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St. Jude Medical filed a lawsuit last month against the investment firm and research agency that issued a report in August claiming their cardiac implants were vulnerable to hacking. St. Jude filed suit against Muddy Waters (an investment firm) and MedSec (a security consultant) after it was discovered that Muddy Waters was shorting St. Jude stock, and that they have a deal with MedSec to split the profits made by shorting. This information calls the report's truthfulness into question due to the fact that Muddy Waters and MedSec both have a strong financial incentive to make claims against St. Jude to cause the stock price to fall.
Most recently, Muddy Waters filed a third party research firm's report in court validating MedSec's initial report's findings. The report, by BishopFox, states that the initial report's findings are accurate. BishopFox also claims to have been able to repeat the cyber attacks on the devices that the initial report described.
Follow the Money
While the two reports' findings are disturbing, there are still many doubts surrounding the claims. When a University of Michigan researcher was unable to verify the claims, Muddy Waters dismissed the researcher by explaining that they did not release the full details in their report for security reasons. The U of M researcher however did explain that the one piece of photographic evidence in the report was indicative only of a device that was not connected to an actual person.
Following the money should logically cause a person to doubt the claims of Muddy Waters, MedSec, and even BishopFox. When an investment company is shorting a stock, like Muddy Waters is doing with St. Jude, they are betting against the stock. If the stock price goes down, they will make money. The report they released in conjunction with the fact they were shorting St. Jude, especially by having an agreement with the research firm that authored the report to split profits from the stock short, really calls the research firm and investment firm's motives into question.
Is This Insider Trading?
There is a big difference between short-selling and insider trading. Although Muddy Waters appeared to have confidential information that the St. Jude devices were vulnerable, that information was not from St. Jude, but rather from independent research firms, and thus not from inside St. Jude. While insider trading is not legal, there is nothing illegal about playing the market based on information that you have gained through careful research.
However, manipulating a stock price as Muddy Waters did has limits. If it is discovered that Muddy Waters, or MedSec, released false information to manipulate the stock price, then there can be severe legal penalties. The current lawsuit against the investment and research firm by St. Jude Medical asserts that the reports are false and were done for the purpose of manipulating the market so the firms could have a more profitable short sale of St. Jude's stock.