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  • sam43spade43 sam43spade43 Aug 7, 2009 1:13 PM Flag

    Summary of the scandal

    The market didn't like it when the HIFU business was sold to the CEO. You just don't get that type of transaction in the US. Or if you do, it's better explained and involves more individuals setting the price.

    So....OK, the market didn't like that.

    But then someone sent an anonymous letter discussing particulars of that deal, probably calling it self-dealing, and then indicated that analysts were on board to continue giving good prospects going forward.

    Here are some points I believe are important, as far as we know.....:

    It was not alleged that revenues were overstated.

    It was not alleged that cash was missing.

    It was not alleged that the company was unprofitable.

    It was not alleged that the focus on the ongoing diagnostic business was misplaced.

    It was not alleged that prior years or current forward looking statements were incorrect.

    The more I think about what the investigation involved, the more comfortable I am that sour grapes and certain improprieties were involved but nothing affecting the ongoing core diagnostics business, cash flow, or revenues of CMED.

    I do believe there will be a couple of headlines talking about big charges to the P&L for the investigation. But the market looks at p/e and growth going forward so if those numbers are relatively encouraging, this stock is incredibly cheap.

    "Buy when others are fearful......."

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    • cupurman Aug 7, 2009 5:09 PM Flag

      Good topic and discussion. One question for all - are instances of accounting and financial fraud more or less likely in China compared to U.S.? I wonder if corporate officers in China fear consequences more than in U.S.

      I agree that practices that might raise eyebrows in U.S. are acceptable in China. Which doesn't make them wrong but may mitigate U.S. investor uncertainty when news breaks.

    • Thanks for an insightful analysis.
      Now let me ask you, how is it you know so much about this so called 'anonymous' letter and its contents? I can't find anything on any site giving such details as you have relayed, although I've been looking and trying to do some due dilligence.

      • 1 Reply to VenturaBlv
      • I'm only using the press release offered by the company. The allegations appear to concern the sale of the HIFU business which caused a stir at the time. So it makes sense that someone complained about that. Secondly, the letter appeared to talk about the cozy relationship with analysts. Analysts wouldn't ordinarily know anything about how a companies revenues or expenses are being booked. I'm guessing the analyst issue had to do with comments made after the sale of the HIFU business that it may have been good for the company so it could focus on diagnostics. I'm still guessing that the letter writer was very pissed off about the self-dealing that seemed to occur to sell a profitable business to the CEO. Perhaps that was wrong, perhaps the peg ratio on the HIFU business was not pulling down the possible p/e the company could have obtained by focusing on its faster growing businesses.

        The nature of the firms hired by the board to investigate the anonymous letter indicates that the allegations concerned the sale of the division and not revenue or expense recording in general. If indeed the forensic accountants had been poring over the books, then the audit would have been a breeze since most of those papers would have been prepared already. Instead the company indicated they needed to start on the audit side of things at this time.

        Just guessing but makes sense with the known facts.

        I like the stock here, I think it's very cheap if there's nothing fundamentally wrong with the business.

    • Great post and good summary/conjecture. But I'm going to disagree on one small point. The selling of the HIFU business could be questioned as being in the shareholders' best interest and thus affect CMED's business prospects going forward. But, all in all, doesn't warrant such a reduction in share price. Still a strong company that will remain strong.

    • Sam.........a well thought out post and one with which I totally agree. Good post !