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SEC charges Osiris Therapeutics and four former executives with accounting fraud

The U.S. Securities and Exchange Commission has charged the Columbia biotechnology company Osiris Therapeutics and four of its former executives with accounting fraud.

In a suit filed Thursday in Baltimore’s federal court, the SEC alleged that the company and its officials overstated revenue growth and issued fraudulent financial statements, misleading investors in 2014 and 2015.

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Osiris Therapeutics said it cooperated with the SEC investigation and agreed to a settlement that requires it to pay a $1.5 million penalty. It settled without admitting or denying the allegations.

The SEC confirmed the settlement, which still must be approved in federal court.

“As alleged in our complaint, Osiris Therapeutics falsely portrayed to investors that its revenue was growing so rapidly that its performance was consistently exceeding expectations,” Julie Lutz, director of the SEC’s Denver Regional Office, said in a statement. “Corporate cultures cannot be so fixated on higher revenues that they use illegal accounting gimmicks to meet the financial numbers they desire.”

Considered one of the state's most promising biotechnology firms and a specialist in wound care, orthopedics and sports medicine, Osiris is known for stem cell-based products, including Grafix, a human tissue treatment for chronic wounds such as foot ulcers.

But the company fell into difficulties in the past few years as investors and regulators questioned its accounting practices. Its stock price plunged.

The SEC said Osiris overstated revenue in a number of ways, including recognizing revenue using artificially inflated prices and backdating documents to recognize revenue in earlier periods.

In a statement, Peter Friedli, chairman of the Osiris board, attributed what happened to a former management team.

“We have instituted broad remedial measures designed to detect and prevent the issues that led to the matter being resolved, and this resolution allows us to continue moving forward with the company's critical mission of making advances in the area of cellular and regenerative medicine,” Friedli said.

While Osiris settled the case, the federal litigation continues against four former executives: former CEO Lode B. Debrabandere, former chief financial officers Philip R. Jacoby Jr. and Gregory I. Law, and former chief business officer Bobby Dwayne Montgomery.

Law denied the allegations and said through his lawyer he planned to fight the charges.

“The record will establish that at all times Greg acted with the highest integrity and confronted a challenging environment with the sole goal of always pursuing correct and transparent accounting,” said Jacob Frenkel, Law’s attorney and the chair of Dickinson Wright’s government investigations and securities enforcement practice.

Law worked at Osiris from 2014 until May. During his time there, Law cooperated fully with internal and government investigations, Frenkel said.

A lawyer representing Debrabandere could not be reached Friday for comment.

Montgomery’s lawyer, Stephen Crimmins, of Murphy & McGonigal, and Jacoby’s lawyer, Edmund Power, of King & Spalding, declined to comment.

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In a separate, but related case in a U.S. District Court in Manhattan, Jacoby plead guilty Thursday to one count of making fraudulent statements to auditors in connection to their review of Osiris’ financial filings. Jacoby, who was the chief financial officer from 2008 until Sept. 2015, faces up to 20 years in prison and a maximum fine of $5 million.

“Jacoby fabricated documents, made false statements, and asked others to backdate critical transactions in furtherance of his scheme to mislead auditors,” said Acting Manhattan U.S. Attorney Joon H. Kim in a statement. “For his criminal conduct, which ultimately misled those looking to invest in his publicly traded company, Jacoby faces time in federal prison.”

The SEC’s complaint asks the court to require those executives to pay back any gains from alleged fraud plus interest and penalties as well as bar them from serving as an officer or a director for another public company.

Osiris said it has made numerous changes to its internal controls over financial reporting, hired a new CEO, chief financial officer and general counsel, and enhanced staff in its accounting and finance departments.

On Monday, Osiris announced that it continues to work with Ernst & Young on a restatement of its financial reports for 2015 and 2016, but it doesn’t anticipate completing them before the first quarter of 2018. It already restated results for 2014.

As allegations of accounting problems mounted, Osiris has seen significant executive turnover. Linda Palczuk, 55, who joined the company as president and CEO in July, is the company’s fifth CEO since the beginning of 2016.

The company initially attributed its financial issues to difficulties transitioning from a research-focused operation to a commercial entity.

Shares of Osiris were delisted from the Nasdaq exchange in March. On Friday, with the cloud of the SEC investigation lifting, its shares jumped more than 16 percent, closing at $5.96 each in over-the-counter trading.

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