It’s Getting Manic at Masimo vs Politan as Dueling Proxy Materials Sling Sludge & Lawsuits

I’m thinking of pitching Bravo Network on my idea for a new reality TV show called something like …Masimo Manic Mysteries…or Politan Proxy Obsessions… What do you think? I’ve got tons of material to pull from. I’ve followed many proxy battles over the years, but this one definitely wins the prize as the most personal and brutal battle I’ve seen. In the first twelve days of September, there has been no fewer than seventeen new proxy revisions, investor letters, and proxy-related press releases (four separate filings just today!) filed and mailed to investors. Investor’s heads must be spinning…I know mine is!

And of course, as the 2024 Annual Stockholders Meeting approaches – only one week away – the drama continues to ramp up as management continues to dig in to save their jobs while investors keep shoring up more votes. It’s getting really ugly.

See all the latest on the Masimo and Politan proxy battle

Many of these proxy revisions – from both Masimo and Politan – repeat a lot of the previous mailings but just add one or two new developments. I have chosen to not try and report on them individually because much of it is not meaningful, repetitious, and incremental. Some offer an amazing tidbit – like the post where Masimo CEO Joe Kiani and company management filed a lawsuit and accused Politan CIO Quentin Koffey, a Masimo Director, of conspiring with a plaintiff’s attorney to attack Masimo. But others are less sensational.

We Have A Lot to Cover

Oh, and by the way, I have quite the update on that shocking allegation about Masimo’s assertion that they have secret witnesses who will testify to horrible things about Quentin Koffey. More on that in a bit.

Let me start with some overall observations about these two entities entangled in a Deathmatch. It’s clear to me that Joe Kiani takes this personally, intensely dislikes Quentin Koffey, and has decided to try and take down Politan by slinging as much mud as he can find, or even invent, to sully Koffey’s reputation and try to sever his popularity with investors…which, so far, seems solidly intact.

Ad Hominem Personal Attacks

Kiani engages in serial ad hominem personal attacks of Quentin Koffey that are light on data and heavy on invective…flaming invective. At times I think Kiani believes that Koffey wants to be Masimo’s CEO…a role that Kiani believes he is not qualified for. But that is, of course, ridiculous.

Koffey is an activist investor – he is seeking to fix the major mistake that Kiani made – acquiring Sound United – selling it off such that the company’s performance improves and sees its stock take off. Then he’ll sell his stake for a nice profit. In Koffey’s mind, everyone wins.

Koffey Stays Laser-Focused on Winning Two More Board Seats

Koffey is laser-focused on the objective – to win the vote for his two Director nominees – such that the Board can then rise above Kiani’s obstruction and get the ball rolling. In short order, I believe this newly reconstituted Board will sell off Sound United, fine-tune other operating parameters, and watch the numbers improve.

Kiani’s uber-aggressive, at times shady – literally running along the edge of legality – personal attacks, which feel a bit anti-investor, is more likely to have investors rally around Koffey…rather than be drawn back to support the embattled Masimo CEO. A CEO, by the way, who still thinks that, with more time, he could get Sound United to work.

Kiani Had Two Years To Get Sound United on Track; Some Investors are Ready for a New Path

But investors have given Kiani two years to make Sound United work and things are still getting worse. Ironically, as Healthcare began to rebound, that has only served to shine a bright light on the cannibalistic effect of Sound United’s results eating away at the improving Healthcare numbers and pulling them down to mediocre. The stock has never returned to its pre-Sound United levels and that is a fact that continually eats at investors. They are fed up and willing to try a new path forward. If, that is, they can get past Kiani’s efforts to obstructing the vote and watering down investors’ impact in whatever happens.

Much of the action between these two groups – management and investors – has moved into the court system. Masimo and Kiani have sued Politan and Koffey in the U.S. District Court in Central California…while Politan and Koffey have sued Masimo and Kiani in Delaware Chancery Court.

Parties are in Court in California and Delaware

Masimo’s case is seeking two main things: 1) to have the court issue an injunction forcing Politan to correct “material misrepresentations” in their proxy material’ and 2) to bar Politan from using any pro-Politan candidate proxy votes that were based on what Masimo insists were misrepresentations. To get this all done quickly, the Court additionally ordered expedited discovery in view of the impending annual meeting.

Politan’s case with the Chancery Court also initially sought two main things: 1) to force Masimo to go ahead with a stockholders meeting as soon as possible; and 2) to issue a “status quo” order preventing Masimo from engaging in any agreements in advance of the 2024 Annual Stockholders Meeting.

