Alleged ‘Channel-Stuffing’ Scheme Bites MiMedx in New Class Action Case

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A proposed class action has been filed in Georgia against MiMedx over the medical device company’s alleged engagement in a “channel-stuffing” scheme designed to inflate revenue numbers that had not yet been realized.

The plaintiff’s allegations begin with MiMedx’s distribution agreement with federal contractor AvKARE, through which MiMedx was able to send its products directly to VA hospitals. MiMedx’s revenues from its agreement with AvKARE represented a significant chunk of the defendant’s total revenue, the case says. 

In 2016, two former MiMedx employees filed a whistleblower lawsuit over allegedly fraudulent revenue reporting in which they alleged the company was running a “channel-stuffing scheme” by which it fraudulently recognized revenue from its AvKARE distribution agreement in certified financial documents before the money was actually earned. MiMedx denied these claims, the complaint says, and sued the former employees for tortious interference and other charges.

The lawsuit then cuts to September 2017, when several market research firms reportedly set their sights on MiMedx’s supposedly fraudulent revenue reporting practices at the center of the former employees’ whistleblower action. These research companies were predictably sued by MiMedx over allegations of libel, slander and defamation. Earlier this month, the lawsuit says, MiMedx shared some items that stand counter to its previous position with regard to allegations of “channel stuffing”: 

“Then, on February 20, 2018—after months of denying that it had engaged in a fraudulent revenue scheme—MiMedx disclosed an ‘internal investigation into current and prior-period matters relating to allegations regarding certain sales and distribution practices at the Company,’ and with regard to ‘the accounting treatment of certain distributor contracts.’ The Company further announced that, because of this internal investigation, it would delay the release of its fourth quarter and fiscal year 2017 financial results.”

According to the lawsuit, this divulgence from MiMedx caused its share price to drop more than 39 percent, reportedly resulting in “tens of millions of dollars” in investor losses.