Shares of Opko Health, Inc. (NASDAQ:OPK) closed 14.9% lower on Friday. Trading in the stock was halted one week ago after the company and its CEO, Phillip Frost, were charged by the U.S. Securities and Exchange Commission (SEC) with fraud. Opko shares resumed trading today, which prompted a further sell-off in the wake of the scandal.
The SEC's allegations are really serious. Frost and Opko Health were among 10 individuals and 10 associated entities accused of manipulating the share prices of microcap stocks in what is commonly referred to as "pump-and-dump" schemes.
When highly public scandals involving top executives emerge, it is a legitimate reason for investors to decide to bail out on a stock. It's even worse when the company itself is charged (although Opko notes that this SEC complaint does not contain any allegations about company-specific financial or business practices). That's exactly what has happened with Opko.
However, it's important to remember that, for now, the SEC's allegations haven't been proven. Opko Health released a public statement on Sept. 7, 2018, saying that the SEC's allegations contained "serious factual inaccuracies."
The company seemed especially miffed that the SEC had not notified it prior to making the charges public. Opko said that it and Frost "would gladly have provided information that would have answered a number of the SEC's apparent questions." It added that both the company and its CEO "are confident that once a proper investigation is completed and the facts of the case have been fully disclosed, the matter will be resolved favorably for them."
There's now a waiting game for all the facts to emerge. If Opko and Frost are found to have indeed participated in pump-and-dump schemes, the stock could go down a lot more than what it already has. On the other hand, if the facts show that the SEC's allegations are false, Opko Health stock could look like a steal at current prices. Things were starting to look better for the company this summer with improving second-quarter results.
What will happen next? It's anyone's guess. My view is that investors are better off staying on the sidelines with Opko until the dust settles.