The former management team at MiMedx (NSDQ:MDXG), led by ex-CEO Parker Petit, allegedly enacted a scheme to cook the books at the regenerative medicine company, retaliated against anyone who questioned their sketchy accounting practices and secretly filmed their offices, according to a probe the company launched after the scheme blew up last year.
In February 2018, Marietta, Ga.-based MiMedx delayed the release of its 2017 results and commissioned an independent probe after an internal investigation turned up problems with how it recognized revenue from distributors. By June CFO Michael Senken and treasurer John Cranston were out and, in July of last year, Petit and president & COO William Taylor were fired; their terminations were later found to be “for cause,” triggering the forfeit of all equity and incentive awards for the executives and Petit’s resignation from the board.
MiMedx said it would restate all of its earnings reports going back to 2012 and was cooperating with U.S. Securities & Exchange Commission and Justice Dept. investigations. Last December, the accounting firm tapped to audit MiMedx’s books resigned after determining that it couldn’t rely on internal financial controls or what it was told by executives.
In April of this year, Petit, who denied the allegations, mounted a proxy war seeking to regain control of the company. A shareholders meeting is slated for June.
Yesterday MiMedx said that a 15-month investigation conducted by King & Spalding and KPMG, involving more than 1.5 million documents and interviews with more than 85 witnesses, exposed a scheme by Petit, Taylor, Senken and Cranston to pad the recognition of revenue from its largest outside distributor.
The probe also turned up evidence that the management team manipulated sales timing and recognition by shipping unneeded product to customers and recording those sales before receiving payment. The padded sales, targeted for the end of each fiscal quarter, were made via “side deals” struck with customers that changed payment terms or allowed returns or exchanges, according to the investigation.
Petit, Taylor, Senken and Cranston allegedly lied to the MiMedx board, external auditors and the SEC to conceal the scheme; Petit lied under oath during a deposition on revenue recognition from the largest distributor, the company alleged, when he testified that it was not true that the distributor only paid after it sold MiMedx product.
The probe found that Petit and Taylor also went after employees who raised concerns.
“Mr. Petit directed an internal investigation dubbed ‘Project Snow White’ that sought to uncover wrongdoing committed by such employees, rather than the merits of their allegations. As part of this, a secret video surveillance system was installed to record interviews and employee discussions without their knowledge or consent. All this was done in an effort to discredit whistleblowers or find some wrongdoing to justify re-assignment, discipline or even termination,” MiMedx said.
“The evidence showed that Mr. Petit directed that certain employees, whom he and other former members of senior management perceived to hold loyalty to an employee who had raised concerns about the company’s practices, be terminated,” the company said.
The company accused Petit and Taylor of setting “an inappropriate ‘tone at the top'” that “emphasized short-term business goals over compliance and ethics” and “marginalized the company’s legal and accounting departments and advisors.”
“The completion of this investigation is a significant milestone in our concerted efforts to position MiMedx for future success,” chairman Charles Evans said in prepared remarks. “The investigation uncovered evidence of material wrongdoing on the part of the company’s prior senior management team. The board continues to partner with management to ensure that MiMedx operates at the highest levels of ethics, transparency and compliance.
“As a leader in the advanced wound care sector and an emerging therapeutic biologics company, the company is focused on executing our long-range strategic plan and achieving ethical and sustainable growth in a renewed culture of compliance,” Evans said.
The company said it’s continuing to investigate potential violations of Anti-Kickback Statute “in its relationships with various physicians, customers and distributors.”
“Through this process, the investigation has identified certain customer accounts that present potential compliance risks and warrant additional review. This additional work will be undertaken by company counsel in consultation with management to determine the company’s legal risk, including whether any loss contingencies should be recognized or disclosed under GAAP,” MiMedx said.
MDXG shares, which closed down -1.6% at $3.17 apiece, were up slightly to $3.20 today in pre-market trading.
