MiMedx (Nasdaq: MDXG) better hope that its top executive can work the same kind of magic on the federal judge who will soon decide his fate as he has on the shareholders who have placed so much faith in his word.
With its turnaround CEO Parker "Pete" Petit set to face trial on insider-trading charges as early as next month - and its shareholders largely oblivious to both the proximity of that courtroom battle and the gravity of its final outcome - MiMedx desperately needs that looming verdict to favor its accomplished leader and spare its highflying stock from the trauma of his stunning exile. After all, as graphically illustrated by the 70% loss that it suffered back in September, MiMedx paid a staggering price the last time that the market felt blindsided by a major regulatory scare. Now that MiMedx has fully recovered from that nasty wound to reach even loftier highs - achieving a generous $740 million market value that literally eclipses the $500 million value recently assigned to the entire "skin substitute" market that the bleeding firm serves - the company sure would hate to plunge yet again on an overlooked danger capable of erupting into bombshell headlines.
To be sure, the U.S. Securities and Exchange Commission seems bent on a victory that would make those jarring headlines come true. Convinced that Petit tipped off a friend about the imminent buyout of the last public company that he ran, the SEC filed charges against the veteran corporate executive back in early 2012 and - after soundly defeating his motion to dismiss the charges that he actually bothered to challenge - looks fully prepared to move forward with a high-stakes trial that could literally end his entire career.
In a vivid display of its determination, the SEC has invested years in a case against Petit based upon suspicions raised by a pair of trades that date all the way back to 2007 and involve a relatively modest windfall that never personally benefited the seasoned executive at all. Still, the SEC highly doubts that his longtime friend simply lucked out by gambling half of his net worth on Matria Healthcare (the company that Petit led at the time) ahead of a generous buyout offer to score an easy $94,000 jackpot as a total novice playing the market for the very first time. Seeking to nail the veteran officer for that suspected leak and prevent him from committing any future offenses, the SEC has proposed a severe punishment that - by stripping Petit of the right to serve as an officer or director of any publicly traded company - threatens to drive the popular MiMedx leader right out of the executive suite.
MiMedx did not respond to requests from TheStreetSweeper seeking input from the company ahead of this story.
Try to imagine MiMedx without the celebrated industry veteran who has presided over the powerful rally that fueled its escape last spring from the lowly OTC Bulletin and magically transformed the stock into a Nasdaq darling. A bleeding firm that obviously still needs to prove itself, MiMedx has nevertheless blossomed from a neglected $1 penny stock into an explosive $7 highflier - generously valued at the sort of nosebleed multiples often reserved for lucrative buyout offers - by relying heavily on its accomplished leader to lend the company its outsized respect.
Go ahead and ask the proud CEO himself. Hardly shy about taking credit for his contributions to the company, Petit has repeatedly pointed to the expertise of senior executives - his own in particular - as the driving force behind that amazing success.
"The one key issue that's been very key to our growth is our management," Petit bragged at a major investment conference earlier this year, reinforcing the message that he likes to deliver on a regular basis. "You cannot grow a company at 100 percent a year-plus without having key management to bring to the team at the right point in time …
"As you can imagine, this management team is looking forward to 2014," he later concluded at the end of that bullish presentation. "We expect, this time next year, to be the unquestioned leader in the advanced wound care sector."
Right now, however, MiMedx cannot even promise that the confident executive who made that bold call will remain "the unquestioned leader" of the company itself. While MiMedx has practically assumed that Petit will clear his name from the very start, casually downplaying the stubborn charges against him as little more than a pesky nuisance on the rare occasions when the company has bothered to mention them at all, the SEC itself has clearly taken the opposite stand. Hardly intimidated in spite of its treatment by MiMedx as an underdog facing long odds, the SEC obviously felt driven enough to chase after the prominent executive for years - successfully overcoming his efforts to derail the case along the way - and has since emerged confident enough to take its chances on an unpredictable trial.
Indeed, if not for scheduling conflicts that prompted the SEC to request a later date, Petit and his alleged co-conspirator Earl Arrowood would face a four-day trial starting early next week. With the SEC free in April and already booked up throughout most of May, that delay could prove brief enough to simply postpone the trial until sometime next month.
The SEC has dropped no obvious hints about a possible settlement since it originally filed its complaint more than two years ago, either. The last sign of negotiations dates back to September of 2010, well ahead of the actual charges, when the SEC almost struck a deal with Arrowood - who directly implicated his friend by agreeing to confess that Petit had "tipped" him off ahead of the second trade that struck regulators as suspicious - before changing his mind and deciding to fight the charges instead.
