What happened

Shares of Eargo (EAR), a hearing aid manufacturer, are sinking in response to the disclosure of a federal investigation the company made to investors after markets closed on Wednesday. The medical device stock was down 68.5% as of 10:40 a.m. EDT on Thursday.

So what 

Eargo reported net revenue that rose 44% year over year to $23 million in the second quarter, but a recent SEC disclosure has investors questioning the integrity of the company's sales figures. On Sept. 21, Eargo was informed that it is the target of a criminal investigation by the U.S. Department of Justice.

People in white coats looking embarassed.

Image source: Getty Images.

The investigation is related to insurance reimbursement claims the company submitted on behalf of customers covered by federal health plans. Eargo markets tiny rechargeable hearing aids that cost nearly $3,000 per pair. 

In August, Eargo increased its revenue forecast for 2021 to a range between $93 million and $96 million. In light of the investigation, though, the company withdrew its financial guidance for the year.

Now what

Without a way to be sure sales to insurers can remain on the company's income statement, investment banks including J.P. Morgan and Wells Fargo severely lowered their ratings on the medical device start-up. 

It's hard to guess how much of an impact the DOJ investigation will have without more details. We do know the company's largest third-party payor initiated a claims audit earlier this year. Intrepid investors thinking about catching this falling knife probably want to stand back until we know more.