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In 2013, two analysts at Orthofix, a medical device maker, contacted Firm partner Jordan A. Thomas, who submitted a tip to the SEC on his clients’ behalf, promising to follow up with a more detailed submission, records show. To bolster their case the analysts kept picking through Orthofix’s financial statements, while the Firm’s investigators, hit the phones and scouted industry message boards looking for former Orthofix employees.
In Orthofix’s case, what the two analysts pieced together suggested that Orthofix was goosing its earnings by “channel stuffing.” If not disclosed to investors, the practice of flooding distributors with more products than they can use or pay for is illegal. It lets the company smooth earnings by prematurely recognizing revenue, and pushing shortfalls into the future.
One former employee they found revealed in an interview that in order for them to “make their numbers,” the company sent large orders to distributors, only to have them returned and then reshipped to other customers, according to the updated submission Labaton Sucharow sent to the SEC in August.
The update included the analysts’ estimates by how much Orthofix would need to lower its earnings and sales for 2011 and 2012. Those numbers later turned out to be right in line with what the company ultimately restated in 2014 and 2015.
The SEC still does not know the identities of the two analysts, but it will find out in May, when Thomas submits a claim on their behalf asking the SEC to consider giving them an award for their tip.