Although Petit sought to dismiss that withdrawn "proffer" as mere hearsay, the judge refused to grant his wishes and simply blocked the SEC from using that damaging evidence against Arrowood himself instead. Moreover, back when Petit originally filed his motion for a summary judgment, the executive simply challenged the allegations related to the first trade that caught the attention of securities regulators and never even bothered to contest the charges prompted by the second transaction that (as illustrated below) arguably looks like the far more suspicious of the two. Rejecting his arguments about even the more distant trade - executed months ahead of the actual buyout deal - the judge ruled against Petit, anyway.
"Given that a merger is such a significant event in the life of a company, the Court finds that inside information regarding exploration of the possibility of a merger - even if not concrete information about when and with whom such a merger would occur - could be material even at such an early stage in merger discussions," the federal judge wrote last summer, when denying Petit's motion for a partial summary judgment that would have at least narrowed the scope of the case. "The Court finds that genuine issues of material fact exist as to whether a reasonable investor would find the information Mr. Petit allegedly disclosed to Mr. Arrowood to be material, and these factual issues must be submitted to a jury."
No wonder all of the charges managed to stick. Take a look at some of the more noteworthy discoveries reported by the SEC in the chronology presented below:
August 2004: Petit agrees to help Arrowood out with his personal investments by managing an IRA account for the Delta pilot after he retires. Friends for more than a decade by then, Petit and Arrowood have flown together on a regular basis for years and even vacationed together with their respective wives. Granted the authority to exercise full control over the IRA, consisting of $212,024 in cash, Petit will go on to conduct all of the trades in that account - making investment decisions without consulting Arrowood in advance - for almost three full years, providing his services at no charge to his close friend.
November 2004 and December 2005: Petit actually uses funds from the IRA account to buy stock in his own company Matria on two separate occasions, purchasing a total of 5,700 shares, as an investment for Arrowood that will ultimately backfire. The highflying stock will peak just a couple of months after that second purchase, with the shares reversing course and losing a big chunk of their value soon after that.
Late 2006: As both the chairman and the CEO of Matria, Petit begins receiving a string of calls from a number of potential suitors expressing interest in a possible buyout of the company.
May 2007: With Petit fielding calls about a potential buyout of his company, he proceeds to unload all of the Matria stock that he previously acquired for his friend - liquidating the entire position at a loss - and suddenly stops trading in the IRA account altogether.
Sept. 27, 2007: A few months after Petit dumps all of the stock from his friend's account at a loss, Matria officially hires an investment banker to explore a potential sale of the company. By the end of the following month, Matria will attract interest from five different companies - including its ultimate suitor - serious enough to conduct due diligence for a potential buyout offer.
Oct. 25, 2007: With Matria set to host a quarterly update half an hour before the market opens, Petit fields a burst of early-morning calls from Arrowood during a 20-minute span that ends almost two full hours ahead of the opening bell. Arrowood first contacts the home of the CEO, receiving a call from the home of Petit's son seven minutes later, and then follows up with two calls to the home of the executive's daughter 11 minutes after that. Less than 10 minutes after Matria hosts its quarterly conference call, lowering its guidance (and likely the price of its stock right along with it), Arrowood suddenly executes his very first stock trade in the IRA account that Petit alone had previously managed for years. Despite the loss that he suffered a few months earlier, when Petit unloaded all of the Matria stock from his account, Arrowood decides to take his own chances on a massive investment in that very same company. By splurging on 8,452 shares of Matria, with the stock trading at $25 a share, Arrowood literally depletes the entire $213,000 cash balance sitting in his IRA account. Following that big-ticket purchase, Matria represents almost 90% of the holdings in his entire portfolio.
Dec. 5, 2007: Matria delivers official letters to all five of its potential suitors, requesting that each one submit a written buyout proposal within the next two weeks.
Dec. 19, 2007: Of the five potential suitors that previously expressed interest in a buyout deal, three submit preliminary non-binding offers at prices ranging from $26.50 to $31 a share.
Dec. 20, 2007. The day after Matria lands preliminary buyout offers from three different bidders interested in a potential deal, Petit and Arrowood begin exchanging the first of 15 different phone calls that they will make to one another in the span of one short week.
