MiMedx expands workforce amid allegations of fraud

The exterior signage of MiMedx Group Inc in Marietta. ALYSSA POINTER/ALYSSA.POINTER@AJC.COM

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The exterior signage of MiMedx Group Inc in Marietta. ALYSSA POINTER/ALYSSA.POINTER@AJC.COM

Inside the Marietta headquarters of fast-growing medical supplier MiMedx Group Inc., a sign below a portrait of 78-year-old Chairman and CEO Parker “Pete’’ Petit playfully pronounces, “Things get better with age…I’m approaching brilliant.’’

Petit has built a reputation as one of Georgia’s most successful and politically connected businessmen, boasting a decades-long track record of turning health-industry startups into billion-dollar companies. When he wasn’t flying his Soviet-era fighter jet for fun or having Atlanta university buildings named after him in recent years, he was rubbing shoulders with the likes of Sen. Johnny Isakson, former Secretary of Health and Human Services Tom Price and President Donald Trump.

But these days, besieged by short sellers accusing MiMedx of widespread fraud amid deepening regulatory scrutiny, the hard-charging entrepreneur might need to marshal a lifetime of smarts to keep his wound-care company aloft and prevent his legacy from unraveling.

In the latest blow, MiMedx disclosed March 15 that the Department of Justice is conducting a preliminary review of its business practices. Shares of the maker of human tissue grafts have lost roughly half their value since Feb. 20, when management abruptly postponed the release of 2017 financial results and hired outside teams to investigate its sales and distribution methods.

MiMedx said last September that the Securities and Exchange Commission issued a subpoena after former employees alleged the company illegally inflated revenue by overshipping to Veterans Affairs hospitals in a practice known as channel stuffing. Adding to regulatory uncertainty, the Food and Drug Administration could impose sales or marketing restrictions on MiMedx after questioning some of the company’s products in a 2013 warning letter.

The financial probes have triggered shareholder class action complaints against Petit and MiMedx in recent weeks, further emboldening short sellers who launched a noisy social media campaign targeting the company last autumn. Nearly half of MiMedx’s shares as of March 15 were held by short sellers, who bet on a stock’s downturn by selling borrowed shares.

“I will bury Parker Petite [sic] under the Biggest Prison in the Land,’’ Marc Cohodes, a California short seller, tweeted to his more than 20,000 Twitter followers in March. He has accused Petit of overseeing “the granddaddy’’ of frauds.

The SEC, DOJ, VA and FDA declined to comment on any potential investigations of MiMedx, which markets wound coverings and injections from placental tissue to assist healing and reduce inflammation. The company says revenue last year topped $300 million, increasing more than tenfold from 2012, pushing its stock market capitalization above $1.5 billion before the recent selloff.

Petit, who started his first company in 1970 and has been heading MiMedx since 2009, allows that some MiMedx sales staff might have engaged in “rogue” behavior but says there’s no sign of widespread fraud. The company sued some short sellers in October for slander and libel, among other allegations.

“I’ve been doing this a long time. Why is Petit all of a sudden going to go rogue and do stupid things at my age of 78? This is all stuff trumped up to drive the stock price down,’’ he told a reporter during a lengthy interview at the company’s headquarters on a recent morning.

Outside teemed with trucks as a construction crew added parking spaces for MiMedx’s expanding workforce. More than half of the company’s 900 employees are based in Georgia and the company plans to sign shortly a lease for a fourth site in Marietta’s environs. He said MiMedx remains on track to eclipse $500 million in sales by 2020, boosted in part by an aggressive push into pain-management products for everything from plantar fasciitis to osteoarthritis.

But Petit acknowledged it likely will take months, not weeks, for accountant KPMG LLP and law firm King & Spalding LLP to conduct their independent investigation into any potential wrongdoing before MiMedx can release audited results. He says he’s putting in 70 to 80 hours a week running the company, up from 60 hours a few months ago.

