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MiMedx “Channel Stuffing” and Improper Revenue Recognition Securities Class Action

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When two former employees filed a whistleblower action against MiMedx Group, Inc., the company denied their claims and sued them in return. When analysts published reports on the allegations, MiMedx again issued denials and sued them as well.  But the complaint for this securities class action claims that these denials were just a continuation of the company’s false or misleading statements, which violated the Securities Exchange Act of 1934.

The class for this action is all investors who acquired MiMedx Group common stock between March 7, 2013 and February 19, 2018.

MiMedx is a medical device company that provides biomaterials for soft tissue repair as well as other biomaterial-based products. It distributes its products through a number of companies, including AvKARE, Inc., a federal contractor.

According to the complaint, MiMedx was able to use its distribution agreement with AvKARE “to order products directly to the Department of Veterans Affairs (VA) hospitals at will.” The revenues from its relationship with AvKARE are a significant portion of the company’s revenues, for example, 56% of total revenues in 2013.

In December 2016, two former employees filed a complaint against MiMedx claiming they had been fired from the company after they had reported improper revenue recognition. The two spoke of a “channel-stuffing scheme” which claimed that the company had recognized revenue in its financial statements before that revenue had been realized or earned. According to the complaint for this class action, the company operated the scheme through its distribution agreement with AvKARE and others.

The company denied the accusations and sued the former employees, among other things for tortious interference.

In September 2017, more than one market analyst published reports on the revenue recognition allegations in the whistleblower action. MiMedx again issued denials and sued the analyst companies for libel, slander, and defamation.

Only on February 20, 2018 did MiMedx disclose that it had hired independent accounting and legal advisors to make an internal investigation into its sales and distribution practices and the accounting treatment of certain distributor contracts. Because of this, the company said it would delay publishing its fourth-quarter and full-year 2017 results.

At the news, the company’s stock price fell by more than 39%. The complaint claims that the plunge in price was caused by the company’s not previously disclosing that it was involved in a channel-stuffing scheme and claiming that it had adequate internal controls over reporting, when it clearly did not. 

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