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A Short-Seller Goes Too Far to Beat the ‘Bullies’

Joe Nocera

(Bloomberg Opinion) -- The first line in Marc Cohodes’s Twitter ID reads: “No Greater Motivator Than Disrespect.”

It’s a sentiment you often hear from athletes, but rarely from an investment professional like Cohodes. And with good reason. Although being “disrespected” can be a powerful spur, it also creates blind spots that can lead one astray. You won’t find a better example of this than Cohodes’s efforts over the last year to destroy — yes, destroy — MiMedx Group Inc., a biomedical company that makes products that heal wounds and treat serious inflammation.

Cohodes is a short-seller; he has spent the bulk of his career exposing companies that were committing fraud and then profiting when their stock drops. From 1985 to 2006, he partnered with another prominent short, David Rocker. Together, they uncovered wrongdoing at companies like AremisSoft Corp. and Conseco Inc. When Rocker left the firm in 2006, Cohodes took over and renamed it Copper River Management LLC.

When Lehman Brothers collapsed in 2008, Copper River was crushed.(1) Cohodes closed up shop and retreated to a chicken ranch he owns in California.

But he continued to bet against companies using his own money. One of his biggest winners in recent years was Valeant Pharmaceuticals International Inc., which he sniffed out well before the company’s stock collapsed in the fall of 2015.

Cohodes first focused on MiMedx in October 2017, shortly before he was scheduled to speak at the short-seller’s mecca: the semi-annual investment conference sponsored by Grant’s Interest Rate Observer. A month earlier, Fortune magazine had ranked MiMedx No. 5 on its list of fastest growing public companies, with revenue increasing at an annual rate of 58%, and earnings per share up an average of 88% a year during the previous three years.

But Cohodes had recently come to believe that some of those numbers were fraudulent. At the Grant’s conference, he read aloud from a letter he had obtained from a MiMedx whistle-blower. Sent to the company’s chief executive, Parker Petit, the letter decried the company’s “complete lack of integrity.” In his talk, Cohodes strongly suggested that MiMedx was “channel stuffing” — that is, shipping more products that its customers could use, and then booking revenue that didn’t yet exist.

There was something else about MiMedx that bothered Cohodes: The company, he said, was trying to silence its critics. It had sued three bloggers who were posting negative information. And Petit had accused the shorts of acting as a “wolf pack” to bring MiMedx down. As part of Petit’s attack on short-sellers, Cohodes said, MiMedx “had the very bad idea to put on their website things about me — that I was part of the Cali cartel, I launder money, I evade taxes.”

In truth, MiMedx had suggested no such thing. Petit had posted a link to a long, unsigned article denouncing an illegal practice called “naked short-selling,”(2) which had been a hot subject among financial conspiracy-mongers maybe 15 years ago. The article mentioned both the Cali cartel and Cohodes in passing. But it did not link the two, as Cohodes was now claiming.

Still, Cohodes made it clear that he was offended by MiMedx’s actions against all the shorts, not just himself. “Quit intimidating the shorts, the critics, the free speakers,” he seethed. “It has to stop.”

Cohodes would later tell an interviewer that Petit had showed him “the ultimate disrespect by defaming me.” He took a big short position in the stock and soon became the company’s most vocal critic.

Cohodes’s allegations went well beyond channel stuffing; they also included bribing doctors and engaging in Medicare fraud. He set up a website, which he named “Petite(3)  Parker the Barker,” where he posted negative information about the company. Cohodes attended a health-care conference where he interrupted Petit’s presentation to accuse the company of wrongdoing. A journalist from the website Stat recorded the confrontation.

And then there were Cohodes’s tweets, which were both nasty and personal. Here’s one example (there are many others):

In mid-October 2017, he tweeted this:

And then, a few weeks later, this:

Petit would later tell me that he felt threatened by the latter two tweets. “I didn’t know what he was capable of,” Petit said. So the MiMedx CEO reached out to the Federal Bureau of Investigation.(4) And whaddya know: On Dec. 1, two agents showed up at Cohodes’s ranch. One of them took the lead in dressing down the short-seller. Here’s how Bloomberg News described the scene:

The agent said he wouldn’t leave until Cohodes promised not to post further threatening tweets about Petit. The agent said there would be consequences if they had to return. … He asked Cohodes several times: “Do you understand?”

