A medical implant manufacturer will pay $2 million in fines and recoup nearly $600,000 in incentive-based compensation from four senior executives who allegedly manipulated the company’s financial statements, wrongdoing the Securities and Exchange Commission (SEC) said it identified through its earnings per share (EPS) initiative.
Surgalign Holdings, formerly RTI Surgical Holdings, and former company Chief Executive Officer Brian Hutchison and Chief Financial Officer Robert Jordheim committed securities law violations when they masked disappointing sales figures by shipping future orders ahead of schedule to “pull forward” revenue, the SEC said Wednesday in a press release.
The alleged practice, which occurred from 2014-19, “cannibalized future revenue streams and damaged important customer relationships while the company reassured investors it was meeting revenue guidance,” the SEC said. The company, based in Illinois, would not have achieved its quarterly revenue guidance for almost all of the quarters in that five-year period without the scheme, the SEC’s order said.
Pulling forward revenue by booking it early defrauds investors by concealing a firm’s true financial performance and contradicts generally accepted accounting principles (GAAP), the SEC said. In some cases, RTI allegedly shipped orders early without customer approval.
The settlement marks the latest achievement for the SEC’s EPS initiative, in which the Division of Enforcement uses data analytics to uncover hard-to-detect accounting and disclosure violations by public companies. The SEC fined pest control company Rollins $8 million in April to settle accounting fraud violations identified by the EPS initiative.
Without admitting or denying the SEC’s findings, Surgalign agreed to pay the penalty and cease and desist from further violations of the anti-fraud provisions of federal securities law. Jordheim, who was the company’s CFO from 2010-17, agreed to pay a $75,000 fine, return $206,831 in compensation to Surgalign, and be suspended from appearing and practicing before the SEC as an accountant for five years.
In a separate complaint lodged in U.S. District Court for the District of Columbia, the SEC charged Hutchinson with six counts of violating federal securities law, three counts of aiding and abetting RTI’s violations of federal securities law, and one count of violating the Sarbanes-Oxley Act. That case is still pending.
Three other unnamed former RTI executives returned more than $361,000 of compensation to Surgalign, the SEC said.
Surgalign response: In a statement, Surgalign said it cooperated with the SEC’s investigation, provided agency staff with access to documents, conducted an internal investigation into the allegations, and updated the SEC regularly on the status of its probe.
“Reaching this settlement with the SEC will allow us to move forward without this uncertainty and is one more issue resolved in our effort to transform the company since we divested the RTI OEM (original equipment manufacturer) business roughly two years ago,” David Lyle, CFO of Surgalign, stated.