Federal Probes at MiMedx Carry a Familiar Ring for CEO Petit
(Bloomberg) -- Parker “Pete” Petit spent years building a tiny skin-graft manufacturer into a $2 billion company, MiMedx Group Inc. Now, in a matter of months, it’s unraveling: Federal authorities are investigating. MiMedx shares have lost almost two-thirds of their value. Last week the company said it must restate more than five years of financial results.
Some of this is familiar territory for Petit, 78, one of Georgia’s most successful businessmen. In interviews, 19 current and former executives and employees of his companies describe a hard-charging leader -- one who didn’t dwell on the rules as he pursued revenue growth, according to about a dozen of them.
Over more than four decades as a health-care entrepreneur, Petit built up medical-device companies that later came under scrutiny, one by the Justice Department and another by the Securities and Exchange Commission. Those companies settled without admitting wrongdoing, and Petit says they strove to comply with both the spirit and the letter of the law.
Now he may be facing a stiffer challenge, with both the Justice Department and the SEC investigating sales practices and government contracts at MiMedx, and short sellers circling. Last month, three health-care workers were indicted over allegations they accepted bribes from MiMedx representatives. Announcing last week that years of financial results may not have been accurate, MiMedx also said two top finance executives had stepped down.
MiMedx, based in Marietta, Georgia, said it’s continuing to conduct an internal probe that could turn up additional issues, with Petit telling investors the company is sound.
In comments to Bloomberg, Petit said he couldn’t comment on pending investigations but noted that health-care companies are highly regulated. “In my line of work, regulatory review is a fact of life. My companies have always cooperated fully with the regulatory review process,” he said in an emailed statement.
Petit projects a larger-than-life persona, flying Soviet-era fighter jets in his spare time. Over the years, he’s made more than $100 million running and selling companies, according to a Bloomberg analysis. He’s pumped enough money into Georgia universities that he’s gotten his name on a football field and two research centers. In 2016, he was selected as the state’s finance chairman for the presidential campaign of Donald Trump.
Allies call his style inspiring and masterful. Detractors see him as a controlling leader who goes to great lengths to silence critics.
“It’s his way or no way,” said Steve Gorlin, an early investor in Petit’s first company who said the two were friends until they had a falling out over a business matter a decade ago. “But he’s a brilliant CEO.”
Ignore the Noise
Petit’s approach was on display in January, as sales staff gathered at a golf resort in Orlando, Florida, for the firm’s annual team meeting. At the time, short-sellers and former employees had already begun, in private, on social media and in lawsuits, to question MiMedx’s accounting and business practices. Petit battled back on conference calls and the firm’s website.
In Florida, Petit encouraged his team to ignore the noise. Focus instead on MiMedx’s positive momentum, he said, according to two people who attended the meeting. After all, MiMedx had just announced its best year yet. The company’s market value was at record levels. It was a big leap forward from 2009, when Petit took over the company with revenue of less than $1,000.
The short sellers, looking to profit from a falling stock, were calling that success story into question. Last year, publication Capitol Forum and short sellers Viceroy Research and Aurelius Value took note of lawsuits filed by former employees alleging the firm engaged in so-called channel-stuffing to meet revenue targets. The shorts, including Marc Cohodes, have since published dozens of reports saying that MiMedx booked sales for products that customers hadn’t ordered, overcharged the government and used distributors held by friendly parties to inflate sales.
MiMedx has fought back with more than 40 statements of point-by-point rebuttals of the short sellers’ allegations, and Petit has berated his critics as part of a “wolf pack” illegally shorting the stock. In October, MiMedx sued several firms, including Sparrow Fund Management LP, which it said was behind the anonymous moniker Aurelius. Sparrow countersued last week, saying it isn’t.
Separately, MiMedx has fired and sued several workers for allegedly violating their contracts, with Petit calling them “rogue employees” on a conference call. At least two have settled with the company.
More than a half-dozen former MiMedx employees interviewed by Bloomberg, who requested anonymity, said they saw little upside to flagging any potential misconduct while working there, an understanding that flowed from what they called an us-vs.-them culture nurtured by Petit. Several of them noted that while Petit has publicly encouraged workers to write “Dear Pete” letters reporting wrongdoing, he created a culture internally in which workers were reluctant to criticize practices.
Another former employee of Petit, James Ashton, sees similarities to a company Petit ran several decades ago.
In the early 1970s, after his son suffered crib death, Petit founded Life Systems, which developed and sold infant monitors to track children’s heartbeats. The company went public in 1981 under the name Healthdyne Inc. The SEC later alleged in a lawsuit, partly based on information from Ashton and at least one other ex-employee, that Healthdyne had failed to report issues with monitors and misrepresented revenue and earnings projections before a secondary share offering in which several company executives sold shares.
Petit “didn’t think that he was doing anything wrong,” according to Ashton, who said he found numerous instances of wrongdoing during the seven months he was Healthdyne’s president and was fired after raising those concerns with the board. “It’s the idea that everybody does it.”
The SEC probe ended with Healthdyne signing a consent decree, neither admitting nor denying wrongdoing and paying no fine. Petit rejected Ashton’s accusations, calling him a disgruntled former executive with a checkered work history.
Other former Healthdyne employees chalked the matter up to rogue employees making hollow claims.
“It was one of those things that a high-flying company went through,” said J. Brent Burkey, Healthdyne’s general counsel who worked with Petit until retiring about a decade ago. He said Petit is “an exceptional person” who worked tirelessly and always had his eye on how to grow his companies.
In 1995, Healthdyne was split into three companies. One of them merged with another firm to form Matria Healthcare, a seller of diabetes-management products, which made Petit its CEO in 2000.
A few years later, Matria was sued by U.S. prosecutors for allegedly shipping products that hadn’t been ordered, falsifying records and overbilling Medicare. Senior managers were aware of the scheme and encouraged it, according to the federal complaint, which didn’t identify the managers. The charges were filed after two former employees had contacted the government. Matria settled for $9 million without admitting guilt.
Petit said the issues at Matria occurred at its Diabetes Self Care unit, a business that was acquired during a period when he was Matria’s chairman. The errors on Medicare payments were inadvertent, and the decision to settle lawsuits was based on an assessment of the costs to pursue a defense, he said.
Petit retired after Matria was sold in 2008, which yielded him more than $66 million based on the offer price. A year later, Gorlin, the Healthdyne investor, said he recruited him to take over MiMedx.
The company, which sells allografts used to help heal soft-tissue wounds and reduce inflammation in joints, said Thursday it will restate financial results going back to 2012 and that its 2018 projections can’t be relied upon. Chief Financial Officer Michael Senken and Treasurer John Cranston stepped down. The board’s ongoing internal probe is led by audit committee leader Terry Dewberry, Petit’s college fraternity brother who’s worked with him for almost four decades.
On an investor call last week, Petit didn’t provide an estimate when the probe will be concluded.
“If any of our issues are still not clear to you, come and please check in with us,” Petit said, ending the call without taking questions.
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