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ICYMI – Investing Insight from “The Scourge of Wall Street” Marc Cohodes - Header replay

Hedgeye CEO Keith McCullough just hosted a conversation with renowned short-seller Marc Cohodes.

If you haven’t watched it yet, we encourage you to do so.

According to Cohodes, the craft of short-selling is more than just about making money, it’s about exposing business practices that are at best deeply questionable and at worst… criminal.

"I try to find bad management and bad motives, people who are ripping off innocents,” Cohodes says. “I look for bad accounting and people who have no respect for the law, markets and free speech... I am a nasty mother**cker when you stir me up."

If you’re interested in listening to some amazing war stories and gleaning powerful investing perspective from a successful short-selling veteran, this interview is for you. (This is must-see TV... Bloomberg calls Cohodes "the Scourge of Wall Street.")

Below we’ve transcribed a key excerpt from this hour-long interview. CLICK HERE to watch the entire conversation between two ardent short-sellers.

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Keith McCullough: Hi, I'm Keith McCullough. Welcome back to another edition of Real Conversations and this one is going to be a dandy. I have Marc Cohodes, one of Wall Street’s renowned short sellers. So thanks for taking the time to join me. I certainly appreciate it.

Marc Cohodes: Well thanks for having me, Keith. It's quite an honor. I'm all set to heat it up.

McCullough: What I'd like to do first, because you have so many ideas and frauds and bad people are revealing themselves to the world all the time, is I want to get into your process. I want to discuss when you find what you think is a short.

Cohodes: Okay, that sounds good. I have very strong opinions. I do an inordinate amount of work to form those opinions. But before you do anything I say or talk about, do your own work. You know, I don't really care about stock valuations and I don't really care about well managed or good companies. I won't short a stock because it's high. I won't buy something because I think it's at its low. To all the legitimate people out there, I wish them nothing but the best. They don't know who the hell I am. But all the bad actors, in all parts of the world, know who I am.

I use sports metaphors a lot. Usually in shorts I try to find the Ken Griffey of bad companies. Ken Griffey, to my mind, was the best ball player I've ever seen. So I try to find bad management, bad motives, ripping off innocents, whether it's insurance companies, seniors, payers in the medical space, or bad accounting. I look for people who have no respect for the law, no respect for markets and no respect for free speech. And occasionally I find these actors and companies then I get involved, and I get involved in a big way.

I don't have a diversified portfolio. I look at things project by project. So that's my overall overarching process. I try to find things and when I do I tend to dig in deeply and I don't move until I want to move. Sadly, I am not a normal person. I don't sleep much. I have a restless mind.

I am a nasty motherf@*ker when you stir me up. And right now I'm beyond stirred up on a few things and I can't wait for these things to meet their end. When you move the needle or make a difference, a lot of people want to see you fail and that serves as extreme motivation for me.

McCullough: Let's get into this. MiMedx (MDXG) and their former CEO Parker “Pete” Petit. Why don’t you tell us why you're a short seller of it.

Cohodes: Okay. So I'm lying on my pink couch one day a couple of years back, just doing some reading, and Carson Block calls me and he says, ‘Have you seen what this company MiMedx is writing about you?’ And I say to him, ‘What is a MiMedx? Never heard of this thing.’ So he points me to the website and I'm being called a money launderer and head of a drug cartel, working with Hells Angels, things like that. And I said, ‘This is just absolutely crazy.’ So I call my attorney who says, ‘This is defamation.’ He writes MiMedx a letter that says to take it down or we'll come after you. MiMedx takes it down and sends a letter apologizing.

I posted it on Twitter saying, ‘Here's this company MiMedx.’ Ten minutes later, 15 to 20 former MiMedx employers are all over my DM sending me one piece of bad information after the next that the company is channel stuffing, ripping off bad science, the whole thing.

Cohodes: I was speaking at Grant’s I think in six days, the conference in New York. And I had my presentation and I said, ‘This MiMedx is so outstanding.’ So I make a little MiMedx presentation and it turns out through FOIA that day, Parker Petit reached out to Senator Isakson about what I was talking about and that's when the FBI activity actually began. It had nothing to do with what I was tweeting about with MiMedx.

I think this was one of my greatest accomplishments and I've done some crazy stuff over the years. On January 23rd I wrote the auditor at Ernst & Young a letter with the primary source documents, court documents and analysis on what I believe to be the 12 categories of serious wrong doing at MiMedx. I dubbed MiMedx an “around the clock fraud,” among them Medicare fraud, endangering patient safety and undisclosed federal criminal investigations.

I sent that letter on January 23rd and it's been downhill for them ever since. And I haven't stopped. I haven't stopped.

Our mutual friend Grant Williams at Real Vision was with me in January and he said, ‘I know you're driven on MiMedx. It's a great story. Are you still short?’ And I said, ‘Yeah, I'm still short.' And he goes, 'Why don't you cover your short and that way you can carry on as normal but then people will realize this is all about the cause and not making money.’

So for the first time ever, I covered 98% of my short in MiMedx after I spoke with Grant because I want everyone to know right now MiMedx has nothing to do with money. For me, this is all about principle and seeing these undesirable motherf@*kers in this criminal operation brought to justice.

This needs to come out. What's exactly going on is a Medicare/Medicaid insurance scam of the VA system because our veterans are being ripped off. All of the bad actors at MiMedx are still there. Parker Petit will go to jail and his henchmen will go to jail or get arrested, if there is such a thing circa 2019. But this is pound for pound the biggest fraud I've ever seen. And I exposed Lernout & Hauspie, which was the biggest fraud in Europe at the time.

McCullough: The great insult, they think to us, the short sellers, is that we're only doing it to make money. Whereas if you really look at the incentives, what the short sellers uncover are people that are doing what they're doing fully loaded with illegal activity. This is about actually being transparent, accountable and truthful. And I don't know why we ended up being vilified for that. This is America for God sakes.

Cohodes: That’s the thing. When companies attack messengers, rather than focusing on the message, that's a tell and a sign for me to really dig in.

You know, this Parker Petit. He’s five feet tall, which is another indicator. He wears a wig, another indicator. I think I'm now 16 of 17 in success rate shorting CEO’s who wear wigs. When I see someone wearing a wig who runs a company, I think I will short the stock on the spot.

You want to know another name that I'm very serious about that’s the next Ken Griffey short right now? It's a company called Lannett. It trades under the symbol LCI. It's in the generic drug business, which is probably the worst business right now on the planet. It's the most leveraged company out there. They're more leveraged than Teva.

They just lost 60% of their business, which is Levo, and by my estimation, they’ve gouged the U.S. government for over $300 million since Levo was their’s.

Why is this short so great? One, they're leveraged probably six to seven spins of leveraged, depending on what number you look at. They're not going to make any number going forward. Their gross margins are artificially high. But what's truly amazing and truly wonderful is Forbes just wrote an article about generic drugs and generic drug pricing and price fixing, which hurts everybody. The generic drug industry is being sued by the state of Connecticut and 44 other states.

And since all this stuff has broken about the 44 state lawsuit, the only thing that Lannett has announced is that their CFO was leaving. They haven't put out an 8-K about the suit. They haven't conducted an internal investigation. Maureen Cavanaugh (Lannett’s Senior VP & Chief Commercial Operations Officer) and others still have a job and this is a company whose core competency, at 7.1 leverage, is ripping off the Seniors, Medicare, insurance companies, everyone. These companies should not be in business. They should not be in business.

CLICK HERE to watch the entire conversation.