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SEC Sues Surgalign Over Accounting, Disclosure Fraud Allegations

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On Wednesday, the Securities and Exchange Commission (SEC) announced that it filed actions federal court against Surgalign Holdings, Inc. as well as former executives Brian Hutchison and Robert Jordheim for their alleged masking of low sales numbers by shipping future orders in an effort to accelerate revenue.

Surgalign’s pulling-forward of their revenue was kept from investors until June 2020 when they released their public financial statements from years earlier in order to correct errors caused by the changes, the SEC alleged.

Surgalign, per its website, is “a global medical technology company committed to the promise of digital health. We are investing to be a leader in developing and harnessing the incredible possibilities of digital surgery to redefine the very idea of ‘personalized medicine.'”

The plaintiff agency alleges that Surgalign’s practices “cannibalized future revenue streams and damaged important customer relationships while the company reassured investors it was meeting revenue guidance.” By making shipments without customer approval and prematurely recognizing the revenue for those shipments, Surgliagn allegedly violated generally accepted accounting principles (GAAP), leading to accounting and disclosure fraud.

Hutchison, per the SEC, repeatedly approved quarterly revenue targets that were unrealistic and announced the figures to investors and the market more generally since he knew he would receive additional compensation in the event that the marks were hit by Surgalign. When Surgalign was not on track to meet the figure, Hutchison would allegedly urge his managers to “ship products that were not due to be sent until the next quarter – weeks or months in advance.” As the process continued, it was more and more difficult for Surgalign to meet the goals that it had announced to its investors, court filings said.

D. Mark Cave, the Associate Director of the SEC’s Division of Enforcement, said in the press release that “We allege that [Surgalign’s] dependence on shipping future orders early concealed the company’s true financial performance from investors and in some instances violated GAAP.”

The complaint charges Surgalign with violations of the Exchange Act, the Securities Act, the Sarbanes-Oxley Act, and Hutchison and Jordheim with aiding and abetting Surgalign’s violations. The SEC is seeking favorable judgment on each count, and injunction preventing further violations of federal securities laws, civil monetary penalties, disgorgement, an injunction preventing Hutchison from being a future officer or director, a trial by jury, and any other relief deemed proper by the Court.

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