conduct against MiMedx by "customers," constituted actionable libel," says MiMedx's complaint.
'Parker the Barker'
Again, I probably wouldn't know any of this if it weren't for Cohodes, a particularly loud short seller who lives on a California chicken farm. Cohodes is one of the most infamous short sellers on Wall Street, known for bombastic language and RSVP'ing "will attend" to any fight he's invited to. He got wind of what was going on at MiMedx and started a site called PetiteParkerTheBarker.com, which documents Petit's "bullying."
On the site you can also view Cohodes' presentation at Grant's Interest Rate Observer Conference. MiMedx says I interviewed Cohodes at that conference where he said:
"I always say bet the jockey not the horse. So I look for inept and/or dishonest management who has a track record of running companies into the ground. Telling a lie or two along the way also helps. I also look for balance sheet stress and financial engineering to make the business look stronger than it truly is."
The thing is, I wasn't at Grant's this year. And that quote is from an interview I did with Cohodes last year about two completely unrelated stocks.
So I was compelled to make some calls - including one to Sen. Isakson's office. His representative said the senator was in no way involved with a VA investigation into MiMedx, since the VA investigative unit is totally independent. His office had, however, put Petit in touch with the VA at Petit's request - something it would do for any constituent.
I also dug through the legal filings and sent a bunch of pointed questions to Petit regarding the lawsuits, the whistleblower allegations, UBS' research, and his relationships with powerful politicians.
Here's a smattering of what I sent:
- Can the company say on the record that Aurelius, Viceroy, or Capitol Forum make false statements about the company? Which statements are false?
- Can MDXG confirm that it is not under investigation by federal authorities, including the SEC as well as the VA Office of the Inspector General?
- Can the company comment on UBS research that suggests its products have a lower efficacy rate than the 90% rate the company claims?
- In one of your public disclosures, you say that I interviewed Marc Cohodes at a Grant's Interest Rate Observer Conference. I did not, and have never interviewed Cohodes publicly. Where did you get your information?
I knew we weren't going to have frank discussion when I read the first sentence of Petit's response. "First your statement that you never wrote an article about Marc Cohodes is incorrect," it said. He's right, I had written about Cohodes - but that wasn't my question.
You can read the full letter below, but here's the meaty part.
"Now I read your questions. It appears to me they have all come directly from Marc Cohodes, Aurelius, Viceroy, or others who are seeking to bring down MiMedx's stock price to gain a financial advantage for themselves. Therefore, if you publish an article addressing these questions, you are going to be acting as their "Shill". Indeed, some of your questions seemed to be aimed at obtaining information from MiMedx for this group to use in their pending litigation."
Petit suggested that I discuss this with an attorney, which I have done.
"He can call himself the Donald Trump of Georgia or the Kim Kardashian of Atlanta - anything he wants ... if you drag people into court with no basis you should expect trouble and you deserve trouble," said Gordon, who has also taught at the University of Michigan's law school.
"Short sellers lead a precarious life," he added. "What scares short sellers away is evidence that the short is going to bite them, but suing short sellers is unlikely to scare them away. It's more likely to attract more short sellers."
Well, after Cohodes and Capital Forum got involved, Citron Research, helmed by short seller Andrew Left, put out a YouTube video on the channel-stuffing allegations against the company.
A third former MiMedx employee filed a retaliation claim against the company. His name is Michael Fox, and he was a supervisor for the two first whistleblowers. He says that after they filed their claim, he refused to engage in MiMedx's fraudulent scheme. He says he went to the SEC and that the SEC then subpoenaed MiMedx. After that MiMedx withheld his wages and sued him.
MiMedx's stock has fallen 27% in less than three months.
Read Petit's full letter to me below.
Linette Lopez Letter 103117 by Linette Lopez on Scribd