Pete Petit and Bill Taylor Charged with Fraud

On November 26, 2019, the Federal Securities and Exchange Commission (SEC) filed a Complaint in federal court against former MiMedx CEO Parker (Pete) Petit, former CFO Michael Senken and former COO William Taylor charging them with engaging in a “wide-ranging fraud” designed to artificially inflate the company’s reported revenue.

The complaint also charges Petit and his colleagues with misstating “millions of dollars of revenue” in SEC filings from 2015 and, as a result, misleading investors. The misstated millions amounted up to 14% of reported sales per quarter.

After the company disclosed an internal investigation of the accounting practices in February 2018, the SEC estimates that more than $1 billion of shareholder value was wiped out.

Petit’s Response

Responding to the Complaint, Petit reportedly accused the U.S. Attorney’s Office of “significantly over-reaching.”

“The primary issues appear to relate to business negotiations with some distributors in mid-2015. 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. Our accounts receivable aging remained within industry standards, and we also adequately reserved for sales returns and bad debts,” Petit said.

Petit blamed false allegations by short sellers and an inexperienced Board making “self-serving decisions and poor business judgement.”

After the SEC subpoena, Petit told a Journal-Constitution reporter, “I’ve been doing this a long time. Why is Petit all of a sudden going to go rogue and do stupid things at my age of 78? This is all stuff trumped up to drive the stock price down.”

Propping Up Stock Price

According to the 82-page SEC complaint, Petit’s motivation for performing the alleged misconduct was to keep MiMedx’s stock price high.

From 2013 through the third quarter of 2017, (when the trio ran the company), the SEC alleges that the defendants “engaged in a wide-ranging fraud” designed to artificially inflate the company’s reported revenue. “This pervasive, long running fraud” involved relationships with five of the company’s largest distributors.

The defendants created “secret” side deals with the distributors which allowed the distributors to pay MiMedx only after they had resold the products. The distributors were even allowed to return unsold products. The SEC says the trio hid these agreements from auditors.

Had these side deals been reported, the company would not have been able to “book” the revenue under GAAP rules.

The distributors were not named in the Complaint and are referred to as Distributors A, B, C, D and E. Here are some examples of the alleged dealings with the distributors.

According to the Complaint, company sales to Distributor E were gradually decreasing by 2015. “As a result, during the last three quarters of 2015, Petit and Taylor caused MiMedx to improperly record revenue by entering into and concealing side arrangements with four additional distributors.”

Distributor A – Saudi Connection

In the second quarter of 2015, Taylor allegedly offered payment terms for Distributor A that did not require Distributor A to pay for a $1.9 million order until it received authorization from a foreign government to sell the product. In addition, “Taylor misled MiMedx accounting staff about the status of the authorization.” The foreign government is identified as Saudi Arabia.

In the fourth quarter of 2015, Taylor allegedly concealed from company accountants that he had made another side deal with the same distributors allowing them not to pay for a $2.54 million order until the product was resold, and that Distributor A could return the product if Distributor A was unable to resell it. “Taylor’s actions with Distributor A caused MiMedx to improperly and prematurely recognize millions of dollars of revenue.”

Distributor B – $220k Inducement

Also in 2015, states the Complaint, Petit and Taylor caused the company to “improperly record $1.4 million of revenue from product sales to Distributor B, by concealing from MiMedx accountants that they had arranged for MiMedx to: (i) pay the owner of Distributor B $200,000 to induce Distributor B to buy products that quarter; and (ii) ship $1.2 million of products that Distributor B did not need or want with the agreement that Distributor B could swap for different products in the following quarter.”

There’s more.

Distributor C – Concealed Petit Family Loan

According to the Complaint, also in 2015, Petit and Taylor caused the company to improperly recognize $4.6 million of revenue concealing from MiMedx accountants that the two of them had altered the payment terms of the agreement between MiMedx and Distributor C.

“Distributor C was a startup distributor without available means to pay MiMedx, yet Petit and Taylor assured Distributor C’s principal that MiMedx would be flexible about payment. Then, during the fourth quarter of 2015, Petit caused MiMedx to improperly recognize an additional $1 million in product sales to Distributor C. Petit did so by touting Distributor C’s more than $1.2 million of payments to MiMedx for past orders as evidence that Distributor C could pay for its orders, but concealing from MiMedx’s accountants that Distributor C’s payments had been funded by a $1.5 million loan from Petit’s family to Distributor C.”

