Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, November 4, 2009

Merge Healthcare and Two Former Officers Settle SEC Accounting Fraud Charges

The SEC settled charges that Milwaukee-based Merge Healthcare Incorporated and two former senior executives engaged in an accounting fraud that ultimately caused the company's stock price to drop by two-thirds during a seven-month period.  The SEC alleges that former CEO Richard Linden and former CFO Scott Veech engineered a process where Merge, which is a provider of medical imaging software, hardware and services, improperly recognized revenue from sales that had not been fully completed with delivery of the software products, features or enhancements promised to customers.

The SEC further alleges that Linden, with Veech's knowledge, interfered with the audit confirmation process by instructing Merge sales personnel to tell some of Merge's customers not to disclose side agreements to Merge's outside auditor. Also, Linden signed at least 16 and Veech signed at least 14 false and misleading management representation letters to Merge's outside auditor.

According to the SEC's complaint, filed in federal court in Milwaukee, Merge prematurely recognized revenue from 124 transactions between 2002 and 2005, many of which involved Merge's promises to customers of "hanging protocols" that provide radiologists with the ability to rearrange the sequence and orientation of images. The SEC alleges that these fraudulent accounting practices caused Merge to overstate its net revenue by approximately 26 percent and overstate its net income by approximately 230 percent in annual and quarterly reports from its first quarter of 2002 through its second quarter of 2005. The accounting fraud ultimately cost the company more than $500 million in market capitalization.

Merge, Linden, and Veech each agreed to settle the SEC's charges without admitting or denying the allegations against them.  Under the settlement, Linden will pay a total of $590,000 and Veech will pay a total of $280,000. Linden and Veech are permanently enjoined from committing future violations of the antifraud provisions of the federal securities laws, and are barred from serving as an officer and director of a public company for five years. Additionally, Veech consented to the entry of an administrative order that suspends him from appearing or practicing before the Commission as an accountant, with a right to reapply after three years. Merge is permanently enjoined from future violations of the internal controls, books and records, and reporting provisions of the federal securities laws.

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