The latest from Grants Almost Daily…KWM
Now, this is passive. Today, biotech firm MiMedx Group, Inc. announced that its shares will be delisted from the Nasdaq, sending the price lower by 40% and extending the year-to-date loss to 70%. The company last filed financials on Oct. 31, 2017 and announced in June it will need to restate five years of results, and noted today that its efforts will extend beyond the exchange’s Feb. 25, 2019 deadline to remain listed. MiMedx will not appeal Nasdaq’s decision, and will begin trading over-the-counter tomorrow.
The problems at MiMedx are well aired, and include the termination of CEO Parker H. Petite and chief operating officer Bill Taylor for cause this summer, a compensation claw back of four senior executives allegedly involved in misconduct and an ongoing investigation from a number of government agencies including both the Justice Department and Securities and Exchange Commission. The short interest currently stands at a whopping 60% of the float.
Not that MiMedx’s largest shareholders even noticed that the company hasn’t filed a 10-Q in more than a year. The top three holders, BlackRock, Inc., State Street Corp. and Vanguard Group, Inc., combine to control more than 28% of shares outstanding according to data from Bloomberg. Those passive behemoths have allocated MiMedx shares across nearly 100 funds ostensibly designed for a wide array of strategies, including the SPDR Portfolio Total Stock Momentum ETF, the iShares Core S&P Small Cap ETF, the Vanguard U.S. Factor Value ETF, among many others.
Pre-eminent short seller and vocal MiMedx bear Marc Cohodes tells Grant’s that the presence of those large passive holders who may know little to nothing about the individual stocks they hold can serve to artifically extend the life of such questionable enterprises as MiMedx:
The whole problem with indexation is that there are no adults at the switch. The focus of index firms is on advertising and asset gathering, rather than compliance or even simple adult supervision. This situation would never have gone on so long without the unwitting help of passive investors.
What will become of the MiMedx shares held by those passive funds? A search through the relevant prospectuses yields no mention of procedure when an underlying company faces delisting. Calls to Vanguard, BlackRock and State Street yielded no definitive answers by publication time, beyond a blanket statement from State Street that they “follow the rules as designed” by the relevant index.
Nevertheless, the passive train keeps rolling, as Pension & Investments magazine reports that total worldwide index fund assets under management jumped 13% to $13.37 trillion in the year-ended June 30, while passively managed U.S. equity assets rose by 16%, to $6.42 trillion over the same period. For context, the market capitalization of the Wilshire 5000, which tracks all listed U.S. equities, currently stands at $28.5 trillion according to the Federal Reserve Bank of St. Louis, while total worldwide equity market capitalization stood at just over $79 trillion at year-end 2017 according to the World Bank.
Advises Cohodes: “People need to know what the hell they’re in.”
Grant’s Interest Rate Observer is an independent, value-oriented and contrary-minded journal of the financial markets. Check out more at https://www.grantspub.com/index.cfm