Nerves Frayed at Neurometrix

Neurometrix (NURO) keeps testing its investors' nerves.

The Boston Globe reported Tuesday that Neurometrix faces an escalating probe by federal prosecutors known for their tough stand on healthcare fraud. The company is suspected of improperly rewarding doctors for using its NC-Stat nerve-testing machines. It has come under scrutiny for its marketing practices.

Shares of Neurometrix, which fetched $40 less than a year ago, plummeted10% to a new 52-week low of $9.87 Tuesday.

Meanwhile, analysts remained oddly silent. Most of them continue to recommend buying, or at least holding, the company's shares despite the ongoing setbacks.

But Neurometrix bears sensed a downturn coming. By mid-February, they had sold more than half of the company's stock short in anticipation of a fall.

"We believe the investigation -- contrary to the impression that Neurometrix management has left people with -- is very much alive," one short-seller told TheStreet.com on Jan. 31.

The following day, Neurometrix reported disappointing results that sent the company's stock plunging. Reimbursement challenges, exposed by TheStreet.com months earlier, had finally taken a toll. But short-sellers expect even more pain ahead.

Meanwhile, Neurometrix insiders started cashing out before the big crash. Last year, they sold Neurometrix stock at more than three times the current share price. Now at least one of them -- Chief Operating Officer Gary Gregory -- has only a fraction of his previous stake in the company left.

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