Former Osiris CFO Pleads Guilty, Company Settles With SEC

On November 2, 2017, in Manhattan federal court, Columbia, Maryland-based Osiris Therapeutics, Inc.’s former Chief Financial Officer Philip Jacoby pled guilty to recording $1.1 million in revenue in the last quarter of 2014 from the sale of the company’s Ovation bone matrix product, even though the product had been given to a distributor on consignment rather than sold at the time.

Improper Accounting

Jacoby, according to the lawsuit, later made false statements to the company’s auditors to cover up the improper accounting, prosecutors said.

The Securities Exchange Commission (SEC) said that after former CEO Randy Mills left the company, Osiris, Jacoby and three former executives engaged in a “wide-ranging fraud” to inflate the company’s reported revenue by about 17% in 2014 and about 9% the first three quarters of 2015.

The agency said that in addition to Jacoby’s misstatements, the fraud included reporting false, higher sale prices for products, and reporting revenue from sales before necessary agreements were signed.

As part of the plea, Jacoby and prosecutors agreed that an appropriate sentence under federal guidelines would be four to ten months in prison and a fine of up to $5 million. Jacoby is scheduled to be sentenced on February 2, 2018.

The other defendants are former Osiris Chief Executive Officer Lode Debrabandere, former Vice President of Finance Gregory Law and former Chief Business Officer Bobby Montgomery.

Law’s attorney denied the claims against his client and said the SEC had “turned a blind eye to mounds of exculpatory evidence. We look forward to fighting for Greg vigorously and expect to prevail at trial,”

On the same day of the guilty plea, the company announced a resolution with the SEC over the accounting practices.

Without admitting or denying the allegations of the SEC, the company consented to the entry of a final judgment, subject to court approval, that permanently restrains and enjoins the company from violating certain provisions of the federal securities laws. As part of the resolution, the company also has agreed to pay a civil penalty in the amount of $1,500,000.

The company said it cooperated fully with the SEC investigation and has made numerous 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.

Peter Friedli, chairman of the company’s board of directors, said, “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. We have instituted broad remedial measures designed to detect and prevent the issues that led to the matter being resolved.”

The resolution does not impact the ongoing criminal investigation being conducted by the U.S. Attorney’s Office for the Southern District of New York relating the former executives.

Shades of DiscoCare

Jacoby’s plea might remind readers of the DiscoCare fraud scheme ten years ago where ArthroCare Corporation executives ended up being convicted of reporting false revenue numbers by dumping inventory, first through a distributor called DiscoCare and then sending free shipments to end-users that resulted in shareholder losses of over $750 million.