Bloomberg News

OSI Systems Falls After Hearing on Naked-Image Scanners

November 15, 2012

OSI Systems Inc. (OSIS:US) fell the most in more than 15 years after a U.S. lawmaker said tests may have been falsified on software intended to stop the company’s airport body-scanning machines from recording graphic images of travelers.

OSI’s Rapiscan Systems unit, one of two suppliers of scanners used for U.S. airport security screening, “may have attempted to defraud the government by knowingly manipulating an operational test,” Representative Mike Rogers, chairman of the House Transportation Security Subcommittee, said in a Nov. 13 letter to Transportation Security Administration chief John Pistole.

OSI, in a statement, said testimony to a hearing held by Rogers’s subcommittee today shows “that this was at all times a government-controlled test” and that the company “could not have manipulated” any of the data.

“At no time did Rapiscan Systems falsify test data or engage in any fraudulent conduct,” OSI Chief Executive Officer Deepak Chopra said in today’s statement. “We take the matter very seriously and are fully cooperating with the TSA during this process.”

OSI fell $21.40, or 28 percent, to $54.89 on the Nasdaq Stock Market, the Hawthorne, California-based company’s biggest one-day drop since (OSIS:US) October 1997 and Nasdaq’s biggest percentage decline today. Almost 4.9 million shares changed hands, 44 times the three-month daily average.

John Sanders, assistant administrator for the TSA’s office of security capabilities, said at the House hearing that the agency doesn’t have evidence that tests on the machines were manipulated.

“At this point we don’t know what has occurred,” Sanders said. “We are in contact with the vendor. We are working with them to get to the bottom of it.”

Underwear Bomber

The TSA accelerated the use of advanced scanners in 2010, following the Dec. 25, 2009, attempt by Umar Farouk Abdulmutallab to blow up a Northwest Airlines flight by igniting explosives in his underpants. It’s used two vendors: Rapiscan, whose backscatter machines use a form of X-rays, and L-3 Communications Holdings Inc., (LLL:US) which features another imaging technology known as millimeter-wave.

Airline passengers were offended by the revealing images, including those of children and the elderly, and the TSA moved its screens to separate rooms away from the checkpoints so the scans couldn’t be seen by the public. If TSA agents spot an image that looks like a weapon or an explosive, they communicate by radio with screeners at the security lines about where to search.

‘Strip Search’

The Electronic Privacy Information Center sued the agency, calling use of the machines the equivalent of a “physically invasive strip search.”

Rapiscan has been trying, without success, to write software that would display a generic image. L-3 has been able to produce such software.

TSA has said passengers who don’t want to go through the scanners can opt for a pat-down instead. That option has also generated criticism from the public and members of Congress as being excessively invasive.

The European Union banned backscatter machines in November 2011, citing health risks from low doses of radiation. TSA says the machines expose passengers to less radiation than they receive from the atmosphere during a flight.

If wrongdoing is proven on the government contracts, Rapiscan could face fines, prison terms and a ban on government contracting, said Dan Gordon, former head of federal procurement for President Barack Obama’s administration.

‘Incredibly Serious’

“Fake test results are incredibly serious,” said Gordon, now a dean at George Washington University Law School in Washington. “Every false statement is a criminal act, sending someone in that company to jail.”

Rogers said his committee received a tip alleging that tests were faked. While Rogers’ letter doesn’t identify the company, his spokeswoman, Shea Snider, confirmed in an e-mail that the lawmaker was referring to Rapiscan.

TSA relied on a third-party vendor rather than the company to verify the technology, so the agency may be attempting to find a scapegoat for a poorly managed program, Rogers said at today’s hearing.

The Alabama Republican, who has oversight of TSA operations, said the agency first indicated it was moving Rapiscan machines to smaller airports, then couldn’t produce a list of airports. The agency is moving 91 units worth $14 million to a warehouse instead of redeploying them, Rogers said.

The TSA has 174 backscatter machines, David Castelveter, a TSA spokesman, said.

‘Transparency Problem’

“It appears we not only have a technology problem, but a significant transparency problem on our hands,” Rogers said.

The TSA intends to keep the machines in a warehouse until the privacy-protection software works, John Sanders, assistant administrator for the agency’s office of security capabilities, said at the hearing.

TSA has spent about $40 million on backscatter machines to date, Sanders said. It has spent about $100 million on 600 millimeter-wave machines.

The agency awarded a September contract to three companies for the next generation of advanced-imaging scanner: L-3, American Science & Engineering Inc. (ASEI:US) and Smiths Group Plc. (SMIN) All future machines will come pre-equipped with privacy software, Sanders said.

Peter Kant, an executive vice president with the company, said Rapiscan received a so-called show-cause letter from the TSA on Nov. 9 seeking detailed information about the testing of technology used in the machines.

Passenger Safety

Rapiscan became aware of an issue related to software under development months ago and promptly notified the TSA, Kant said in an interview yesterday. The company is fully cooperating with the agency’s investigation, which doesn’t relate to software that detects anomalies on passengers’ bodies, Kant said. Passenger safety was never affected, he said.

Show-cause letters are sent when the government believes a contractor isn’t complying with terms, said Gordon, the former federal procurement administrator. It’s a last chance for the company to demonstrate it hasn’t violated the contract, he said.

Show-cause letters are rare because most contractors try hard to meet the government’s requirements, Gordon said. Companies that default on contracts may have a difficult time winning business again from that agency or other parts of the government, he said.

Machines Moved

The TSA recently said it was relocating Rapiscan machines from seven larger, busier airports to smaller ones.

The change related to extra time it takes for passengers to be scanned with the backscatter machines, not any doubts about whether the technology works, Pistole told reporters at a news conference in Washington Nov. 13. Backscatter machines require staff in a separate room to look at the images and radio back to an officer at the checkpoint if extra screening is needed, he said.

TSA believes backscatter technology is still effective in finding non-metallic objects, Pistole said.

“We originally went with two companies to help drive competition and try to get to the next level of detection with the best possible performance,” Pistole said. “We’re still committed to doing that.”

TSA has contracted for increasing levels of detection and other efficiency and privacy enhancements, Castelveter said in a statement yesterday.

“We fully expect our vendors to deliver on their commitments, and are working with them to that end within the federal contracting process,” Castelveter said.

To contact the reporter on this story: Jeff Plungis in Washington at jplungis@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net


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Companies Mentioned

  • OSIS
    (OSI Systems Inc)
    • $69.29 USD
    • 1.34
    • 1.93%
  • LLL
    (L-3 Communications Holdings Inc)
    • $121.37 USD
    • 0.52
    • 0.43%
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