A former executive with Hansen Medical (NSDQ:HNSN) can’t get out of a lawsuit filed against him by the the U.S. Securities & Exchange Commission accusing him of hatching a scheme to artificially inflate Hansen’s revenues.
The SEC accused Christopher Sells, the robotic surgery device company’s erstwhile vice president of commercial operations, and Timothy Murawski, a VP and Sells’ deputy, of scheming "to have Hansen Medical personnel temporarily install the company’s robotic catheter system at a customer site before the customer was ready for it so that Hansen Medical could record the product sale," according to an SEC press release issued at the time.
"Hansen Medical personnel would then immediately dismantle the equipment and put it in storage until months later, when they would return to reinstall the equipment," according to the statement. "The SEC further alleges that, in a sales transaction in the final days of December 2008, Sells and Murawski instructed Hansen Medical personnel to forge a customer signature on certain required documents to allow the company to record the revenue that quarter."
Sells and Murawski allegedly aimed to avoid revenue recognition rules and fool the company’s financial gurus "into believing that the sales had been completed and revenue could be recorded," according to the agency.
Murawski settled with the securities watchdog Nov. 6, according to court documents, but Sells filed a motion for sumary judgment, seeking to have Judge Claudia Wilken of the U.S. District Court for Northern California seeking to have several of the charges against him tossed.
But Wilken ruled that the SEC “has presented sufficient evidence to meet its summary judgment burden. Specifically, it has submitted sufficient evidence to support an inference that Sells knew of – and possibly even facilitated – the alleged plan to recognize revenue prematurely,” according to court documents.
“SEC has presented evidence that Sells knew that Hansen recognized revenue in December 2008 even though the company had failed to complete the physician-training requirement that month. It points, in particular, to e-mails that Sells received on Dec. 28 and Dec. 29 stating that Hansen had yet to obtain a physician’s signature for the training certificate which it needed to complete before recognizing revenue from the sale,” Wilken wrote. “Although Sells submitted evidence suggesting that he never instructed Hansen’s clinical account manager to forge the physician’s signature on the training certificate, this is does not constitute undisputed evidence that he lacked scienter. The e-mails SEC submitted are sufficient to suggest that Sells knew that the physician-training requirement was never completed in December 2008 and, thus, that the revenue from the sale was recognized prematurely.”
The SEC also presented sufficient evidence to dispute Sells’ claim that he didn’t know about the sham installations designed to counterfeit sales of the Sensei device, according to the judge.
“SEC has presented evidence indicating that Sells knew that the company completed temporary sham installations of the Sensei System at these hospitals for the purpose of recognizing revenue from the sales before the devices could be permanently installed and put to use,” she wrote.
Sells’ case is slated to go to trial March 17, 2014, according to the documents.
In july, Hansen said it agreed to pay out $8.5 million in cash and stock to put to rest a shareholders’ lawsuit filed over its 2009 restatement of revenues.
The Mountain View, Calif.-based robotic surgery company said it agreed to pay $4.25 million in cash and another $4.5 million worth of its own stock to settle the lawsuit.
Hansen adjusted its books in 2009 after receiving an anonymous tip that "documentation related to certain revenue transactions was falsified, and there was not an effective control environment in our sales, clinical and field service departments," according to regulatory filings. The company had recognized revenues for the sale of 2 of its Sensei robotic surgery systems but had in fact received only $320,000."As a result, there were instances where revenue was recognized prior to the completion of all of the elements required for revenue recognition under our revenue recognition policy. All of the irregularities that were identified during the investigation occurred outside of the accounting department," according to the filings.
The restatement pushed Hansen’s losses during the 3 months ended Sept. 30, 2008, from $12.0 million, or 48 cents per share, to $12.9 million, or 51 cents per share. HNSN shares plunged 9% that day, from an Oct. 16, 2009, close of $3.43 to end the next day at $3.12.
Shareholder lawsuits soon followed, alleging that the company and its management "made false and/or misleading statements and/or failed to make disclosures regarding our financial results and compliance with [generally accepted accounting principles] while improperly recognizing revenue; that these misstatements and/or non-disclosures resulted in overstatement of our revenue and financial results and/or artificially inflated our stock price; and that following our October 19, 2009 announcement, the price of our stock declined," according to SEC filings.