Nov. 4--West Allis-based medical software maker Merge Healthcare Inc. and two former senior executives were charged Wednesday by the U.S. Securities and Exchange Commission for their roles in an accounting fraud that caused the company's stock price to drop by two-thirds -- or over $500 million -- during a seven-month period.
The SEC alleges that former Chief Executive Officer Richard Linden, of Barrington, Ill., and former Chief Financial Officer Scott Veech, of Whitefish Bay, engineered a process where Merge improperly recognized revenue from sales that had not been fully completed.
The agency also claims Linden, with Veech's knowledge, interfered with the audit confirmation process by instructing Merge sales personnel to tell some of Merge's customers not to disclose side agreements to the company's outside auditor. Also, Linden and Veech signed false and misleading management representation letters to Merge's outside auditor.
"Linden and Veech went to deliberate lengths to disguise the timing and truth behind the sales of their software products and enhancements," said Merri Jo Gillette, Director of the SEC's Chicago regional office. "The company's weak and ineffective internal controls allowed these corporate executives to carry out the fraud."
According to the agency's complaint, filed in U.S. District Court in Milwaukee, Merge prematurely recognized revenue from 124 transactions between 2002 and 2005.
The SEC alleges these fraudulent accounting practices caused Merge to overstate its revenue by 26%, and overstate its net income by 230%, in annual and quarterly reports from its first quarter of 2002 through its second quarter of 2005. The accounting fraud ultimately cost the company more than $500 million in market capitalization.
Merge, Linden and Veech each agreed to settle the SEC's charges without admitting or denying the allegations against them.
Under the settlement, Linden will pay $590,000 and Veech will pay $280,000.
Linden and Veech are permanently enjoined from committing future violations of the antifraud provisions of federal securities laws, and are barred from serving as an officer and director of a public company for five years.
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.
Merge is permanently enjoined from future violations of the internal controls, books and records, and reporting provisions of the federal securities laws.
The agency's investigation was launched in December 2007. At that time, Merge had run an operating loss for six consecutive quarters, and had no credit lines available -- making it dependent on available cash and cash flow to pay for its operations.
Since then, Merge has improved its finances, and has even acquired other companies.
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