SEC Charges Surgical Implant Manufacturer Surgalign and Former Senior Executives with Accounting and Disclosure Fraud
Litigation Release No. 25463 / August 3, 2022
Accounting and Auditing Enforcement No. 4319 / August 3, 2022
Securities and Exchange Commission v. Brian K. Hutchison, No. 1:22-cv-02296 (D.D.C. filed Aug. 3, 2022)
The Securities and Exchange Commission today charged Surgalign Holdings, Inc., formerly RTI Surgical Holdings, Inc., and former executives Brian Hutchison and Robert Jordheim for masking disappointing sales numbers by shipping future orders ahead of schedule to accelerate, or "pull forward," revenue and then failing to disclose this practice to investors. In June 2020, RTI restated its public financial statements from 2014 through 2019 to correct errors caused by this practice.
As alleged by the SEC, RTI's reliance on pull-forwards cannibalized future revenue streams and damaged important customer relationships while the company reassured investors it was meeting revenue guidance. The SEC further alleged that RTI sometimes shipped orders early without customer approval and recognized revenue for those shipments prematurely, in violation of generally accepted accounting principles (GAAP), and that RTI's former CEO, Hutchison, and former CFO, Jordheim, permitted RTI to recognize revenue for such shipments.
The SEC's complaint against Hutchison, filed in federal district court in Washington, DC, charges him with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charges him with violating Exchange Act Section 13(b)(5) and Rules 13a-14, 13b2-1, and 13b2-2 thereunder, and Sarbanes-Oxley Act Section 304, and with aiding and abetting RTI's violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The SEC seeks a permanent injunction, civil penalties, disgorgement with prejudgment interest, the return pursuant to SOX Section 304 of Hutchison's bonuses and profits from sales of RTI stock, and an officer-and-director bar.
In a separate proceeding, without admitting or denying the SEC's findings, Surgalign and Jordheim agreed to cease and desist from violating Sections 17(a)(2) and (3) of the Securities Act of 1933 and other provisions of the securities laws and to pay civil penalties of $2 million and $75,000, respectively. Jordheim also agreed to return $206,831 to Surgalign pursuant to SOX Section 304 and to be suspended from appearing and practicing before the SEC as an accountant. The order permits Jordheim to apply for reinstatement after five years. Separately, three other former RTI executives returned over $361,000 of incentive-based compensation to Surgalign. Their tenure as RTI executives post-dated Hutchison's and Jordheim's alleged violations of the antifraud and other provisions of the federal securities laws.
The SEC's investigation was conducted by Nishchay Maskay, Colin Rand, and Robert Gray, with the assistance of Alex Lefferts of the Office of Investigative and Market Analytics. The investigation was supervised by Mr. Cave and Kristen Dieter. The litigation against Hutchison will be led by John Timmer under the supervision of Melissa Armstrong.