Osiris has settled a case of accounting fraud with the U.S. SEC, but four former company execs will face charges for the alleged financial misreporting.
Maryland-based Osiris Therapeutics has settled a case of accounting fraud with the U.S. Securities and Exchange Commission, but four former company executives will face charges for the alleged financial misreporting.
According to the SEC charges, Osiris routinely overstated company performance and issued fraudulent financial statements for a period of nearly two years. During this time, the SEC said Osiris executives “improperly recognized revenue using artificially inflated prices, backdated documents to recognize revenue in earlier periods, and prematurely recognized revenue upon delivery of products to be held on consignment.” Additionally, the SEC said the company and its executives allegedly and knowingly used false pricing data and “attempted to book revenue on a fictitious transaction,” as well as other improper accounting procedures.
“Corporate cultures cannot be so fixated on higher revenues that they use illegal accounting gimmicks to meet the financial numbers they desire,” Julie Lutz, director of the SEC’s Denver regional office, said in a statement.
On Thursday, the SEC charged former chief executive officer Lode Debrabandere, chief financial officers Philip Jacoby Jr. and Gregory Law, and chief business officer Bobby Dwayne Montgomery with accounting fraud. Debrabandere resigned from the company in 2016. Montgomery took over as interim CEO and was then appointed full-time to the position.
In its charges against the four men, the government is seeking a return of any profit from the alleged fraud, as well as interest and other penalties.
For its part, Osiris agreed to settle the charges without admitting or denying the allegations. The company will pay a $1.5 million civil penalty to the government. The courts must still approve the Osiris resolution.
Peter Friedli, chairman of the Osiris board of directors, said the company has instituted “broad remedial measures” that are designed to detect and prevent the fraudulent accounting practices from happening again. By reaching a settlement with the SEC, Friedli said the company will be able to return to its goal of “making advances in the area of cellular and regenerative medicine.”
Although Osiris reached a resolution with the SEC, the company noted there is still an ongoing criminal investigation being conducted by the U.S. Attorney’s Office for the Southern District of New York relating to the accounting issues. Osiris said it is cooperating with the criminal investigation.
A red flag was raised about the company’s accounting practices when the company’s registered public accounting firm, BDO USA, resigned in December 2015. BDO indicated that Osiris’ 2013 and 2014 financial statements were fine, it “advised that their opinion on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2014 should no longer be relied upon due to management’s identification of a material weakness in internal controls over financial reporting related to the timing of revenue recognition under certain distribution contracts.”
Osiris manufactures three different human tissue products. The primary one is Grafix, which is used for wound care from problems such as burns and diabetic foot ulcers. Grafix provides the largest revenue stream for the company, about 90 percent, according to reports. Additional products include Cartiform, a cartilage allograft and BIO4, a bone allograft.
