(Bloomberg Opinion) — Short-sellers like to say that the CEOs who complain the loudest about them often turn out to be the ones with the most to hide. To judge by what regulators did Tuesday, that appears to be the case with Parker Petit, the former CEO of MiMedx Group Inc., a company that specializes in wound grafts, which he ran from 2009 until he was forced out by the board in 2018.During his last few years at MiMedx, Petit fought back fiercely as short-sellers began alleging that the company was “channel stuffing” — that is, shipping product to distributors who didn’t need it, and then booking the nonexistent revenue.Of course, no CEO likes investors who bet that the company’s stock will go down. But Petit seemed particularly obsessed with proving the short-sellers wrong. He devoted a section of the MiMedx website to rebutting their claims. He held anti-short conference calls. He described them as “a wolf pack” trying to bring the company down. He even sued several of them.But now, the MiMedx short-sellers have every reason to feel vindicated. On Tuesday, Geoffrey Berman, the top federal prosecutor in Manhattan, charged Petit and the chief operating officer of MiMedx, William Taylor, with securities fraud “for engaging in a scheme to fraudulently inflate MiMedx’s revenues.” In other words, channel stuffing.At the same time, the Securities and Exchange Commission unveiled its own set of charges against the two men, as well as the former chief financial officer, Michael Senken. In its press release, the SEC also announced that MiMedx settled the charges for $1.5 million without admitting or denying the allegations.According to the government, for three consecutive quarters in 2015, Petit and Taylor cut side deals to induce a handful of distributors to take MiMedx products they had no intention of using.For instance, the indictment alleges they paid one distributor $200,000, disguised as a “consulting fee,” which allowed them to book $1.2 million of revenue. They convinced another distributor, a startup, to take $4.6 million worth of product even though they knew the distributor didn’t have the means to pay for the shipment. Petit’s adult children even gave the distributor secret loans that he used to make a partial payment, thus helping to fool the auditors. And so on.The government says Petit and Taylor undertook this scheme so they could tell Wall Street they were beating their quarterly guidance. MiMedx had a track record for doing so — and that track record, in turn, had caused the stock to generate annualized returns of 26% from 2013 to early 2018. Indeed, by the end of 2015, MiMedx had met or exceeded its revenue guidance for 17 straight quarters—thanks to the channel stuffing that took place that year, according to the government.In a statement, Petit professed his innocence, and said that the government was twisting standard business negotiations into “alleged ‘side deals,’ which is not accurate.” Through his attorney, Taylor also denied the charges. MiMedx’s statement included a quote from the chairwoman of the board, Dr. M. Kathleen Behrens: “Bringing this investigation to conclusion is another step towards the Company’s commitment to resolve past issues and move forward without distraction from our efforts in advanced wound care,” she said.It seems pretty clear that the vociferous table-pounding by the short-sellers, including the well-known investor Marc Cohodes, spurred the MiMedx board to launch an internal investigation in 2017. The investigation uncovered the channel stuffing, and in June 2018, the board fired Petit, Taylor and several other executives. It also announced that the company would restate earnings going back to 2012.By the end of 2018, the stock, which had peaked at $17.90 a share, was under $2.MiMedx is a stellar example of why short-sellers play an important role: without them, the allegedly fraudulent actions of the MiMedx brass may well have remained hidden.But as I noted in several columns earlier this year, that wasn’t the end of it. Even though Petit had been ousted and a new management has been installed, the shorts have continued to hurl allegations at MiMedx. Cohodes has even called the company “a criminal enterprise.”On Tuesday, Cohodes took to Twitter to both claim victory and to warn that MiMedx was still a bad actor, tweeting: “The best part of the $MDXG story is that the Fraud and Criminal activity is still ongoing…” His Twitter allies also spent much of Tuesday gloating about the indictments.But I remain convinced that the worst is behind MiMedx, and the company’s prospects are bright. The $1.5 million penalty MiMedx is paying is little more than a slap on the wrist; it won’t have much effect on its business. Several respected health care investors are now on its board. Most of the old guard has been pushed out. There are doctors who swear by its products, which are made from placental tissue. And one important innovation, an injectable form of placental tissue, is in Phase III and Phase II trials for several indications.What’s more, the channel stuffing that’s alleged by the government was pretty small potatoes. According to the prosecutors, MiMedx reported revenue of $187.3 million in 2015. The alleged fraudulent activity accounted for just $9.5 million of that amount. One suspects that the earnings restatement, when it is finally completed, will mollify investors rather than alarm them.As it turns out, investors seem to agree. In the last few days, MiMedx shares have topped $6, and have returned 225% this year. Indeed, after the indictment was unveiled, the stock rose 6.46%.We’re all going to find out the truth soon enough. Once the restatement takes place, the company will start to once again post quarterly numbers and hold annual meetings. All the rumors and speculation will finally take a back seat to whatever story the numbers tell. Then we’ll know. To contact the author of this story: Joe Nocera at [email protected] contact the editor responsible for this story: Sarah Green Carmichael at [email protected] column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
