What happened

Shares of OSI Systems, Inc. (NASDAQ:OSIS) tumbled on Friday and were down 22% at 10:45 a.m. EST after the designer and manufacturer of electrical systems and components reported fourth-quarter results and disclosed an investigation by the SEC.

So what

On one hand, OSI Systems reported a solid fiscal second quarter. Revenue came in at $277.5 million, which was up 14.4% versus the year-ago quarter and beat the consensus estimate by more than $11 million. Earnings, likewise, came in ahead of expectations, with the company posting a profit of $0.97 per share, which was $0.08 per share ahead of the consensus. The company "achieved record revenues, operating margin expansion, and strong cash flow," according to CEO Deepak Chopra. Further, it grew its backlog and raised its guidance for the fiscal year.

An investor looking at a bad chart.

Image source: Getty Images.

That said, the company also disclosed that the SEC had launched an investigation into its compliance with the Foreign Corrupt Practices Act. Further, the U.S. Attorney's Office has also requested information relating to this matter. These actions stem from a report by noted short-seller Muddy Waters, which said the company used bribes to win a large contract in Albania as well as the pricing of a contract in Mexico.

Now what

Muddy Waters launched serious accusations against the company, which the U.S. government is now taking seriously. If OSI System's did indeed use bribes to win those contracts, it could have "an enormous impact on OSIS's profits," according to Muddy Waters. Because of that risk, investors should avoid this stock until it's cleared of all wrongdoing, because there could be significantly more downside ahead if it's not.

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