When his biopharma company fell under suspicion of over-shipping products to VA hospitals to inflate revenues, Parker "Pete" Petit pointed fingers. He blamed short sellers, employee whistleblowers and his own "rogue" salespeople for sweeping him up in the allegations.
But on Tuesday, federal authorities who have been investigating Marietta-based MiMedx Group for more than two years laid blame on the 80-year-old Petit, the company’s former chairman and chief executive.
Known for decades as a politically-connected Atlanta business leader and a well-heeled philanthropist for higher education, Petit now faces criminal accounting fraud charges. He’s accused of orchestrating several channel-stuffing schemes and secret side deals with distributors designed to inflate sales revenues and keep stock prices up. The fraud went on for years, prosecutors say, inflating revenues by millions of dollars.
Former Chief Operating Officer William Taylor took part in the schemes, prosecutors allege.
Some of those alleged schemes involved a distributor that sold MiMedx products to the U.S. Department of Veterans Affairs and the Department of Defense for their medical facilities, and another that sold products to Saudi Arabia’s government-run medical facilities. MiMedx sells regenerative injections, used in orthopedics, and wound coverings derived from human placental tissue, used to treat burn victims and other injuries.
In one deal designed to boost the company’s numbers, Petit arranged for three of his adult children and their spouses to use a shell company to loan a distributor $1.5 million to make payments on products that it couldn’t afford and couldn’t move, federal prosecutors say. The distributor ordered $4.6 million worth of one MiMedx product – a sum that was nearly 10 times larger than the distributor’s annual revenue. Petit and Taylor went so far as to purchase freezers for the distributor so it could store that much product, according to prosecutors.
In another deal, Petit and Taylor allegedly paid $200,000 to the owner of a Texas distributor as an inducement to buy products the distributor didn’t want or need.
None of the distributors were identified.
Cell phones of ex-MiMedx employees lit up across the country Tuesday as they spread the news of the charges and screamed in happiness, said Mary Armstrong, a former MiMedx account executive. Armstrong says the company fired her after she told Petit and others about overcharging, up-charging and over-shipping at dozens of medical facilities in the Dallas-Fort Worth area.
“This is vindication that I wasn’t wrong, and I wasn’t making stuff up,” she said. “It softens the pain and the tragedy of what has happened over the last few years.”
The indictments, which were unsealed Tuesday, were handed down in U.S. District Court for the Southern District of New York. Petit and Taylor each face one count of securities fraud and one count of conspiracy to commit securities fraud, making false filings with the U.S. Securities and Exchange Commission, and improperly influencing the conduct of audits.
Petit denied the charges in a statement issued through his attorney, saying that at least the court action will give him a chance for due process of law.
“The primary issues appear to relate to business negotiations with some distributors in mid-2015,” Petit said in his statement. “However, those communications have now been twisted into alleged ‘side deals,’ which is not accurate. Under my leadership, the company collected virtually all the approximately $1 billion in booked revenues.”
Taylor’s attorney says he also denies the charges, attributing the accusations to MiMedx’s internal efforts to piece together its own finances.
“(Taylor) always acted in the best interests of MiMedx’s customers, employees and shareholders and served the company for nearly 10 years with dedication and integrity,” attorney Bill Weinreb said in a statement. “Today’s charges grow from a deeply flawed internal investigation by a self-interested audit committee, designed to appease government regulators by scapegoating executive management.”
Compounding Petit’s and Taylor’s legal woes, the SEC filed a civil lawsuit against them on Tuesday, as well as against former chief financial officer Michael Senken and MiMedx itself. In a complaint that echoes the federal indictment, all are accused of defrauding investors by misstating the company’s revenue and attempting to cover up their misconduct by lying and withholding information.
The SEC wants Petit, Taylor and Senken to be permanently barred from acting as officers or directors of any public company, and for them to pay back all gains from the unlawful activities and pay civil penalties. The SEC also wants Petit and Senken to reimburse MiMedx for all bonuses, incentives and profits realized from their sales of MiMedx stock.
Senken could not be immediately reached for comment.
MiMedx Group has already agreed to pay a $1.5 million penalty to settle the case against the company, saying it neither admits nor denies the SEC’s charges. The company said the agency recognized its cooperation in the investigation, and in a press release pointed to a bright future for MiMedx.
