Critics of short-selling like to overlook the blatant acts of fraud committed by public companies while accusing short-sellers of disrupting the marketplace. Obviously, short-sellers are not popular with executives of companies that have been exposed by short-sellers as frauds. In its 8 years of existence, Asensio & Company, Inc. (“Asensio”) targeted 30 fraudulent companies and published over 300 reports. These 30 companies Asensio investigated are not among the biggest supporters of Asensio. However, the Asensio research reports benefited various members of the securities industry, including legislators, regulators, journalists and investors. Critics of Asensio point to the research on Polymedica (“PLMD”) as an example of a failure. While it is true that the price of PLMD did not fall to the Asensio valuation, there is little doubt that the company was involved in highly irregular and illegal activities.
Asensio initiated coverage of PLMD in October 2001, several months after 85 FBI agents raided 8 PLMD offices and warehouses and the homes of 2 PLMD executives. The raid followed a series of reputational setbacks to PLMD that sent share prices sharply down, including the New York Stock Exchange’s (NYSE) refusal to list PLMD in July 2001.
After the September 11 terrorist attacks, PLMD’s stock began to rise again, gaining as much as 78%. The company’s recovery was not supported by positive developments and Asensio quickly identified PLMD as an overvalued company. PLMD attempted to reverse the controversy surrounding it by issuing misleading statements to the press. For example, in April 2002, PLMD announced that it was no longer subject to an investigation by the Securities and Exchange Commission (“SEC”). The announcement drove the price of PLMD shares up 68%, but the company’s claim was not substantiated.
The Department of Health and Human Services’ Officer of the Inspector General (“OIG”) began its investigation of PLMD in 1999, eventually referring complaints about PLMD’s Medicare practices to the Federal Bureau of Investigation (“FBI”). The OIG alleged that PLMD strategically billed Medicare for supplies that had not been ordered. PLMD’s alleged misconduct included deliberate shipments of test strips to senior citizens who did not order strips, shipments of strips that were not prescribed by a medical doctor, shipments of excessive quantities of strips, failure to collect the required 20% from the beneficiary for insurance companies, failure to credit Medicare for shipment returns, and the charge of Medicare for these fraudulent shipments.
Asensio disproved each of PLMD’s various attempts to undo the negative attention that resulted from its criminal activities, including the formation of an Oversight Committee. Meanwhile, the company shamelessly continued to deceive the marketplace and uninformed investors. It is possible to observe through the Asensio research reports that PLMD’s inflated earnings were a product of its Medicare fraud. The company overstated its assets and sales and the price of its shares remained overvalued.
Though PLMD proved to be impossible opponent for Asensio, the research provided by short-sellers gave the market an opportunity to liberate itself from a massive fraud. Regulators and legislators were unwilling to censure PLMD, but Asensio did everything it could to uncover and expose this deception in the marketplace. Clearly, Asensio was motivated by profit. However, his research also benefited the marketplace. The information about PLMD helped investors learn the truth about an overvalued, criminal company, even if government officials refused to do anything about it. The PLMD file is a testimony to the hard work and dedication Asensio employed in its investigation of this company.
We hope that the following reports help regulators, legislators, journalists and investors appreciate the Asensio contribution to the securities industry. Short-selling facilitates the price discovery process. The indefatigable efforts of short-sellers like Asensio help investors learn the truth about public companies before investing precious savings.
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