All publicity is good publicity—but not in the world of life science investing. St. Jude Medical (NYSE:STJ) saw its stock fall four percent after a report alleged that the medical device manufacturer had serious cyber security issues with its cardiac devices. Now, St. Jude is striking back with a lawsuit its CEO calls “critical to the entire medical device ecosystem.”
The story begins last August, when MedSec, a security company, allegedly discovered vulnerabilities with St. Jude’s cardiac devices. The findings were passed on to Muddy Waters Capital, a company that prides itself on “speaking truth to power.” “In the face of egregious market inefficiencies,” their website asserts, “Muddy Waters refuses to be deterred by the financial marketplace’s insider titans.”
Muddy Waters published a tell-all report based on MedSec’s findings—one that many investors found alarming. “There is a strong possibility that close to half of STJ’s revenue is about to disappear for approximately two years,” the report claims, suggesting that St. Jude’s pacemakers, ICDs, and CRTs—medical devices which amounted to 46 percent of the company’s 2015 revenue—should immediately be recalled, based on their vulnerability to cyber attacks.
Many investors apparently heeded the warning, because St. Jude saw its stock dive, dropping four percent within a few days. And that, the medical device manufacturer alleged on Wednesday, was exactly the intention of the report.
The recently filed lawsuit claims that Muddy Waters and MedSec colluded on a short-selling scheme, spreading false information in order to lower St. Jude Medical’s stock price. It is supported by research out of the University of Michigan, which did not find any of the alleged security vulnerabilities in St. Jude’s medical devices.
MedSec and Muddy Waters, however, are standing by their actions. “We have chosen to depart from standard cyber security operating procedures in order to bring this to the public’s attention and to ensure that St. Jude Medical responds appropriately and with urgency,” MedSec’s CEO, Justine Bone said, explaining why the security firm shared their findings with Muddy Waters first. Meanwhile, a spokesperson for Muddy Waters accused St. Jude of trying to “silence its critics,” according to a recent article in The Wall Street Journal.
The scandal comes at a poor time for St. Jude, which is currently being acquired by Abbott Laboratories (NYSE:ABT). That deal was initially valued at $25 billion. It remains to be seen how these recent legal issues may affect it.
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Securities Disclosure: I, Chelsea Pratt, hold no direct investment interest in any company mentioned in this article.