Securities Regulation Daily Biotech firm settles SEC accounting fraud charges with $1.5 million penalty
Friday, November 3, 2017

Biotech firm settles SEC accounting fraud charges with $1.5 million penalty

By Joanne Cursinella, J.D.

The SEC announced that it filed charges against a biotechnology company that researches, develops, and markets products for orthopedics, sports medicine, and wound care, alleging that the firm and its former senior officers engaged in a wide-ranging fraud scheme to artificially inflate the company’s reported revenue. The firm agreed to settle the charges without admitting or denying the allegations and must pay a $1.5 million penalty (SEC v. Osiris Therapeutics, Inc., November 2, 2017).

Fraudulent and deceptive acts. According to the Commission’s complaint, for all of 2014 and the first three quarters of 2015, the company and former senior officers directed misstatements of the company’s financial results to artificially inflate the company’s reported revenue, misleading its shareholders and the public as to the company’s revenue and revenue growth in violation of the securities laws.

In addition, the SEC alleged that the former senior officers engaged in other deceptive acts including entering into undisclosed side agreements with distributors, recognizing revenue in direct contradiction to their disclosed accounting policies, lying to Osiris’ independent registered public accounting firm, using false pricing data, and backdating and falsifying documents.

The alleged misstatements and scheme were carried out by former officers of the firm, including its CFO and, subsequently, vice president of finance and principal accounting officer; its vice president of finance and principal accounting officer and, subsequently, CFO; its CEO; and its general manager of orthopedics and sports medicine and, subsequently, its chief business officer, according to the complaint.

Litigation continues. Even though the firm settled the charges, the litigation continues against the four executives who led the firm during the alleged period of accounting fraud from 2014 to 2015. The SEC’s complaint seeks disgorgement of ill-gotten gains plus interest and penalties along with officer-and-director bars.

In a parallel criminal case, the company’s former chief financial officer pleaded guilty to one count of making fraudulent statements to auditors. The count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million. Sentencing is scheduled for February 2, 2018.

The case is No. 1:17-cv-03230-CCB.

Attorneys: Danielle R. Voorhees for the SEC.

Companies: Osiris Therapeutics, Inc.

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