The Securities and Exchange Commission announced Wednesday that it has charged Merge Healthcare Inc. (MRGE) and two former senior executives for their roles in an accounting fraud.
According to the SEC, the company's former CEO Richard Linden and former CFO Scott Veech engineered a process where Merge improperly recognized revenue from sales that had not been fully completed with delivery of the software products, features or enhancements promised to customers.
In addition, the SEC 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.
Linden signed at least 16 and Veech signed at least 14 false and misleading management representation letters to Merge's outside auditor, the SEC said.
Between 2002 and 2005, the SEC alleges that Merge prematurely recognized revenue from 124 transactions, 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 says that the 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, the SEC said.
Merge, Linden and Veech each agreed to settle the SEC's charges without admitting or denying the allegations against them.
Under the terms of the settlement, Linden will pay a total of $590,000 and Veech will pay a total of $280,000. The two are also 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.
Merge, meanwhile, 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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