Securities and Exchange Commission v. Mimedx Group, Inc.

Background

The Securities and Exchange Commission (SEC) sued MiMedx Group, Inc., Parker H. Petit, William C. Taylor, and Michael J. Senken. The complaint asserted securities-fraud claims, books-and-records claims, false-certification claims, false-filing claims, aiding-and-abetting claims, control-person liability, and a claim under Section 304(a) of the Sarbanes-Oxley Act of 2002.

The motion addressed in this opinion was filed by Senken, MiMedx’s chief financial officer from 2011 until June 2018. The SEC alleged that MiMedx improperly recognized revenue from Distributor E as soon as products were shipped, even though an undisclosed side arrangement allegedly made the relationship operate like a consignment arrangement. Under that arrangement, Distributor E allegedly paid MiMedx after receiving payment from the Department of Veterans Affairs and the Department of Defense, and could receive credits or return products.

The SEC alleged that Senken received daily purchase-order information and weekly revenue tables about Distributor E, whose sales made up substantial portions of MiMedx’s reported revenue. It also alleged that employees emailed Senken about unusual payment practices and possible violations of generally accepted accounting principles. According to the complaint, Senken signed public financial filings and management-representation letters stating, among other things, that MiMedx’s financial statements complied with those accounting principles, that he knew of no management fraud, and that side agreements had been disclosed. The SEC further alleged that Senken worked with Petit and Taylor to conceal information from MiMedx’s audit committee and auditors.

MiMedx later restated financial statements for earlier periods. The company had previously entered a final judgment on consent requiring it to pay a $1.5 million civil penalty and permanently enjoining specified securities-law violations. Those proceedings were separate from Senken’s motion.

Senken’s Motion and the Court’s Analysis

Senken moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court was required at this stage to accept the complaint’s factual allegations as true and draw reasonable inferences for the SEC. Securities-fraud allegations also had to describe the alleged fraud with particularity.

The court held that the SEC adequately alleged scienter, meaning an intent to deceive, manipulate, or defraud, or sufficiently reckless conduct. Although Senken’s compensation tied to MiMedx’s performance did not by itself establish scienter, the court found stronger circumstantial evidence in his position as CFO, his accounting background, his access to Distributor E’s payment information, the unusual revenue-tracking system, the emails from his subordinates, and the alleged concealment from auditors and the audit committee.

The court also held that the SEC adequately alleged material misstatements. It reasoned that reported revenue would be important to a reasonable investor, Distributor E represented significant portions of MiMedx’s reported revenue, MiMedx later restated several years of financial statements, and the company’s stock price fell after disclosure of the revenue-recognition problems. The court rejected Senken’s argument that the reported revenue figures were merely opinions, finding that they were historical income figures based on objective criteria.

For the Section 17(a)(2) claims, the court adopted the view that a defendant may satisfy the requirement of obtaining money or property by obtaining money for an employer while acting as its agent or by personally receiving money indirectly from the alleged fraud. The court found that the SEC alleged both that MiMedx obtained money through stock sales and that Senken received salary, bonuses, and equity compensation allegedly influenced by MiMedx’s misstated financial performance.

The court did not resolve the parties’ broader disagreement about whether scheme-liability claims require deceptive acts beyond misstatements. It found that resolution unnecessary because the SEC adequately alleged additional deceptive acts, including concealing material information from MiMedx’s audit committee and auditors.

The court rejected Senken’s argument that the SEC had to prove MiMedx’s internal controls were inadequate to establish his books-and-records violations. The court found that the SEC adequately alleged that Senken knowingly circumvented internal controls or knowingly falsified records by concealing material information.

Finally, the court held that the SEC sufficiently pleaded a violation of Section 304 of the Sarbanes-Oxley Act. That provision requires a company’s chief executive officer or chief financial officer to return certain bonuses, incentive compensation, or securities-sale profits when the company restates financial statements because of misconduct. The court found that the complaint adequately alleged Senken’s misconduct, identified relevant filings that were later restated, and alleged that the claim was timely.

Disposition

Judge Naomi Reice Buchwald denied Senken’s motion to dismiss in its entirety. The court stated that the SEC had sufficiently pleaded scienter, materiality, Section 17(a)(2) liability, scheme liability under specified provisions of Rule 10b-5 and Section 17(a), books-and-records violations, and violations of Section 304 of the Sarbanes-Oxley Act. The clerk was directed to terminate the motion.