“We are focused on our future as a mission-centered healthcare company,” CEO Timothy Wright said in a statement, “and are committed to continued implementation of strong financial systems and independent oversight controls, which reflect both sound business practices and an ethical culture.”
Kevin LaCroix, a securities attorney and executive vice president at executive insurance liability firm RT ProExec, said companies have survived worse. Whether MiMedx survives depends on its cash-flow to meet obligations and whether it faces crushing debt, he said.
“If they’ve already settled, at least the company itself has contained its own exposure,” LaCroix said. “Assuming they are adequately capitalized and the wrongdoing individuals are no longer with the company, there is no reason why they wouldn’t continue.”
Petit and Taylor abruptly resigned from MiMedx in July 2018, although Petit remained on the board about another three months.
For 37 years, Petit ran publicly traded companies in the healthcare and biotech industries.
He also donated millions of dollars to local institutions, getting his name on biotech and sciences buildings at Georgia Tech and Georgia State University. The football field at GSU stadium carries his name, the result of a $10 million pledge.
In an email late Tuesday, a spokeswoman for the Georgia Board of Regents said the board was aware the SEC’s actions and will closely monitor the situation as it develops.
Petit also served as the finance chairman of Donald Trump's presidential campaign in Georgia in 2016, and he is a major donor to both U.S. Sen. Johnny Isakson and former Secretary of Health and Human Services Tom Price.
MiMedx forced Petit out last year, and earlier this year shareholders voted against allowing him to return to the board of directors. Asked by the AJC recently whether he is concerned his reputation has been tarnished, Petit said, “I really don’t give a damn.”
How the scandal unfolded
Marietta-based MiMedx once had a workforce of about 950 and was a darling of Wall Street. But in the past two years, it has struggled for survival amid concerns that it had inflated sales revenues. Here are key events.
September 2017: MiMedx says that the U.S. Securities and Exchange Commission had issued a subpoena after former employees alleged the company illegally inflated revenue by overshipping products to VA hospitals in a practice known as channel stuffing.
Feb. 20, 2018: Management abruptly postpones the release of the company’s 2017 financial results and hires outside teams to examine its sales and distribution methods.
March 15: MiMedx discloses that the Department of Justice is conducting a preliminary review of its business practices.
May 12: Three women who worked at VA facilities in South Carolina are indicted on charges they accepted inducements from MiMedx in exchange for causing the excessive use of its products.
June 6: MiMedix parts ways with two of its top finance officials: CFO Michael Senken and controller/treasurer John Cranston.
June 7: The company announces that it must revise more than five years of financial statements.
July 2: Petit and the company’s president and COO, Bill Taylor, abruptly resign. However, Petit remains on the board.
Sept. 20: MiMedx announces that Petit had resigned from the board of directors, effective immediately. This same date, the AJC reveals that five doctors at a Minneapolis VA resigned after being accused of improprieties involving MiMedx products.
Nov. 7: Nasdaq delists MiMedx and suspends trading in its stock.
Dec. 4: Ernst & Young notify the board’s audit committee that it was immediately resigning from the engagement to audit the company’s financial statements for 2017 and 2018.
Dec. 5: MiMedx announces it is cutting 240 jobs.
April 11, 2019: Petit nominates himself to rejoin the company’s board, along with two of his associates.
May 23: The company’s audit committee reports that Petit had set up a secret surveillance system, dubbed Operation Snow White, to spy on employees and target whistleblowers. Petit and some other leaders also misled the board, outside auditors, and federal regulators, the committee reports.
June 17: Petit loses his bid to rejoin the MiMedx board. He tells the AJC that it was possible he would be criminally charged but says neither he nor anyone else in management knowingly did anything illegal.
Nov. 26: Criminal indictments are unsealed against Petit and Taylor, and the SEC files a lawsuit against the men and another former executive, as well as the company.
Our reporting
After former employees raised concerns that biopharma firm MiMedx Group was misleading investors, the AJC began chronicling the unfolding federal and internal company investigations. Among our coverage were reports that the VA had fired healthcare workers in two states over concerns of improprieties with the Marietta-based company, and that ex-CEO Parker Petit had spied on employees to target whistleblowers.
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