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Merge Healthcare Settles SEC Case
HDM Breaking News, November 5, 2009
The Securities and Exchange Commission has reached a settlement with medical imaging software vendor Merge Healthcare after it charged the firm with record-keeping violations. It also has settled with two former senior executives of the firm accused of accounting fraud, who both were slapped with hefty fines.
The Milwaukee-based vendor, former CEO Richard Linden and former CFO Scott Veech each agreed to settle the charges without admitting or denying the allegations against them, according to the SEC. The agency did not assess financial penalties against Merge, but permanently enjoined (forbid) the company from future violations of the internal controls, books and records, and reporting provisions of federal securities laws.
The accounting fraud occurred from 2002 through 2005, according to the SEC. Consequently, Merge in 2006 restated its financial statements for those four years and saw its stock price fall from $24.50 per share to $7.30, a loss of $500 million in market capitalization.
The SEC alleged that Linden and Veech engineered a process that involved Merge improperly recognizing revenue from sales that had not been fully completed with delivery of the software products, features or enhancements promised to customers, according to an agency statement.
"The SEC further alleges that Linden, with Veech's knowledge, interfered with the audit confirmation process by instructing Merge's sales personnel to tell some of Merge's customers not to disclose side agreements to Merge's outside auditor," according to the statement. "Also, Linden signed at least 16 and Veech signed at least 14 false and misleading management representation letters to Merge's outside auditor."
Merge, according to the SEC, prematurely recognized revenue from 124 transactions between 2002 and 2005. Many of the transactions involved promises to customers of functionality that enables radiologists to rearrange the sequence and orientation of images. Merge should have deferred recognition of these revenues until the functionality was actually delivered in 2005, according to the SEC.
The agency alleges that the fraudulent accounting practices caused Merge to overstate net revenue by approximately 26% and overstate net income by about 230% in reports from the first quarter of 2002 through the second quarter of 2005.
Under the settlement with the SEC, Linden will pay a total of $590,000 in fines and related penalties, and Veech will pay a total of $280,000. "Linden and Veech are permanently enjoined from committing future violations of the antifraud provisions of the federal securities laws, and are barred from serving as an officer and director of a public company for five years," according to the SEC. "Additionally, Veech consented to the entry of an administrative order that suspends him from appearing or practicing before the Commission as an accountant, with a right to reapply after three years."
--Joseph Goedert
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