Biotech firm Osiris Therapeutics has agreed to pay $1.5 million to settle charges that four former top executives, including two finance chiefs, used “illegal accounting gimmicks” to artificially inflate revenue.
The U.S. Securities and Exchange Commission said the alleged fraud reflected a culture at Osiris that was set by CEO Lode Debrabandere and embraced by the two CFOs — Philip Jacoby and Gregory Law — and chief business officer Bobby Montgomery.
In particular, the SEC said in a civil complaint, Osiris was “focused on demonstrating consistent revenue growth each quarter” and when the CFOs and Montgomery “realized that Osiris’ actual sales were not meeting Debrabandere’s aggressive targets, they engaged in a variety of improper accounting practices to artificially inflate reported revenue.”
“Q4 is becoming a big challenge,” Debrandere allegedly emailed the executives in December 2014, noting that Osiris needed $500,000 more to meet the $20 million revenue target. “Any suggestions?” he asked.
The settlement with Osiris requires the company to pay a $1.5 million penalty. The litigation against the four former executives is continuing, with the SEC seeking disgorgement of ill-gotten gains plus interest and penalties.
In a related criminal case, Jacoby on Thursday pleaded guilty to lying to Osiris’s auditors. He faces from four to 10 months in prison at his sentencing on Feb. 2.
“Osiris Therapeutics falsely portrayed to investors that its revenue was growing so rapidly that its performance was consistently exceeding expectations,” Julie Lutz, director of the SEC’s Denver Regional Office, said in a news release.
“Corporate cultures cannot be so fixated on higher revenues that they use illegal accounting gimmicks to meet the financial numbers they desire,” she added.
Osiris sells products for orthopedics, sports medicine, and wound care. Jacoby served as CFO from July 2009 to September 2015 when he became principal accounting officer. Law, who had been PAO, took over as finance chief.
The alleged fraud spanned all four quarters of 2014 and the first three quarters of 2015. According to the SEC, the improper accounting practices included prematurely recognizing revenue in quarters before sales had been made and critical agreement terms were finalized. Osiris also allegedly tried to book revenue on a fictitious transaction.