Former Chief Executive Officer And Chief Operating Officer Of Publicly Traded Biopharmaceutical Company Charged With Accounting Fraud

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, and Philip R. Bartlett, Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service (“USPIS”), announced today the unsealing of an Indictment in Manhattan federal court charging PARKER H. “PETE” PETIT and WILLIAM TAYLOR, the respective former chief executive officer and chief operating officer of MiMedx Group, Inc. (“MiMedx”), a publicly traded biopharmaceutical company, with securities fraud offenses for engaging in a scheme to fraudulently inflate MiMedx’s revenue.  The case is assigned to U.S. District Judge Jed S. Rakoff.

PETIT and TAYLOR are expected to be presented later today in Atlanta federal court.

U.S. Attorney Geoffrey S. Berman said:  “As alleged, Parker Petit and William Taylor deceived the SEC, auditors, and the investing public by repeatedly misrepresenting the financial condition of a publicly traded company.  They allegedly conspired, through secret agreements and financial inducements with four distributors, to misstate sales revenue.  The alleged conduct resulted in serious criminal charges Petit and Taylor now face.”

USPIS Inspector-in-Charge Philip R. Bartlett said:  “As alleged, Petit and Taylor’s fraudulent scheme to falsely inflate revenue could not withstand the pressure of meeting their own aggressive goals.  The investing public relied on Petit and Taylor’s misrepresentations.  Investors should not have any doubts or concerns with information distributed by a publicly traded company.  The U.S. Postal Inspection Service will not tolerate this criminal behavior and will seek out and bring to justice anyone who breaks the system of laws designed to protect the investing public.”

According to the allegations contained in the Indictment[1] unsealed today in Manhattan federal court:

MiMedx was headquartered in Marietta, Georgia, and its securities traded under the symbol “MDXG” on the NASDAQ.  MiMedx sold regenerative biologic products, such as skin grafts and amniotic fluid, both directly to end users, such as public and private hospitals, and to various stocking distributors, which, in turn, resold the product to end users. 

One of the most critical financial metrics disclosed in MiMedx’s public filings with the Securities and Exchange Commission (“SEC”), and touted in MiMedx’s accompanying press releases, was MiMedx’s quarterly and annual sales revenue.  Under Generally Accepted Accounting Principles (GAAP) and SEC guidance, a company like MiMedx that engages in the sale of products through a distributor may recognize revenue upon transfer of the product to a distributor if certain requirements are satisfied, including that delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability of payment is reasonably assured.  PETIT and TAYLOR repeatedly demonstrated and touted their understanding of these rules governing revenue recognition.  They also publicly identified revenue as the principal metric reflecting MiMedx’s growth, and touted MiMedx’s consistent record of quarter-over-quarter revenue growth and meeting or exceeding revenue guidance in 17 consecutive quarters, from 2011 through year-end 2015.  By 2015, however, it became increasingly difficult for MiMedx to reach its revenue guidance due to decreased demand from certain distributors and the increasingly aggressive revenue targets that MiMedx had publicly announced. 

Confronted with the difficulties faced by MiMedx in meeting its quarterly and annual revenue guidance by legitimate means, PETIT and TAYLOR engaged in a fraudulent scheme to falsely recognize revenue upon the shipment of MiMedx product to four stocking distributors (“Distributor-1” through “Distributor-4”) in the second through fourth quarters of 2015.  PETIT and TAYLOR caused MiMedx to report fraudulently inflated revenue figures to the investing public in order to ensure that the reported figures fell within MiMedx’s publicly announced revenue guidance, and to fraudulently convey to the investing public that MiMedx was accomplishing consistent growth quarter after quarter, as PETIT and TAYLOR had falsely touted to the investing public.  The fraudulent scheme involved the following central features:

• As to Distributor-1, in the second quarter of 2015, PETIT and TAYLOR caused MiMedx fraudulently to recognize $1.4 million in revenue by (1) making a $200,000 sham “consulting” payment to Distributor-1’s owner to induce Distributor-1 to buy MiMedx product and (2) secretly agreeing to send Distributor-1 approximately $1.2 million of product it did not want and did not intend to sell, while promising that Distributor-1 could return the product to MiMedx and swap it for different product in a subsequent quarter.  PETIT and TAYLOR entered into the sham “consulting” agreement to conceal that the payment was an inducement to purchase product, and Distributor-1’s owner performed no consulting work for the payment.  Neither PETIT nor TAYLOR disclosed to MiMedx’s outside auditors the “consulting” payment or product swap.  

