Former CEO, COO of MiMedx Convicted of Securities Fraud

The former CEO and the former chief operating officer (COO) of biopharmaceutical company MiMedx Group have been convicted of crimes related to their roles in a scheme to fraudulently inflate the company’s revenue.

Former CEO Parker Petit was convicted of securities fraud, while former COO William Taylor was convicted of conspiracy to commit securities fraud, to make false statements in US Securities and Exchange Commission (SEC) filings, and to mislead the conduct of audits.

MiMedx sold regenerative biologic products, such as skin grafts and amniotic fluid, to public and private hospitals and to various stocking distributors, which resold the product to end users.

According to the allegations in the indictment, Petit and Taylor schemed to inflate revenue related to the shipment of MiMedx products to four stocking distributors to give the appearance that the company’s revenue fell within MiMedx’s publicly announced guidance, and to fraudulently convey consistent growth quarter after quarter.

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The company identified revenue as the principal metric of its growth, and claimed that quarter-over-quarter revenue growth met or exceeded guidance in 17 consecutive quarters, from 2011 through year-end 2015. However, according to the indictment, due to decreased demand from certain distributors and the increasingly aggressive revenue targets MiMedx had announced, by 2015 it became increasingly difficult for MiMedx to reach its revenue guidance and Petit and Taylor conspired to falsely inflate the revenue figures.

“As the jury found, Parker Petit and William Taylor employed secret agreements and corrupt financial inducements with four distributors to materially misstate the quarterly and annual sales revenue of MiMedx,” acting US Attorney Audrey Strauss said in a statement. “They deceived the SEC, auditors, and the investing public, repeatedly misrepresenting the financial condition of their publicly traded company.”

For example, in the second quarter of 2015, Petit and Taylor caused MiMedx to fraudulently recognize $1.4 million in revenue by making a $200,000 fake consulting payment to the owner of one of its distributors, which the Southern District of New York (SDNY) says was really a bribe to get the distributor to buy MiMedx products. Under the arrangement, MiMedx secretly agreed to send the distributor products it did not want and did not intend to sell, while promising that the distributor could return the product to MiMedx and swap it for different products in a subsequent quarter.

In the third quarter of 2015, Petit and Taylor caused MiMedx to fraudulently recognize $4.6 million in revenue by booking revenue from another distributor, despite knowing that the distributor would not make a timely payment for the product. To hide this from MiMedx’s auditors, Petit arranged for his adult children to use a shell company to loan money to the distributor with the understanding that the loan proceeds would be used for paying down the distributor’s debt to MiMedx. The money in the shell company came from a trust fund established by Petit for his children’s benefit. Petit did not disclose the loan to MiMedx’s outside auditors, and made false and misleading statements to the auditors about the distributor’s ability to pay MiMedx.

According to the charges against Petit and Taylor, their manipulation of MiMedx’s revenue caused the company to report materially inflated revenue in the second, third, and fourth quarters of 2015, as well as for the full-year 2015. In MiMedx’s 2015 annual report, revenue was fraudulently inflated by approximately $8.2 million. The Southern District said that without the inflation of revenue, MiMedx would have missed its revenue guidance for the third and fourth quarters of 2015 and annual revenue guidance for 2015.

The securities fraud count against Petit, 81, carries a maximum sentence of 20 years in prison, and the conspiracy count against Taylor, 52, carries a maximum sentence of five years in prison. Both men are scheduled to be sentenced in February.

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Tags: Audrey Strauss, biopharmaceutical company, MiMedx Group, Parker Petit, SEC, Southern District of New York, US Postal Inspection Service, William Taylor

So how crucial is further Washington stimulus money to the economy’s—and the stock market’s—continued health? Right now, there’s a lot of doubt about how much, if any, new aid will be coming.

Never fear, says UBS Global Wealth Management. The market dipped last week on news about the potential end of a Federal Reserve safety net, funded by money from the US Treasury. But the firm’s CIO, Mark Haefele, wrote in a report that development of coronavirus vaccines should outweigh those concerns. Plus, he expressed optimism that some kind of fresh stimulus would be coming next year.

“While near-term uncertainty could persist, we believe the case for further upside in global equities remains intact,” he indicated. “For investors, we see the greatest potential in the sectors with scope to catch up as the vaccine rollout and policy support facilitate an economic recovery over the coming year.”

Late Thursday, Treasury Secretary Steven Mnuchin announced a cessation of Federal Reserve lending programs to, among other things, buy state and local debt and bolster small businesses. Mnuchin said these programs were no longer needed to counter the pandemic’s economic impact. And, indeed, the lending facilities have not been used much, and even strapped states such as New Jersey have been able to peddle new bonds to tide themselves over.

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Opponents of Mnuchin’s decision say it is a GOP bid to undermine President-elect Joe Biden’s ability to restore the US economy. The fear is that, between now and whenever any vaccines are successfully deployed, the virus’ latest spread will demand much more help from Congress and the Fed.

At the moment, the Republican-led Senate and the Democrat-controlled House of Representatives are at loggerheads on extra relief. Fed Chair Jerome Powell has said more funding from Congress is necessary to get the US economy moving again.

On Friday, the Mnuchin move helped pull down stocks, according to many analysts. The S&P 500 fell 0.68%.

UBS’s Haefele, though, expressed confidence that the new Biden administration would be able to push through another stimulus package in the new year—to the tune of $500 billion to $1 trillion. The high end of that range is slightly less than half of what House Democrats have been seeking.

A vaccine rollout and further Washington help should be good for the market, Haefele said. In particular for small- and mid-cap stocks, financials, consumer discretionary, and global industrials. In short, areas that have lagged in this year’s market advance.

What’s more, Haefele wrote, “we recommend that investors build exposure to likely longer-term winners including disruptors in sectors undergoing technological transformation.”