How to Lose 75% of Your Company's Value Overnight

Yikes! After its last data release, I suggested that Sequenom (Nasdaq: SQNM  ) had Rule Breaker potential, but I didn't think it was an actual breaker of the rules of integrity.

Sequenom's shares sank 75% today after the company said last night that four employees had been suspended because of "employee mishandling of R&D test data and results" for its revolutionary blood test for Down syndrome.

Yikes indeed.

No news is not good news
The information about what happened was frustratingly not available on the conference call, as the company is continuing to investigate. What we do know is that Sequenom needs to throw out all the promising clinical data it had reported on beginning last summer and repeat the tests on new clinical samples to find out if the test is able to determine if a fetus has Down syndrome. Those tests should be completed in the fourth quarter, but under the circumstances, Sequenom doesn't plan to launch the test until after larger, on-going, independent clinical studies are published in a peer review journal sometime next year.

Basically, the company went from being on the verge of launching a promising test -- the data to date said it was more accurate and/or safer than what is currently available -- to having no proven clinical data that its most advanced test works.

How does something like this happen?
When you invest in a company, you're basically putting your trust in management, but management in turn needs to be able to be able to trust the foot soldiers. Unfortunately, that's not as easy as it sounds and this certainly wasn't the first time a company has had to deal with a rogue employee.

  • Rogue traders at Allied Irish Banks (NYSE: AIB  ) , Credit Suisse, and Solomon Bothers -- now part of Citigroup (NYSE: C  ) -- have been responsible for losses of billions of dollars because of bad trades they performed. On the flip side, BP (NYSE: BP  ) had a "rogue trader" that may have made the company money -- possibly illegally, though.

  • A Disney (NYSE: DIS  ) employee apparently released photos of women flashing the automated camera on Disneyland's Splash Mountain ride. It might be the happiest place on earth, but I'm pretty sure that's not what the clean-cut company had in mind.

  • An employee at Fidelity National Information Services apparently stole 2.3 million records of customers that contained personal information -- including credit card and bank account information -- and sold them to a data broker.

  • President Obama's cell phone records were accessed by a Verizon Communications (NYSE: VZ  ) employee, according to the company. It may have been just idle curiosity, but it doesn't paint the company in a good light.

Of course, even CEOs aren't immune to rogue behavior. Remember Whole Foods Market's (Nasdaq: WFMI  ) CEO John Mackey and his misguided message-board musings about his company under his alter ego, "Rahodeb"?

The perils of investing
No one said investing in individual equities was easy. Companies lose value for many different reasons, from ones you should have seen coming to those that were impossible to foresee.

You can limit the pain from the problems you should have seen coming by doing plenty of homework before you purchase. Play the devil's advocate and figure out the bear argument before you invest and you might decide the risks aren't worth the reward. There's not much you can do about unavoidable plunges from the unfathomable, but keep a well diversified portfolio so that one 75% loss doesn't kill your hopes for the future.

As for Sequenom, it's hard to tell whether it's a value or a value trap at this beaten-down level. The company is trading at a lower price now than it did before the first clinical data was released last June, so buying at this level, you're essentially getting the test for free. Whether the test is worth something remains to be seen.

Walt Disney and Whole Foods Market are Stock Advisor picks. Walt Disney is an Inside Value selection. Allied Irish Banks is a Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of Allied Irish Banks. Our integrity comes from within, but The Fool's disclosure policy lets you know it's for real.


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