• As to Distributor-2, in the third quarter of 2015, PETIT and TAYLOR caused MiMedx fraudulently to recognize $4.6 million in revenue by (1) reaching a secret agreement with Distributor-2’s owner to excuse Distributor-2’s contractual obligation to pay for the product Distributor-2 had purchased within 30 days of shipment and (2) booking the revenue despite understanding that Distributor-2 would not make a timely payment for the product, and certainly would not do so within contractual terms.  To hide from MiMedx’s auditors that the collectability of payment from Distributor-2 was questionable, during the fourth quarter 2015, PETIT arranged for his adult children to use a shell company to loan money to Distributor-2 (money that came from a trust fund established by PETIT for their benefit), with the understanding that the loan proceeds would be used in substantial part to pay down Distributor-2’s debt to MiMedx.  PETIT did not disclose the loan to MiMedx’s outside auditors and made false and misleading statements to the auditors about Distributor-2’s ability to pay MiMedx.

• As to Distributor-3, in the third and fourth quarters of 2015, PETIT and TAYLOR caused MiMedx improperly to recognize $2.6 million of revenue, where they (1) failed to agree with Distributor-3 on the essential terms of the deal, including when payment was due; (2) reached a secret understanding that Distributor-3 could swap or return unwanted product in subsequent quarters; and (3) understood that Distributor-3 could not pay for the product in a timely fashion.  In fact, PETIT granted the right of return to Distributor-3 in a back-dated letter he hid from MiMedx’s internal accountants and outside auditors.  Ultimately, Distributor-3 paid MiMedx less than 10 percent of the value of product it had purchased.   

• As to Distributor-4, in the fourth quarter of 2015, TAYLOR caused MiMedx improperly to recognize $2.2 million in revenue by making an undisclosed promise to Distributor-4 that it could return any product that it could not sell and that MiMedx would not leave Distributor-4 with any losses.  To carry out the scheme, TAYLOR sent two emails four seconds apart to Distributor-4.  The first was a “cover story” that purported to require payment within a fixed period, as required by MiMedx’s accountants.  TAYLOR forwarded the first email to MiMedx’s accounting department.  The second email, sent only four seconds after the first, memorialized the true terms of deal, which involved an agreement to defer payment and take back product if it could not be sold.  TAYLOR hid the second email from MiMedx’s internal accountants and outside auditors.  TAYLOR also arranged for a false audit “confirmation,” which falsely represented that Distributor-4 was required to pay within a fixed period and omitted the true terms of the deal, to be provided to MiMedx’s outside auditors.

PETIT’s and TAYLOR’s fraudulent manipulation of MiMedx’s revenue caused MiMedx to report materially inflated revenue in the second, third, and fourth quarters of 2015, and for the full year 2015.  In its 2015 10-K, MiMedx reported annual revenue that was fraudulently inflated by approximately $9.5 million, or approximately five percent.  Absent this fraudulent inflation of revenue, MiMedx would have missed both (1) its quarterly revenue guidance in the third and fourth quarters of 2015 and annual revenue guidance for 2015 and (2) analyst revenue consensus for the second through fourth quarters of 2015 and the full year 2015.

*                *                *  

PARKER H. “PETE” PETIT, 80, and WILLIAM TAYLOR, 51, both of Roswell, Georgia, were charged in the Indictment with one count of conspiracy to commit securities fraud, make false filings with the SEC, and improperly influence the conduct of audits, and one count of securities fraud.  The conspiracy charge carries a maximum prison term of five years.  The securities fraud charge carries a maximum prison term of 20 years.   

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge. 

Mr. Berman praised the work of the investigative work of USPIS.  Mr. Berman also thanked the SEC, which brought a separate civil action.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force.  Assistant U.S. Attorneys Edward A. Imperatore, Scott A. Hartman, and Daniel M. Tracer are in charge of the prosecution.  

The allegations contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.