Profit At The Expense of Industry

The friction between social mission and business mission that workers' compensation represents goes much deeper than the conflict an insurance company or third party administrator faces when pressured for profits.

Much deeper.

Many of you, I'm sure, know of or have at least heard of the hedge fund industry.

In summary, hedge funds seek businesses in which there is an opportunity, at least perceived, to flip ownership stakes for short term profit. Usually this is done on borrowed money. And usually this activity occurs in low glamour, off-the-radar industries, like workers' compensation.

I get telephone inquiries all of the time from research groups seeking information about work comp on behalf of some investor. Usually these inquiries are in the medical supply side of the industry, and occasionally some other sector.

These investment groups have a single, very powerful, mission - short term profit.

Some might call it greed, but I think that's too powerful given that avidity underlies capitalism.

Still, when capitalism is not tempered with transparency then misguided rapacity damages companies and industries.

Copperfield Research, an otherwise anonymous entity, posted a 32-page report online on the stock market analysis website SeekingAlpha accusing professional employer organization Barrett Business Services, aka BBSI, of violating generally accepted accounting principles, under-reserving and overstating its income, warning investors that the self-insured entity should be viewed as an insurance company that is undercapitalized.

Bowzer smells something wrong...

When the report issued BBSI's stock, which is publicly traded, tumbled. The stock price of BBSI opened at $57.29 on Sept. 16, the day the report was issued. It ended at $48.69, and as of market close on Wednesday the price stood at $40.44 – a decline of 29.4% since the Copperfield report came out.

The problem with the Copperfield report is that it is anonymous and, based on research by WorkCompCentral, appears to be tied to a short-selling investment group that has used "research" reports in the past in attempts to manipulate the stock market, and in the workers' compensation space no less.

Copperfield, which publishes anonymously on SeekingAlpha and the document-hosting website Scribd, issued a similar report about the risk management firm CorVel in 2012. The report accused CorVel of operating a “quasi-black market” preferred provider organization and said the company was “generating financial results that would appear to defy the laws of business.”

CorVel's stock was not as dramatically affected as BBSI's and has since generally recovered.

The Wall Street Journal posted an article exploring the idea that the research group was involved in “short selling” after Copperfield issued a negative report about MagicJack, an alternative phone service company.

Meanwhile, the California Office of Self Insurance Plans, which lists Barrett on its roster of private self-insured entities in the state, has no record of issuing a disciplinary or corrective action against the company, Department of Industrial Relations spokesperson Peter Melton told WorkCompCentral.

Barrett posted net income of $7.3 million in its second-quarter financial earnings report. That represents an increase of 24% from the second quarter of 2013.

All of which is to say that you can't believe everything you read, you must be skeptical whenever money is involved, and that the financial underpinnings of workers' compensation, like any other financial product, are highly susceptible to manipulation by people whose business mission clearly overrides their social conscience.

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Postscript - many thanks to Mike Gavin, president of Prium, Inc., and formerly in the private equity industry for correcting my errors and my confusion between private equity and hedge funds.