The Securities and Exchange Commission has charged biotech company MiMedx Group and three of its former top executives with defrauding investors by misstating the company’s revenue and attempting to cover up their misconduct.
MiMedx has agreed to settle with the SEC, without admitting or denying the allegations, by consenting to the entry of a final judgment, subject to court approval, that permanently restrains and enjoins the company from violating certain provisions of the federal securities laws. As part of the resolution, the company also agreed to pay a civil penalty in the amount of $1.5 million. The settlement, if approved by the court, will conclude the matters alleged by the SEC in its complaint.
According to the SEC’s complaint, from 2013 to 2017, MiMedx prematurely recognized revenue from sales to its distributors and exaggerated its revenue growth. Former CEO Parker Petit and former COO William Taylor entered into undisclosed side arrangements with five distributors that allowed distributors to return product to MiMedx or conditioned distributors’ payment obligations on sales to end users, according to the SEC.
Petit, Taylor, and former CFO Michael Senken allegedly covered up this scheme for years, despite concerns raised by a former controller at the company. The SEC also alleges Petit, Taylor, and Senken misled MiMedx’s outside auditors, members of its audit committee, and outside lawyers who inquired about the transactions.
“As alleged in our complaint, MiMedx’s former executives misled investors about the growth of MiMedx’s revenues and then repeatedly concealed their fraud,” said Kurt Gottschall, Director of the SEC’s Denver Regional Office, in a news release. “This action reflects our commitment to holding issuers and their senior officers accountable for failing to provide accurate financial statements to the investing public, while the settlement with MiMedx gives appropriate credit for the company’s later remediation and cooperation.”
The SEC’s complaint, filed Nov. 26 in the Southern District of New York, charges all defendants with violating the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. The SEC also charged Petit, Taylor, and Senken with lying to MiMedx’s outside auditors. The complaint seeks officer-and-director bars against the three executives, as well as the clawback of bonuses and other incentive-related compensation paid to Petit and Senken during the alleged fraud.
Senken’s counsel, Mark Cohen of law firm Cohen & Gresser, responded in an emailed statement: “We are disappointed with the SEC’s decision to bring this civil suit against our client, which has put our client into a case in which he does not belong. The SEC’s Complaint asserts that the alleged revenue recognition scheme was repeatedly concealed from Mr. Senken and the accounting group–yet it also alleges that Mr. Senken participated in the very conduct that was kept from him. This is inconsistent with the SEC’s own lawsuit, as well as common sense. Mr. Senken strongly denies the allegations in the Complaint.”
In response to the resolution, MiMedx said its board of directors and current management team “are committed to maintaining strong internal controls, financial reporting, compliance, and corporate governance practices. As previously disclosed, several members of prior management were separated from the company, and those separations were later determined to be ’for cause,’ based on the audit committee’s independent investigation.”
Last year, the company appointed Mark Graves as chief compliance officer, as it was also conducting a formal search to fill the newly established positions of chief accounting officer and internal auditor, amid the ongoing investigation at that time into the accounting violations. Upon acknowledging the SEC settlement, the company also announced the appointment of William Hulse as its new general counsel and secretary, effective Dec. 2. Hulse joins MiMedx from law firm Dykema.
“We are focused on our future as a mission-centered healthcare company and are committed to continued implementation of strong financial systems and independent oversight controls, which reflect both sound business practices and an ethical culture,” Chief Executive Officer Timothy Wright stated. “We appreciate the SEC’s recognition of our cooperation and remediation efforts as part of this settlement.”
The resolution relates only to the previously disclosed investigation by the SEC. The U.S. Attorney’s Office for the Southern District of New York is conducting a parallel criminal investigation involving matters similar to those investigated by the SEC. The company said it is cooperating fully with that ongoing criminal investigation.