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Orthofix Settles SEC’s Accounting And FCPA Claims With Admissions
01/30/2017On January 18, 2017, Orthofix International N.V. (“Orthofix”), a Texas-based medical device company, agreed to a civil money penalty of $8,250,000 to settle claims brought by the United States Securities and Exchange Commission (“SEC”) for artificially inflating the company’s financial condition through faulty accounting, and separately agreed to disgorge $2,928,000, plus interest, and pay a civil money penalty of $2,928,000 for violating the Foreign Corrupt Practices Act (“FCPA”), by providing improper payments to doctors at government-owned hospitals in Brazil. Orthofix admitted to facts set forth in the SEC’s two Orders Instituting Proceedings, and acknowledged that the conduct violated the federal securities laws. In the Matter of Orthofix International N.V., Admin. Proc. No. 3-17791 (Jan. 18, 2017). In the Matter of Orthofix International N.V., Admin. Proc. No. 3-17800 (Jan. 18, 2017).
In the first order, the SEC claimed that from at least 2011 until mid-2013 (the “relevant time period”), Orthofix violated sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 by improperly accounting for transactions by treating certain price discounts as expenses instead of reductions of revenue. The company additionally, among other things, entered into contingent sales agreements with certain distributors, while also recognizing revenue for product sales when the sales could not be resold. In total, due to its faulty accounting, the SEC contended that Orthofix overstated its net sales in 2011 by 6% and its operating income by over 430%. And, by improperly treating certain commissions as expenses rather than as reductions to revenue, Orthofix overstated its revenue by approximately $1.7 million for the fiscal year of 2012. In the Matter of Orthofix International N.V., Admin. Proc. No. 3-17791 (Jan. 18, 2017).
Officers of the company also settled claims with the SEC related to these accounting errors. Specifically, Jeff Hammel, a former Chief Financial Officer (“CFO”) of Orthofix’s Spine Segment agreed to pay a $20,000 penalty for recording revenue on several transactions that resulted in the company making material misstatements in its public filings. Hammel also agreed to a suspension from appearing or practicing before the SEC as an accountant. The SEC’s order permits Hammel to apply for reinstatement after two years. In the Matter of Jeffrey Hammel, CPA, Admin. Proc. No. 3-17792 (Jan. 18, 2017).
Brian McCollum, another Orthofix former CFO and President of its Spine Segment, who allegedly received notice that Orthofix improperly recognized revenue but did not investigate, agreed to pay a $35,000 penalty and reimburse the company $40,885 for bonuses he received during the relevant time period. In the Matter of Brian McCollum, Admin. Proc. No. 3-17792 (Jan. 18, 2017).
Additionally, during the relevant period, Bryan McMillan served as the President of Orthofix’s Spine Segment, and Kenneth Mack reported to him as a Vice President of Global Sales and Development. They both allegedly negotiated transactions with two international distributors containing various improper concessions without the Spine Segment’s CFO’s knowledge or approval. Mack agreed to pay a penalty of $40,000, and McMillan agreed to pay a penalty of $25,000. In the Matter of Kenneth Mack and Bryan McMillan, Admin. Proc. No. 3-17794 (Jan. 18, 2017).
Orthofix’s then-CEO, Robert Vaters, was not charged with any wrongdoing, but reimbursed the company $72,886 for bonuses and certain stock awards he received during the relevant time period. The SEC did not pursue a Sarbanes-Oxley clawback action (or any other action) against him, Press Release, U.S. Securities and Exchange Commission, Medical Device Company Charged With Accounting Failures and FCPA Violations (Jan. 18, 2017), and this prior reimbursement may have played a major role.
In the second order against Orthofix, the SEC alleged that during the same time period, Orthofix’s Brazilian subsidiary, Orthofix do Brasil LTDA, violated the FCPA by using high discounts as a means to make improper payments through third-party commercial representatives and distributors in an attempt to induce doctors at government hospitals to use Orthofix’s products. These payments resulted in the subsidiary earning $2,928,000 in profits. In the Matter of Orthofix International N.V., Admin. Proc. No. 3-17800 (Jan. 18, 2017). No individuals were specifically implicated in connection with the FCPA violations. Given the SEC’s recent FCPA focus on the healthcare/life sciences space, and Brazil, it is not surprising to see such an order.
However, we note that, as the SEC itself acknowledged, Orthofix disclosed the improper payments in connection with its self-reporting obligations undertaken as part of a 2012 settlement with the SEC connected with alleged violations of the FCPA by its Mexican subsidiary. Notwithstanding that self-reporting and ongoing cooperation, the SEC saw fit to bring a brand new claim, with additional penalties, rather than simply let Orthofix’s remedial steps suffice. Like the recent Biomet case, this one reflects the tough approach the SEC will take against those it perceives to be repeat offenders.
