Short seller Gotham is questioning the quality of Medifast products

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• Short seller says shares are worth $30 to $79
• Gotham arranged lab tests of Optavia brand weight loss products
• Lead levels in some products exceed FDA maxmimum intake recommendation

Short-selling firm Gotham City Research is questioning the quality and safety of products sold by weight-loss firm Medifast.

In a report today, Gotham says the shares are worth between $30 to $79 dollars, a fraction of the $208 price at the close of trading yesterday. The short seller alleges that some of Baltimore-based Medifast's Optavia-branded products contain unsafe levels of lead and cadmium. Optavia prices "will face downward pressure" because they're up to four times more expensive than those of competitors', and the products may require warning labels, recalls, or third-party testing, Gotham said in the report. The firm has a short position in Medifast shares, meaning it is betting they will go down.

Calls and an email to a Medifast representative were not immediately returned.

Gotham said it arranged lab testing of Medifast products bought in the open market, and found that lead levels in 85% of Optavia samples exceeded the maximum allowable dose per California's Safe Drinking Water and Toxic Enforcement Act, enacted in 1986. Up to 23% of the products tested exceeded the Food and Drug Administration's maximum daily intake levels for lead, Gotham said. Business Insider was unable to verify the results of the lab findings.

In addition, Medifast's research and development expenses and its capital expenditure - spending on plant and equipment - as a percentage of revenue is less than half its peers, "suggesting underinvestment," Gotham said. Medifast shares have surged about 185% this year, lifting the market cap to about $2.6 billion as of the close of trading yesterday.

Medifast's products are "clinically proven" and of the "highest quality" according to its website, which says: "Developed by a physician, it's the brand recommended by more than 20,000 doctors since its founding."

"We develop and manufacture most of our foods in our wholly owned manufacturing facility just steps from our corporate offices in Baltimore," Medifast says on its website.

Gotham, founded by Daniel Yu, has made waves in the market before. The New York firm went public with skepticism about U.S. "adtech" firm Criteo last year and in 2016 took on MDC Partners, an advertising and communication company. Last year Gotham also sent AAC Technologies shares tumbling after questioning the Hong Kong-based Apple supplier's accounting practices.

A short seller makes money by borrowing a company's shares and selling them, with the aim of buying them back at a lower price and returning them, pocketing the difference. Notable "activist" short sellers, or those who go public with their skeptical research, include Jim Chanos of Kynikos Associates, Bill Ackman of Pershing Square, and Carson Block of Muddy Waters.

Before joining BI, Trista Kelley had worked as a constulant for Gotham City Research, advising on general media strategy, but had no involvement in any specific investment positions.