Manufacturers beware. Your regulatory problems may not be over when you pull a product from the store shelves. Matrixx Initiatives Inc. recalled its Zicam products on June 16 and three days later the Securities & Exchange Commission sent a letter of inquiry. The company said that it did not know what the regulatory agency wanted, according to an article in the Wall Street Journal.
Mattrix is a public company, so it serves many masters, including the SEC and shareholders. The company’s stock lost 70 percent of its value the day the recall was announced. Shares closed at $4.83 on June 23, down another 95 cents from the June 16 close.
As might be expected, users of Zicam products have sued Mattrix. Among the latest is a Fort Lauderdale attorney who defends homeowners against foreclosures. Not a likely plaintiff based on his practice, his claim is based on the fact that he lost his sense of smell in 2007. He attributes that to the use of Zicam and now he wants compensation for damages.
The SEC focuses not on customer, but shareholder losses. A letter of inquiry can be a first step into an investigation that can lead to civil and criminal charges. Or it can lead to nothing; the SEC does not comment on its actions until they are final.
Matrixx stock had survived the downturn in the general market. It was trading near a 52-week high of $19.74 when the Food and Drug Administration issued a warning about certain Zicam products. In May, the company reported that 2009 revenues had hit a record level and annual earnings per share had jumped 40 percent from fiscal 2008 levels. In the earnings press release, acting company president Bill Hemelt said, “The 11% increase in fiscal 2009 net sales was driven primarily by increased sales within our core Zicam Cold Remedy and Allergy/Sinus products.”
Zacks Investment Research had rated the company a strong buy, saying in a release dated May 8 that “The Zacks #1 Rank (Strong Buy) company has now topped the consensus forecast in each of the last 4 quarters with an average upside surprise of 28.48%.”
When a stock on a big upswing suddenly goes into a tailspin, the SEC takes notice. Even if the reason for the decline is obvious, there are questions to be answered.