With that as the background, I will now present a condensed summary of the actions that have taken place since my last post on Masimo. I am only focussing on those items I feel are significant or reasonably meaningful. Read to the end to see the latest consequential news out of the California Court just last night.

August 16, 2024 – Masimo Form 8-K Filing

This document, filed with the Securities and Exchange Commission (SEC) was titled Update on Potential Separation of Consumer Business. This document informed the SEC about discussions taking place with a potential joint venture (JV) partner and the elements surrounding that development.

The only interesting part of this document is that it told the SEC, for the first time, that the company was contemplating selling off Sound United “either with or without the consumer health business.” This was important because, up until now, Kiani was insisting that it had to be sold with both the audio brands and the home healthcare products (which we learned are not successful). By offering to sell Sound United with just its audio brands, the company is likely to have a larger pool of potential buyers.

August 26, 2024 – Politan Schedule 14A Supplemental Proxy Material

Politan notifies investors that Masimo has filed an amended complaint with the California District Court. This is a long document in which Politan shares the full text of Masimo’s amended complaint with all investors. There are two things quite interesting about this document.

First, it notifies investors that in this amended complaint, Masimo “no longer asserts a claim based on the unsubstantiated allegation from Masimo’s original complaint and public communications regarding Mr. Koffey’s alleged ‘secret collaboration’ with certain plaintiffs’ lawyers in litigation against Masimo’s Board.” I first told you about this fantastical claim from Masimo in July (after the link see section A Surprising Accusation About Quentin Koffey Appears Out of Nowhere), which the company immediately made public.

Confidential Witnesses

Masimo, out of nowhere, alleged secret, nefarious, and illegal actions taken by Koffey. The company said “it has uncovered two confidential witnesses. These witnesses, the lawsuit claims, told Masimo ‘That Koffey has been ‘working closely’ with lawyers at Wolf Haldenstein'” in litigation against Masimo. The inference here is that Koffey is sharing confidential information with a party suing Masimo, a breach of his fiduciary responsibility as a Masimo Board member. The lawsuit even said that one of these confidential witnesses said of Koffey rather ominously, “He will use whoever will get him to where he needs to go.”

I called this allegation, “suspicious.” And now we learn that – poof! – it’s gone from the lawsuit. Loudly and publicly asserted…quietly withdrawn.” I repeat, this whole Masimo effort sliming Koffey is highly suspicious. Says Politan, “Masimo recently admitted in a court filing that it has been ‘unable to prove that Koffey worked directly with law firms representing plaintiffs in pending stockholder actions against the Company.'”

Koffey Pulls a Power Move

Secondly, this document reveals all of the allegations against Politan as asserted by Masimo. Masimo bends over backward to allege that many of Politan’s proxy data are incomplete and suggests or infers that Politan is hiding something. Then…in one of the strongest power moves I’ve ever seen, Politan says it denies all of Masimo’s allegations and is completely confident it will prevail in court. However, to expedite the case, Politan voluntarily issued more details on each of the proxy data points that Masimo complained about… “to moot this issue.”

Masimo, by the way, put out a press release crowing about how its lawsuit “forced Politan to make further disclosures.” Note that Politan was NOT ordered by the Court to do this…it took the initiative upon itself.

So why was this a power move on Politan’s part? Because Politan went through each point and added more detail and more information on each of these points that made Masimo look bad. It was brilliant, well written, full of detail, and added more information…all of it devastating to Masimo.

By voluntarily adding all of this devastating detail, Politan completely cut out the foundation for Masimo’s lawsuit.

September 3, 2024 – Masimo Press Release ‘Vote For Only Masimo’s Director Nominees’

This Masimo press release is used as another effort to pummel Koffey’s reputation. The subtitle of this release says it “Share[s] Details From Recently Unredacted Legal Filings About Quentin Koffey’s Multi-Year Plan to Take Control of Masimo.” This is one of a group of documents that Masimo regularly sends out to investors to try and exhort them to vote for the company’s preferred Director nominees.

As you can probably tell from that subtitle, the Masimo’s release refers to Politan documents it received as part of the discovery process in its ongoing litigation. Quite frequently, Masimo and/or Kiani attempt to reframe the “evidence” to make it sound more sinister than it really is.

