- The Securities and Exchange Commission has charged Surgalign Holdings, formerly RTI Surgical Holdings, and former executives Brian Hutchison and Robert Jordheim with accounting and disclosure fraud.
- According to the SEC, RTI shipped future orders ahead of schedule to pull revenue forward and thereby mask disappointing sales figures, all without disclosing the practice to investors.
- Surgalign has agreed to pay $2 million to settle the allegations. Jordheim, RTI’s CFO until 2017, is paying a $75,000 civil penalty and has also agreed to repay Surgalign $206,831.
RTI sold surgical implants, such as orthopedic and spinal implants. The SEC accused RTI of ordering shipments weeks or months before its customers originally requested shipment from 2015 to 2019. In some cases, RTI received permission from the customer to ship early, but in other cases it allegedly shipped early without prior consent.
According to the SEC, the company would have missed its quarterly revenue guidance from the first quarter of 2015 to the first quarter of 2016 without the use of early shipments to pull sales forward. RTI missed its guidance in the third quarter of 2015 “due to a major customer’s resistance to a pull-forward,” the SEC said.
The commission accused RTI of periodically using the practice from 2016 to 2019. It is said that members of RTI’s former senior management, including Jordheim, discussed opportunities for withdrawal going forward and asked the commercial division to identify opportunities.
“Jordheim and other former senior managers approved discounts to induce customers to accept early deliveries. Jordheim and other former senior managers regularly received information about the volume of withdrawals and their impact on RTI’s ability to meet future revenue targets,” the SEC said. Employees expressed concerns, but allegedly were rejected by former RTI senior management.
The SEC order focuses on Jordheim’s role, but other former executives are implicated. Three other former RTI executives paid Surgalign over $361,000 in incentive-based compensation. Hutchison, who was RTI’s CEO until December 2016, is accused of violating anti-fraud provisions and other provisions of federal securities laws.
“This investigation and the resolution reached stemmed from the activities 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,” Surgalign CFO David Lyle said in a statement.
Surgalign spun off RTI’s business, which was responsible for the violations, about two years ago, Lyle added. Surgalign said the company’s internal investigation had uncovered even more “conduct” that the SEC had not yet disclosed and had shared that information with regulators. The company said it expected to recover from the former executives a total of $600,000 in damages related to the violations.