Cohodes, who insists that his tweets were not threatening, was enraged by the FBI visit. From where he sat, the intervention of the FBI was a new low in short-seller intimidation — and disrespect. And Cohodes was going to prove to Petit — and everyone else — that it wouldn’t work. As he put it to me in a recent email, “I refuse to be cowed by bullies.”

Fast forward to June 2018. Just seven months after Cohodes jumped into the MiMedx fray, Petit was gone. So was Bill Taylor, the company president. The allegations hurled at the company by Cohodes and his allies, most of whom were also short the stock, had spurred the MiMedx audit committee to bring in an outside law firm to conduct an investigation. The company concluded, well, here’s how the board put it in a news release:

Petit and Taylor … emphasized short-term business goals over compliance and ethics, purposely took action to disregard revenue recognition rules under GAAP and manipulate the timing and recognition of revenue.

The board also announced that because of the financial improprieties, it would have to restate earnings going back to 2012, that its stock would be delisted from the Nasdaq exchange, and that both the Securities and Exchange Commission and the Justice Department were conducting investigations. (Petit and Taylor have denied wrongdoing; the government investigations appear to be continuing.)

At first glance, this appeared to be a huge victory for the shorts. Although the audit committee never used the phrase “channel stuffing,” its wording strongly implied that’s what had taken place. An $18 stock when 2018 began, MiMedx dropped to $1.15 by year’s end; any short-seller who rode it all the way down made a fortune.(5) In early December, MiMedx’s accountants at Ernst & Young LLP resigned from the account — months after agreeing to audit the company’s books. That’s never a good sign.

But if you looked a little closer, it wasn’t quite the slam dunk it seemed. The internal investigation came up with no proof that MiMedx officials had bribed doctors, as Cohodes had alleged. Nor was there any evidence of Medicare fraud. Cohodes had claimed that MiMedx was “in a death spiral.” It wasn’t. As for the resignation of Ernst & Young, the firm had abandoned the assignment after Cohodes and another short-seller, a firm called Aurelius Value, had sent the auditors letters containing dozens of allegations of financial fraud. The company believes the auditors were scared off by the letters. (E&Y declined to comment.)

Today, MiMedx has a new chief executive with extensive biotech experience. It has a reconstituted board. The company hopes to complete its restatement by mid-December, at which point it will be able to rejoin the Nasdaq.

Yet, Cohodes and his allies, rather than declare victory, have doubled down. The accusations they are making today are, if anything, more extreme than the claims they made when Petit was in charge. They appear to be hellbent on destabilizing the company. “I will take these guys down if it is the last thing I do,” Cohodes declared in an interview earlier this year.

In that same interview, he listed “12 distinct categories of egregious wrongdoing.” They included: Medicare fraud, endangering patient safety, evidence destruction, extortion, rape and sexual harassment, influence peddling, securities fraud and bribery. He routinely describes MiMedx as “a criminal enterprise.”

None of this appears to be true. That’s my next column.

(Corrects year David Rocker left his partnership with Marc Cohodes in third paragraph of article published Aug. 19. Removes description in fourth paragraph of the circumstances surrounding the closure of Copper River.)

(1) Cohodes would later testify in a lawsuit that Goldman Sachs bore some responsibility for Copper River’s failure because it mishandled the firm’s trades during the 2008 financial crisis. Goldman has denied the allegation.

(2) Proponents believed that naked short-selling was at the heart of Wall Street’s version of the deep state. The chief proselytizer was Patrick Byrne, the CEO of Overstock.com.

(3) Cohodes always spells Petit’s last name with an extra “e”; petite, of course, is “little” in French. He says it is because Petit is “a small man of stature, soul and mind.”

(4) According to Bloomberg News, Petit also reached out to Senator Johnny Isakson, a Georgia Republican. Isakson, too, informed the FBI.

(5) Cohodes acknowledges that he got out well before MiMedx hit its low.

To contact the author of this story: Joe Nocera at jnocera3@bloomberg.net

To contact the editor responsible for this story: Stacey Shick at sshick@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."

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