Koffey in Multi-Year Plan to Control Masimo

The text of the release reveals what it tries to present as a shocking allegation that Koffey is engaging in “…a multi-year plan to take control of Masimo…” This seems pretty obvious and non-shocking to me. Koffey is an activist investor…it’s what they do. The release goes on to add, without any evidence or proof that, “[Koffey] has repeatedly acted against the best interests of Masmo’s stockholders and violated his disclosure obligations…”

Other tidbits Masimo thinks you should know is that Politan “raised nearly $440 million, specifically targeting Masimo…” Again, this is not a surprise…it was widely reported. Masimo goes on to say dramatically that Politan did not reveal who invested in their fund (investment companies generally don’t reveal individual investors) and to my knowledge, it is not required by law. But Masimo says, “Politan has gone to extreme lengths to hide the identity of its investors.” Please…

Masimo Suggests Politan is Hiding Something

Masimo goes on to suggest Politan is hiding something. “So, the question is why? Who are the investors backing Politan’s plan…” It goes on to further speculate…and it frankly gets quite tedious.

Other issues raised by Masimo about Politan:

• Politan hired two firms to identify former Masimo employees “to speak secretly with Politan.” Politan’s response is that this is a normal part of due diligence for any major investment company. It is not some dire plot, they say. Masimo believes (but can’t prove) that these employees are involved in some action against the company. Frankly, to me, Masimo and Kiani seem quite paranoid.
• Quentin Koffey intimidated other directors – Even if true, not illegal. Their evidence? Statements from these directors.
• Quentin Koffey “has sabotaged the process…” of separating out the consumer business. There are two sides to all of these allegations.
• Politan was planning to take control of Masimo from day one… Of course, that was to be expected.

The release concludes “Quentin Koffey does not possess the ethics or character to serve on any board, let alone Masimo’s…” Sorry Masimo, you don’t get to fire him, the investors hired him.

September 5, 2024 – Transcript of Masimo Presentation at Wells Fargo Healthcare Conference

Masimo’s CFO Micah Young participated in the Wells Fargo Healthcare Conference held in Boston, MA on September 5, 2024. Most of this text is unremarkable – Young mostly talks about the improving market dynamics for their Healthcare business. On the consumer side (Sound United), they are seeing some good results in the “headphones and hearables” segments, but the core audio business is “challenged.”

One thing in this document I found interesting is that Young was asked about the JV partnership situation. He indicated that the company is still talking to the JV partner who wants to “bring in some additional strategic partners.” But this next comment is new to me. Young says that the JV partner feels these additional partners will help drive “what they’re interested in, which is the hearables and wearables business and consumer health.” Apparently, the audio business is of less interest to them.

Buyers are Interested in ‘Just the Consumer Audio Business’

But Young also said, “We’ve been getting some inbound interest for buyers of… just the consumer audio business.” They are working with Morgan Stanley to help them pursue these opportunities.

In talking about the proxy war, Young used the word “risk” and “risky” multiple times, I think trying to sound scary. “I can’t emphasize this enough, but this is a very risky situation we’re in. And it’s very concerning. I mean there is a high risk to the future of Masimo.” Then a bit later he adds, “And I just hate to see the risk of that momentum – it’s just – it’s a lot of risk.”

Masimo CFO Says SEC Whistleblower is a Sound United Employee

Young was also asked about the SEC investigation. And here he revealed something that I think is new. The company recently announced that it is subject to an investigation by the SEC that was launched due to information the SEC received from a whistleblower in the company’s accounting department. This much I knew (and have previously reported)…but Young revealed a little more.

“And it’s very isolated to one particular employee that’s part of the consumer business. And it dates back to, I believe, 2022, the first year of the acquisition,” Young told the conference. Young said he had one of the Big Four accounting firms come in when he learned of the employee’s concerns and had them audit the situation. He says he feels good about where the situation landed, but they are waiting to hear back from the SEC.

Oh, and then there’s the DOJ investigation! I’ll leave this topic for another time.

September 5, 2024 – Politan Letter to Shareholders

Titled Politan Provides Update on Why Masimo Shareholders Should Support Urgently Needed Board Change at Company’s 2024 AGM, this letter from Koffey and Politan also largely restates why an independent Board at Masimo is necessary, but does add some new bits of interesting information. Generally, Politan has not been quite as aggressive as Masimo in terms of the number of communications to shareholders. But sometimes Politan feels pulled into a response to counter specious claims that Masimo continues to levy against Politan and Koffey personally. That was largely the purpose of this letter.