Things looked brighter for much of last year. Petit attended a Trump inauguration party after serving as his campaign finance chairman in Georgia. The biggest campaign contributor to Price, who would soon be named health secretary, was MiMedx, according to the Center for Responsive Politics. In August, Georgia State University named its new football field Parker H. Petit Field, replacing the old Turner Field, after he made a $10 million gift. A few weeks later, Fortune magazine ranked MiMedx the fifth-fastest growing public company, ahead of Facebook Inc. and Amazon.com Inc., calling it “a designer of a kind of modern medical alchemy.’’

‘Close to the sun’

It wasn’t the first time Petit had experienced success. Healthdyne, the first company he founded, developed infant monitors after he lost a son to crib death. Healthdyne went public in 1981, eventually splitting into several companies with combined revenue of more than $1 billion. Matria Healthcare, one of the offshoots run by Petit, was sold in 2008 in a $1.2 billion transaction. Executives who work with him have a term for his sense of urgency: “Speed of Pete!’’

But there also have been bouts of turbulence. Matria agreed to pay $9 million in 2006 to settle a dispute with the government over allegedly fraudulent billing practices for mail-order diabetes supplies. In 2016 a court approved a $3 million class action settlement between MiMedx and shareholders who alleged the company misrepresented the regulatory status of some products.

In late 2016 and early 2017, a handful of former MiMedx employees sued the company and Petit under whistleblower laws, alleging they had been fired for flagging fraud. They alleged a fraudulent scheme since at least 2014 in which MiMedx flooded VA hospitals’ shelves with its EpiFix grafts and booked the revenue even though the hospitals hadn’t ordered them. Petit and other senior managers were aware of the scheme, according to the lawsuits.

Petit denies any wrongdoing on the part of senior management. He alleges the former employees, who included Michael Fox, Jess Kruchoski and Luke Tornquist, were fired and sued for damages after selling competitors’ products. Fox, Kruchoski and Tornquist declined to discuss their ongoing cases.

On Sept. 20, two anonymous short-seller websites, Viceroy Research and Aurelius Value, published articles detailing the allegations of former employees, sending MiMedx’s share price lower. “We see large undiscounted channel stuffing and kickback risks lurking below the surface,’’ Aurelius wrote in a post titled “MiMedx: Flying Too Close To The Sun,’’ adding the company’s rapid growth appeared “too good to be true.’’

Aurelius later posted an October letter it sent to Isakson, the chairman of the Senate Committee on Veterans’ Affairs, urging that he recuse himself from a VA investigation into wrongdoing because of his long friendship with Petit.

In an interview, Petit says he grew concerned in late 2016 that the fired employees might have defrauded the VA. He says he called Isakson, who sold him his first house in 1968 as a broker, for advice and that Isakson told him to contact the VA’s Office of Inspector General. Petit says MiMedx did, triggering a probe, but that the company itself is not a target of the investigation. A spokeswoman for Isakson said the OIG is independent and that the senator isn’t involved.

Viceroy and Aurelius have continued to publish lengthy articles online detailing what they allege is widespread fraud, citing snippets of court filings, company emails and other documents. Among the allegations: MiMedx inflates revenue by shipping products to a friendly network of distributors and sales agents, including doctors, who agree to take on more inventory than there is demand. In an interview, Petit called short-seller allegations “bogus’’ and said that payments to doctors are for clinical trials, not kickbacks.

MiMedx has posted dozens of rebuttals on its corporate website since September to what it calls “illegal’’ short-seller allegations. It dismisses the allegations as “misinformation’’ for “stock manipulation purposes’’ from “unreliable sources.’’

The company’s public blow-by-blow engagement with short sellers is unusual. “Companies typically ignore it and the short sellers typically go away,’’ said Mike Matson, an equities analyst at Needham & Co. who has a “hold’’ recommendation on MiMedx.

Observers say the vocal sparring with short sellers is a product of Petit’s combative nature. They say Petit also is quick to file lawsuits in disputes, whether it be with competing companies, former employees or, in this case, short sellers.

MiMedx’s share price rebounded in late 2017 and early 2018 as the company kept counterpunching while reporting strong business results. It reported Oct. 10 that third-quarter revenue topped its guidance by more than 5 percent. On Jan. 7 it reported preliminary 2017 revenue of $324.5 million, 32 percent more than in 2016, again beating its guidance, and reiterated it expected revenue to rise to $383 million to $387 million in 2018. The company’s share reached a record closing high of $17.96 on Jan. 29.

