Osiris Therapeutics has agreed to pay a $1.5 million civil penalty and settle charges by the U.S. Securities and Exchange Commission (SEC) that the company, its ex-CEO, and three other former executives engaged in unlawful accounting practices that misled investors.
Without admitting or denying the SEC allegations, Osiris said it will consent to a final judgment, subject to court approval, that includes the penalty and permanently restrains and enjoins the company from violating federal securities laws.
“We are very pleased to have reached the resolution announced today, which relates to activities that occurred during the tenure of the Company's former management team,” Osiris chairman Peter Friedli said yesterday in a statement.
The SEC accused Osiris of routinely overstating its performance and issuing fraudulent financial statements over two years, as well as unlawful acts that included prematurely recognizing revenue upon delivery of products to be held on consignment, the agency stated in a 72-page complaint.
“During all four quarters of 2014 and the first three quarters of 2015, Osiris and its former senior officers engaged in a wide-ranging fraud to artificially inflate the company’s reported revenue,” according to the complaint.
It offered an example: When then-CEO Lode B. Debrabandere, Ph.D., told other top executives that fourth quarter 2014 revenue had fallen short $500,000 of his $20 million target, the complaint stated, then-co-CFO Philip R. Jacoby, Jr., directed Osiris to recognize revenue of over $1 million in connection with a purported sale to an unnamed distributor in Q4—but finalized the deal in January 2015, after the quarter ended.
Debrabandere and Jacoby were among the four former executives charged by the SEC, along with another former co-CFO, Gregory I. Law, and chief business officer Bobby Dwayne Montgomery.
“In addition to directing the misstatement of Osiris’ financial results, the company’s former senior officers engaged in numerous other fraudulent and 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 (“Auditor”), using false pricing data, and backdating and falsifying documents.”
Accused of Accounting Improprieties
Osiris and its executives were also accused by the SEC of accounting improprieties that included using pricing data that they knew was false and attempting to book revenue on a fictitious transaction.
“Osiris Therapeutics falsely portrayed to investors that its revenue was growing so rapidly that its performance was consistently exceeding expectations,” Julie Lutz, director of the SEC’s Denver Regional Office, said in an SEC statement. “Corporate cultures cannot be so fixated on higher revenues that they use illegal accounting gimmicks to meet the financial numbers they desire.”
The SEC’s complaint seeks disgorgement of ill-gotten gains plus interest and penalties along with prohibitions on the executives serving as officers or directors of public companies.
Osiris has since restated its results for 2014, and said Monday it is working with Ernst & Young to restate its results for 2015 and 2016. Since last year Osiris has had five CEOs, including the current president and CEO Linda Palczuk, who took office in July.
“Since the SEC's investigation began, the Company has made numerous important changes to its internal control over financial reporting and disclosure practices, hired a new chief executive officer, chief financial officer, and general counsel, and enhanced staff in its accounting and finance departments,” Osiris said in a statement.
Based in Columbia, MD, Osiris is a developer of cellular and regenerative medicine treatments and also markets products for wound care, orthopedics, and sports medicine. The company was founded in 1992 to commercialize stem cell technology discovered by researchers at Case Western Reserve University led by Arnold Caplan, Ph.D. In 2012, the company won approval in Canada and New Zealand for remestemcel-L, a treatment for graft-versus-host disease.