Former Chief Financial Officer Of Osiris Therapeutics, Inc., Pleads Guilty To Lying To Auditors
Joon H. Kim, the Acting United States Attorney for the Southern District of New York, and Philip R. Bartlett, Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service (“USPIS”), announced that PHILIP JACOBY, the former chief financial officer of Osiris Therapeutics, Inc. (“Osiris”), a developer and producer of regenerative medicine products, was charged by criminal information (the “Information”) and pled guilty today to lying to Osiris’s auditors in connection with the auditors’ review of Osiris’s 2014 10-K and Third Quarter 2015 10-Q filings. JACOBY pled guilty before U.S. District Judge Denise Cote.
Acting Manhattan U.S. Attorney Joon H. Kim said: “Philip Jacoby, the former CFO of a pharmaceutical company, admitted today to lying to auditors conducting an examination of the financial well-being of his company. Jacoby fabricated documents, made false statements, and asked others to backdate critical transactions in furtherance of his scheme to mislead auditors. For his criminal conduct, which ultimately misled those looking to invest in his publicly traded company, Jacoby faces time in federal prison.”
Inspector-in-Charge Philip R. Bartlett said: “In a misguided effort to avoid a restatement of Osiris’s fourth quarter revenue numbers, Philip Jacoby lied about the conversion of $1.1 million dollars of consignment inventory to a final sale. He wasn’t so clever when he left a paper trail of evidence Postal Inspectors followed right back to him.”
According to allegations contained in the Information and statements made in public Court proceedings:
Osiris, headquartered in Columbia, Maryland, is a publicly traded company specializing in the research, development, and marketing of regenerative medicine products. Osiris sold its products either through its direct sales force, or, more typically, through numerous distributors. Osiris’s securities traded under the symbol “OSIR” on the NASDAQ stock exchange.
From in or about 2008 up to and including in or about September 2015, JACOBY held the position of chief financial officer (“CFO”) of Osiris. From in or about September 2015 through in or about January 2016, JACOBY held the position of principal accounting officer. During the period that JACOBY was the CFO of Osiris, he signed Osiris’s quarterly and yearly financial reports. These reports were required to be filed with the United States Securities and Exchange Commission (“SEC”) and provided the investing public with information regarding Osiris’s financial performance.
Although Osiris was initially a research and development company, by at least in or about 2014, Osiris’s management was focused on the company’s “top line,” or gross revenue growth. Osiris was especially focused on being able to demonstrate quarter-over-quarter revenue growth, that is, reporting revenue for each quarter that was greater than the previous quarter’s. For example, a former CEO of Osiris (the “CEO”) regularly prepared internal presentations emphasizing the company’s historical quarter-over-quarter revenue growth and emphasizing the need to achieve future growth. Similarly, in public earnings calls run by the CEO and in its earnings press releases, Osiris touted its revenue performance and quarter-over-quarter revenue growth.
Improper Accounting at Osiris With Respect to Distributor-1
Between approximately 2010 and approximately 2015, Distributor-1 was a distributor for Osiris’s Ovation product, among other products. Distributor-1 was owned in its entirety by a sole principal (“Owner-1”).
In or about September 2013, the Food and Drug Administration (“FDA”) informed Osiris that Ovation failed to meet certain regulatory requirements and thus required pre-marketing approval from the FDA, which Ovation did not have. Thereafter, Osiris agreed with the FDA that it would not sell Ovation after December 31, 2014.
In order to maintain access to Ovation following December 31, 2014, Distributor-1 agreed to take possession of a significant quantity of Ovation prior to December 31, 2014, and by December 2014 was in possession of approximately $1.8 million worth of Ovation. Because Distributor-1 lacked the ability to pay for such a large purchase, the Ovation was shipped to Distributor-1 on consignment. Because the product was on consignment, under governing accounting rules Osiris could not properly recognize revenue until Distributor-1 had sold the product to an end user or Distributor-1 otherwise agreed to purchase the product.
In or about December 2014, JACOBY requested that Owner-1 convert some or all of the consigned inventory to inventory owned by Distributor-1 by December 31, 2014. To the extent other revenue recognition criteria were satisfied, completion of the actual sale of the inventory to Distributor-1 by December 31, 2014, would have allowed Osiris to recognize revenue for that product in 2014 and reference that revenue in the 2014 10-K it would subsequently file.
Notwithstanding internal pressure to make sales, however, JACOBY and Owner-1 did not reach a final agreement regarding the conversion of the consigned inventory until at least in or about January 2015. Despite the fact that no agreement was reached in 2014, Osiris, at the direction of JACOBY, booked approximately $1.1 million in revenue related to the conversion of consignment product in the fourth quarter of 2014 (the “Distributor-1 Transaction”).
Jacoby Conveys False Information to Auditors After Improper Accounting Is Questioned
In or about October 2015, the Company’s auditors (the “Auditors”), in connection with an inspection by the Public Company Accounting Oversight Board (the “PCAOB”), requested additional documentation and information supporting Osiris’s recognition of revenue in December 2014 relating to the Distributor-1 Transaction. In an effort to deceive the Auditors and the PCAOB, JACOBY provided or caused to be provided false, inaccurate, and misleading information to the Auditors.
For example, in or about October 2015, JACOBY and others prepared a memorandum from Osiris to its Auditors attempting to justify the recognition of $1.1 million of revenue from the Distributor-1 Transaction in the fourth quarter of 2014. In the memorandum, JACOBY falsely represented that on December 31, 2014, JACOBY had “discussed the sale terms with [Owner-1] via a conference call, and [Owner-1] agreed to purchase 933 units of Ovation for $1,072,950.” As JACOBY well knew, no telephone call had taken place on December 31, 2014.
Similarly, on or about November 5, 2015, JACOBY created a letter, backdated to December 29, 2014, purporting to memorialize an agreement between Osiris and Distributor-1 (the “Backdated Letter”). That same day, JACOBY used his personal email account to send the Backdated Letter by email to Owner-1 stating:
“attached is something that I think you should find and send to me in an email saying you had this in your file from late last year, and just came across it – and that it does memorialize our several phone conversations . . . . . Call me if necessary, but write a wonderfully warm and convincing email, please – send it to my Osiris email.”
Owner-1 complied and sent the Backdated Letter to Jacoby’s Osiris email account. JACOBY then forwarded Owner-1’s email containing the fraudulent Backdated Letter to the CEO and the then-CFO of Osiris, who forwarded the document to the Auditors.
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PHILIP JACOBY, 65, pled guilty to one count of making fraudulent statements to Osiris’s auditors, which carries a maximum sentence of 20 years in prison. The defendant also faces a maximum fine of $5 million. Sentencing before Judge Cote has been scheduled for February 2, 2018, at 11:00 a.m.
The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by a judge.
Mr. Kim praised the investigative work of the United States Postal Inspection Service and also thanked the SEC, which filed a parallel civil case today.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Rebecca Mermelstein, Brendan F. Quigley, and Daniel B. Tehrani are in charge of the prosecution.