Othofix International, a medical device maker, has agreed to pay over $14 million to settle charges brought by the Securities and Exchange Commission that it improperly booked revenue and made improper payments to doctors at government-owned hospitals in Brazil to increase sales.
Unlike a $1 million settlement with General Motors that the SEC also announced Wednesday, Orthofix agreed to admit wrongdoing (see GM to pay $1 million to settle accounting charges over ignition switch defects).
In addition to the company, four former Orthofix executives also agreed to pay penalties to settle the charges related to the accounting failures. The Lewisville, Texas-based company improperly recorded revenue as soon as a product was shipped even though contingencies required certain events to occur in order to receive payment in the transaction. In other cases, Orthofix immediately recorded revenue when it had provided customers with significant extensions of time to make payments. The accounting failures caused the company to materially misstate some of its financial statements from at least 2011 to the first quarter of 2013.
“Orthofix’s accounting failures were widespread and significant, causing Orthofix to make false statements to the public about its financial condition,” said Antonia Chion, associate director in the SEC’s Enforcement Division, in a statement.
The SEC said Orthofix materially overstated its distributor revenue and operating income in various annual and quarterly reports and earnings releases. Most of the misconduct occurred at Orthofix’s Spine segment, its largest segment at the time. Orthofix improperly recognized revenue associated with several transactions with Spine’s distributors, including its largest international distributor, during the period from 2011 to mid-2013. Among other problems, the company entered into contingent sales with the distributor and recognized revenue for product sales when the product could not be resold due to Orthofix’s delay in providing an associated product that was needed. In the domestic section of Spine, Orthofix improperly accounted for some transactions by treating certain price discounts as expenses instead of a reduction to revenue and recognizing revenue on transactions in which the purchaser had the ability to return or exchange products.
Orthofix’s misconduct was not limited to its Spine segment, though, as the company also improperly recognized revenue in its Orthopedics segment through extra-contractual agreements at its Brazilian subsidiary. Throughout the period, Orthofix had inadequate internal accounting controls over its distributor revenue recognition and had a culture of setting aggressive internal sales targets and imposing pressure to meet those sales targets.
As a result, Orthofix restated its financial results for the first quarter of fiscal year 2013, all reporting periods in fiscal years 2012 and 2011, and its annual reporting period in fiscal year 2010. For example, Orthofix announced it had overstated its net sales for fiscal year 2011 by 6 percent and its operating income by over 430 percent, violating the securities laws.
The SEC’s order also found Orthofix violated the Foreign Corrupt Practices Act when its subsidiary in Brazil used high discounts and improper payments through third-party commercial representatives and distributors to entice government-employed doctors to use Orthofix’s products. The company also resorted to fake invoices for the purported services.
“Orthofix did not have adequate internal controls across all its subsidiaries and failed to detect and prevent the improper payments in Brazil that were intended to boost sales,” said Kara N. Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit, in a statement.
Orthofix agreed to pay an $8.25 million penalty to resolve the accounting violations and more than $6 million in disgorgement and penalties to settle the FCPA charges. The company also agreed to retain an independent compliance consultant for one year to review and test its FCPA compliance program.
Jeff Hammel, a former accounting executive in Orthofix’s largest business segment, agreed to pay a $20,000 penalty, while former sales executives Kenneth Mack and Bryan McMillan agreed to pay penalties of $40,000 and $25,000 respectively. Hammel, a CPA, also agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.
The SEC’s order allows Hammel to apply for reinstatement after two years. Orthofix’s former corporate CFO Brian McCollum agreed to pay a $35,000 penalty and reimburse the company $40,885 for bonuses received during the period when the company committed accounting violations. The four men also consented to the SEC’s orders without admitting or denying the findings.
Orthofix’s then-CEO Robert Vaters, who was not charged with wrongdoing, has already reimbursed the company $72,886 for cash bonuses and stock awards he received during the period when the company committed the accounting violations. Thus, the SEC said it wasn’t necessary to pursue a Sarbanes-Oxley Section 304(a) clawback action against him.
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