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SEC accuses surgical implant business of front-loading sales to meet target

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Dive briefs:

  • The US Securities and Exchange Commission has indicted Surgalign Holdings (formerly RTI Surgical Holdings) and former officers Brian Hutchison and Robert Jordheim for accounting and disclosure fraud.
  • According to the SEC, RTI shipped future orders ahead of schedule and front-loaded revenue to mask disappointing sales, all without disclosing the practice to investors.
  • Surgalign has agreed to pay $2 million to settle the claim. Jordheim, who was his CFO at RTI until 2017, also agreed to pay $75,000 in civil penalties, of which $206,831 he returned to Surgalign.

Dive Insight:

RTI sold surgical implants such as orthopedic implants and spinal implants. Between 2015 and 2019, the SEC accused RTI of shipping orders weeks or months before customers first requested delivery. In some cases, RTI has obtained approval from the customer for early delivery, and in other cases, it is alleged that RTI shipped early without prior consent.

The company wouldn’t have been able to meet its quarterly earnings guidance for the first quarter of 2015 through the first quarter of 2016 without taking advantage of early shipments to accelerate sales, according to the SEC. RTI did not meet its guidance in the third quarter of 2015.

The commission accused RTI of using this practice regularly from 2016 to 2019. Members of his former RTI senior management, including Joadheim, reportedly discussed pull-forward opportunities and asked the commercial division to identify opportunities.

“Joedheim and other former senior executives have approved discounts to induce customers to accept early shipments. We regularly received information about the impact on RTI’s ability to meet its goals.

While the SEC order focuses on Jodheim’s role, it also implicates other former RTI executives. Three other former RTI executives returned over $361,000 in incentive-based compensation to Surgalign . Hutchison, who served as CEO of RTI until December 2016, has been charged with violating anti-fraud and other provisions of federal securities laws.

“This investigation and settlement stems from the actions of RTI and former senior management, not our current team. Reaching this settlement with the SEC will allow us to move forward without this uncertainty.” said David Lyle, CFO of Surgalign, in a statement.

Lyle added that Surgalign sold the RTI business that led to the breach about two years ago. Surgalign said the company’s internal investigation uncovered even more “conduct” that the SEC hadn’t discovered, and that it has shared that information with regulators. The company said it expects to recover a total of $600,000 in compensation from former executives related to the violations.