Muddy Waters' founder Carson Block unveiled his latest short play Wednesday morning. And instead of being another obviously fraudulent Chinese company, Block's target is OSI Systems, an American firm that manufactures security equipment x-ray machines and metal detectors. The company is best known as the owner of Rapiscan Systems - a division that manufacturers scanning machines used at airports.
In a 13-minute video, Block lays out his research, explaining how he suspects OSI’s executives are guilty of multiple violations of the Foreign Corrupt Practices Act for paying kickbacks to local officials who in turn rewarded it lucrative contracts. But as if corruption weren't enough, Block explains how roughly half of the company’s EBITDA is tied to turnkey contract in Mexico that could disappear as soon as next month.
The company is "rotten to the core" warns Block, "we have smoking gun evidence" as the importance of the contract to the company’s bottom line has been obscured by the fact that it represents only 15% of total revenues.
Tracing the threads of corruption led Block to Albania, Mexico and Puerto Rico, three locations where OSI has won lucrative concessions by offering kickbacks to local government officials - kickbacks that were readily accepted.
“I know this will sound crazy - but Albania is a pretty corrupt place," Block says, before explaining that it was practically "an open secret" that OSI benefited from bribing local officials.
For one of OSI’s concessions in Albania, the company turned over half of the contract to a local shell company for roughly $4.50, according to official documents.
As is typical when Block announces a short, OSI - which has a market cap of about $1.3 billion - was down about 15%.
In a statement provided to Zero Hedge, Block said he’s short OSI because he feels it’s “rotten to the core."
“We are short OSI Systems, Inc. because we think it is rotten to the core. We believe it obtained a major turnkey contract in Albania through corruption. It is likely that OSIS’s accounts are misstated as a result.
We believe the pricing of its Mexico turnkey contract does not stand up to scrutiny. This contract is up for renewal in 2018, and we estimate that it accounted for more than 50% of OSIS’s FY2017 EBITDA.
Non-renewal or a material reduction in pricing of the Mexico contract would seemingly have a significant impact on OSIS’s profits. Former employees’ statements support our view that OSIS is rotting from the inside."
Block’s latest bet comes on the heels of a stunning victory for his firm. Last month, Huishan Dairy entered provisional liquidation, validating Block’s call - made about 10 months earlier - that the company’s shares would go to zero.
Now, the question is: Will he do it again?