Koffey wanted shareholders to know the latest status of litigation and what they, like Masimo, have learned during the discovery process. Koffey called Masimo’s lawsuit against Politan “meritless” and said it sought to block Politan’s nominee’s for the Board. He assured investors he was working diligently to “clear this final obstacle” and show the Court the suit is “frivolous.” Here is what Politan has learned during due diligence…

Key Topics of Politan Letter to Shareholders

• Masimo’s “central allegation” that “Mr. Koffey was conspiring with the Wolf Haldenstein law firm to assist in litigation against Masimo” is FALSE. Discovery revealed, “that there was no credible evidence to support this charge.” Politan added, “Masimo and its affiliates made the defamatory claim even though the Company, its lawyers, the opposition research/PR firm they retained, and the private investigator they hired, did not know the identity of the confidential witnesses who were the basis for the accusation. That is because these witnesses do not exist.”
• “Definitive evidence exists regarding Mr. Kiani’s role in RTW’s empty voting scheme:” Masimo and its legacy directors said no one had anything to do with the empty voting scheme. But discovery produced evidence of communications between Kiani and an RTW executive appearing to set up the scheme. There is also evidence that Kiani and RTW are doing it again, Politan says.
• Mr. Kiani’s plan for separation of the Consumer division has been shown to “decrease value for Masimo shareholders:” Experts brought in by Politan showed the plan pursued by Kiani would create a ‘negative valuation overhang” and if that separation plan moved forward on Kiani’s terms, “it would decrease value for Masimo shareholders.”

There was more in this letter, but these are the key points. Koffey closed the letter on an optimistic beat, telling investors that with an independent and accountable Board, “Masimo can be refocused as a growth business…”

September 6, 2024 – Masimo Schedule 14A Filing with the SEC

This filing appears to be in response to the above Politan letter. It is short and exists to deny some of the points that Quentin Koffey made in his letter to shareholders shown above. Below is what the filing says in its entirety.

“Politan continues to lie to advance a false narrative and confuse shareholders. Neither Mr. Kiani nor any other member of management nor any non-Politan members of the Board has ever shared material non-public information with any stockholder. The information shared was merely the Company’s response to Politan’s prior announcement that it would run a second proxy contest. Further, as the Company has previously stated, neither Mr. Kiani nor any other member of management nor the non-Politan members of the Board had or has any agreement with regard to the trading or voting of Masmo stock by any third-party investor. In fact, evidence produced by Politan in litigation shows that Politan and its public relations team conceived of this “empty voting” issue in early July 2024 as another false narrative to be employed in Politan’s effort to take control of Masimo.”

As you can see, Politan apparently touched a nerve. This statement from Masimo refers to the “empty voting” scheme that RTW, an investment company – and known friend of Joe Kiani – set up to enable voting about 10% of the company’s outstanding shares in favor of the management’s director candidates, even though RTW no longer actually owned those shares. It is a very anti-investor strategy.

September 9, 2024 – Masimo Letter to Investors – ‘Masimo’s Future Depends on Vote at September 19 Annual Meeting

Yet another letter from Masimo’s management pitching investors on voting for management’s candidates for Director. The company said this would be its last letter to shareholders. However, that would turn out not to be true.

The letter has two columns in the body of the letter. One column on the left-hand side purports to show the great job Masimo management has done and is doing. Next to it on the right-hand side is a column that tells investors what will happen if they vote for Politan’s nominees. Item number one in that column is that the company will lose CEO Joe Kiani, COO Bilal Muhsin, “and up to three hundred other key employees…” A not-so-subtle threat.

The rest of the column is more trashing of Quentin Koffey, calling him “divisive,” “inexperienced,” “he has no concrete plans for our business,” and on and on.

The rest of the letter consists of testimonials solicited by Masimo from certain customers, as well as some management-friendly media quotes. It closes with, “Do not put the future of Masimo and your investment at risk by handing control to Quentin Koffey.” That’s not nearly as optimistic as the closing of Koffey’s letter.

September 9, 2024 – Hearing on Preliminary Injunction in U.S. District Court, Central District of California

Something else happened on September 9, 2024…a hearing was held in the courtroom of the Honorable Judge James V. Selna. The hearing was set to hear final arguments from the parties on Masimo’s motion for a preliminary injunction.

Both sides argued their case and the judge issued a preliminary ruling. But, frustratingly for those of us trying to follow this case, the judge would seal the ruling…to be published later.

The final ruling came out the evening of Wednesday, September 11…and it was consequential. I will tell you all about it in my next post.

Learn more about Masimo by visiting masimo.com. See their proxy website at protectmasimosfuture.com.

See more on Politan Capital Management at politanmgmt.com. Politan’s proxy website is advancemasimo.com.