The government alleges that in November 2015, Distributor C told Petit that he did not have money to pay MiMedx. He told Petit that he had been turned down for a commercial loan. He also said he didn’t want any equity investors to dilute his ownership of the distributorship and asked Petit if he knew anyone who could give him a loan.

Petit, according to the Complaint, then referred Distributor C to his son-in-law and two of his adult children to discuss a loan. The family agreed to loan the distributor $1.5 million through a newly-formed limited liability company. The loan was funded with money withdrawn from trust accounts Petit had established for his children.

About a month later, the distributor used $1.2 million of the loan to pay MiMedx on $4.6 million third quarter orders. Petit and Taylor then authorized a new shipment of $1 million to the distributor.

Prosecutors claim Petit fraudulently concealed his family’s loan to the distributor.

Distributor D – Acquisition

Similar allegations are made regarding Distributor D. In this case, the defendants are accused of sending Distributor D a “secret, backdated side letter granting Distributor D a right of return if MiMedx’s negotiations to acquire Distributor D did not come to fruition.”

Petit, states the Complaint, never disclosed to MiMedx’s internal accounting staff or Auditor that he had sent the Distributor D side letter or granted a right of return. “It was improper and premature for MiMedx to recognize the $450,000 of Distributor D revenue in the fourth quarter of 2015 because Distributor D had a right of return and collectability was not reasonably assured. MiMedx’s recognition of $450,000 of Distributor D revenue during the fourth quarter of 2015 did not comply with GAAP.”

Alleged Misconduct, Cover-Up and Lies

The Complaint notes that while “directing the misstatements” of published financial results, the defendants “consistently touted the company’s artificial revenue growth in SEC filings, press releases, and analyst calls.”

And from 2016 through early 2018, “to cover up their misconduct, Petit, Taylor, and Senken repeatedly lied to and withheld critical information from the Audit Committee of MiMedx’s Board of Directors, outside auditors, and outside counsel concerning the company’s revenue recognition practices with the five distributors.”

The $1 Billion Shareholder Haircut

Ultimately, says the SEC, there was real harm.

When the alleged fraud was uncovered and disclosed to the public in a series of company announcements from February 2018 through July 2018, “MiMedx’s stock price fell by approximately 73%, from $14.47 to $3.93, eliminating over $1 billion of MiMedx’s shareholder value. In June 2018, Petit, Taylor and Senken separated from MiMedx, and in September 2018, following an investigation by outside counsel, MiMedx’s Board of Directors determined that each of the separations were ‘for cause’.”

SEC Demand – Disgorgement

The SEC seeks “disgorgement of all ill-gotten gains from the unlawful activity set forth in this Complaint together with prejudgment interest; civil penalties against all Defendants.” The SEC also seeks “an order directing Petit and Senken to reimburse MiMedx for all bonuses, incentive-based and equity-based compensation, and/or profits realized from their sale of MiMedx stock.

Along with the disclosure of the Complaint, it was also announced that MiMedx has agreed to pay a $1.5 million penalty to settle without admitting or denying allegations against it. MiMedx chair Kathleen Behrens called the settlement “another step toward the Company’s commitment to resolve past issues and move forward without distraction.”

No trial date has been set.

Petit’s Final Chapter

It’s been a long road down for Pete Petit and his colleagues, William Taylor and Michael Senken, who were riding very high back in 2016.

Their publicly-traded company, MiMedx Group, Inc., was pumping out increasing revenue numbers quarter after quarter. Taylor and Senken were, respectively, the company’s COO and CFO and shareholders of this billion dollar market value company. Petit, the company’s CEO and Board Chair was a business superstar in Georgia and on Wall Street.

He had been inducted into the Georgia State Business School Hall of Fame and the National Academy of Engineering. He was a featured guest on CNBC.

He funded a professorial chair for “Engineering in Medicine” and the endowment of the Petit Institute for Bioengineering and Biosciences at Georgia Institute of Technology in Atlanta, Georgia. He also funded the Science Center building at Georgia State University which bears his name.

Petit’s world began to come apart in September 2017, when the Securities and Exchange Commission (SEC) issued a subpoena regarding claims by former employees who were alleging that MiMedx had illegally inflated revenue through channel stuffing.

Now, after all that has transpired, after enduring the slings and arrows of either outrageous misfortune or his own misconduct, Parker (Pete) Petit will have his day in court.

It is stunning to witness how far Pete Petit has fallen. This old warrior, and Petit has been in more than his fair share of fights, returns to the arena (Federal Court this time) in what will no doubt be his final chapter.

How will the complicated story of Parker (Pete) Petit end?