But many investors bolted on Feb. 20, when the stock plunged 40 percent to $8.75 after management announced it would delay publishing its audited results amid an internal investigation. Some formerly bullish analysts cut their recommendations on the stock, even as they remained skeptical of widespread fraud.

“Some long-term investors will be scared away by the presence of vocal short sellers whether they’re right or wrong,’’ said Lake Street Capital Markets analyst Bruce Jackson, who cut the stock to “hold’’ from “buy’’ on Feb. 23.

There’s no indication the short sellers will quiet down anytime soon. In January a magistrate judge recommended dismissing MiMedx’s lawsuit against short sellers, arguing that they are entitled to make statements of opinion.

‘I will bury the little fella’

Tracking down the identity of short sellers also isn’t straightforward. MiMedx alleged in its suit that Aurelius was part of Sparrow Fund Management LP, which countered that it wasn’t and threatened to sue for damages. A person who told this reporter he was responsible for the Aurelius research notes would only identify himself as an investor named “Charles.’’

But Cohodes, the most vocal short seller, isn’t hiding. He lives on his chicken farm near San Francisco and over the past two decades has helped expose fraud at several companies including Novastar Financial Inc. and aaiPharma Inc. He often tweets several times a day accusing MiMedx and Petit of fraud, sometimes broadcasting lengthy videos with detailed allegations from MiMedx employees or customers while he’s seated with pink shoes in front of pinball machines or lava lamps.

Cohodes filed a formal complaint to the DOJ and Federal Bureau of Investigation after two FBI agents came to his farm on Dec. 1 and warned him to stop threatening Petit.

He says the agents acted in a threatening manner and accuses Petit of having “ginned up’’ the visit through his powerful political connections. He notes FBI Director Christopher Wray formerly worked in the Atlanta office of King & Spalding, which currently counts MiMedx as a client.

An FBI spokesman said the agents visited after Cohodes tweeted “I will bury the little fella in a shoe box. Give up Petite [sic], your game is over’’ and “Guns are loaded the Safety is off $MDXG’’ in addition to posting a family picture of MiMedx’s general counsel that included her five-year-old daughter. Cohodes says he briefly posted a screenshot of the Twitter account of the general counsel’s husband, whom he accused of trolling him, and which contained a photo of the girl.

Petit says he’s never met Wray and that he didn’t personally get involved with the FBI. He also says he’s not into tweeting; his Twitter account shows just one tweet since 2016 and only following Fox News and Georgia Tech’s Parker H. Petit Institute for Bioengineering & Bioscience.

But he says MiMedx has complained to regulators, accusing short sellers of running afoul of securities laws that prohibit them from deliberately coordinating misinformation campaigns to book profits.

“Short sellers can misrepresent facts and even lie because they are not routinely held to the same regulations as corporate executives,’’ said Petit.

MiMedx Group Inc. at a glance

Founded: 2008

Headquarters: Marietta

Employees: 900

Revenue 2017: $325 million (company estimate; unaudited)

Products: Wound coverings and injections processed from placental tissue to assist healing and reduce inflammation

Parker “Pete” Petit

Age: 78

Current Position: Chairman and CEO of MiMedx (since 2009)

Previous companies: Healthdyne, Matria Healthcare; Born: Atlanta and resides in Roswell

Personal: Married (wife Janet) with a son, two daughters and seven grandchildren

Politics: Donald Trump's Georgia campaign finance chair during 2016 presidential election

Education: Georgia Institute of Technology (Bachelor in Mechanical Engineering, 1962; Masters of Science in Engineering Mechanics, 1964) and Georgia State University (MBA in Finance, 1973)

Philanthropy: Funded professorial chair for "Engineering in Medicine" at Georgia Tech in 1986; endowed the Petit Institute for Bioengineering and Biosciences at Georgia Tech in 1995; helped fund the biotechnology building at Georgia Tech, which has his name, in 2001; helped fund the Science Center building at Georgia State University, which also has his name, in 2004; $10 million gift to athletic program of Georgia State University, which named its new football field after him in 2017

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