Dec. 27, 2007: Following a flurry of calls that began a week earlier, Arrowood starts his morning with yet another call to Petit and races into action just minutes after he hangs up the phone. Suddenly eager to raise a fresh mountain of cash, Arrowood proceeds to liquidate the longtime investment that originally ranked as the sole holding in his IRA account before he retired. He sells all 14,260 share of Delta stock left over from his career as a pilot at the airline, voluntarily swallowing a bitter $70,000 loss in exchange for the $282,000 that he clears to replenish his IRA account. After speaking to Petit twice again, Arrowood promptly blows most of that cash within a matter of hours by spending more than $200,000 on another 9,100 shares of Matria - at prices that have drifted below $23 a share by this time - early that same afternoon. Arrowood calls Petit one last time a couple of hours later before he ends his busy day.
Jan. 15, 2008: Less than three weeks after Arrowood doubles down on the stock, Matria publicly announces that the company has reached the advanced stages of negotiations for a possible buyout deal. The stock instantly soars from its previous close of $24.45 a share to $29.34 a share - recording an immediate 20% gain - on mere news of a likely buyout alone. After purchasing his initial stock in Matria at $25, then boosting his position at prices below $23 a share the previous month, Arrowood manages to record a handsome $94,000 gain on his well-timed trades before the company even announces a concrete deal. Matria will actually go on to fetch a far more generous price of $39 a share a couple of weeks later, with one of its five original suitors - already conducting due diligence on the company back when Arrowood purchased his first block of stock - emerging as the ultimate buyer in the end.
The SEC found that chain of events fishy enough to suggest likely insider trading. Four years later, with Matria long since swallowed and MiMedx now relying on Petit as its turnaround CEO, the SEC officially filed charges against both the veteran corporate executive and the retired pilot suspected of striking it rich on a generous favor from his longtime friend.
Dutifully rushing to Petit's defense, MiMedx automatically responded to the SEC complaint with a public display of support for its embattled chief. After that, however, MiMedx spent the next two years largely ignoring the dangerous charges that now threaten to end his celebrated reign.
MiMedx never bothered to disclose the pending SEC complaint in any of its official regulatory filings until last summer, for example, when the company suddenly added a new warning to the quarterly report that it issued the day after the judge refused to dismiss the charges against its CEO and cleared the way for a rare courtroom trial instead. With the prospect of a high-profile trial attracting some unwelcome media attention, practically forcing the company to acknowledge the SEC complaint that it had failed to mention in its seven previous financial reports, MiMiMedx finally acknowledged the pending charges by slipping a brief disclosure into its second-quarter report for last year underneath a section entitled "We depend on key personnel."
When MiMedx filed its next quarterly report a few months after that, however, the company reverted back to form by inexplicably removing that disclosure even as the case moved closer toward a risky trial. Indeed, before MiMedx even got a chance to issue its next financial report, the court officially scheduled Petit for a four-day trial set to begin before the end of this month. Spared from an immediate trial by scheduling conflicts that postponed the original court date, but likely by no more than a month or two, MiMedx retrieved the disclosure that it had previously discarded and - looking forced once again - acknowledged the pending charges against its CEO in its recent 10-K filing, with the threat now posed by an imminent trial proving virtually impossible to ignore.
Otherwise keeping its mouth shut and hoping for the best, MiMedx continues to bank on Petit to shake the stubborn charges that still linger more than two years after the company first dismissed them as a legitimate danger. Despite the unwavering faith that the company has maintained in its CEO throughout his courtroom setbacks, however, his second-in-command (and most obvious heir to the throne) seemed almost rattled when suddenly faced with heightened odds of trying to fill those giant shoes.
Starting the day before the judge officially released his decision to uphold the charges against Petit and continuing on the actual date of that ruling, MiMedx President William "Bill" Taylor proceeded to cash out a mountain of cheap stock options a full seven years ahead of their distant expiration date. After scoring a cool $1 million on those rare insider sales, Taylor still managed to clear more than $850,000 even after covering the cost of exercising another 200,000 cheap options to quietly replace all of the pricey shares that he had just sold.
Granted, after working alongside the popular MiMedx leader for so many years, Taylor understands firsthand just how much Petit means to the bleeding company and its senior management team. Of course, Petit makes that pretty clear to the general public, too. After all, he seems to remind the world every chance that he gets.
Just look. As always, his words speak for themselves.
"Fiscal year 2013 was an exceptional year for MiMedx," Petit boasted during the company's latest quarterly conference call. "We faced a number of hurdles that may have crippled an organization with a less seasoned executive team. We came out of the year with a substantial degree or organizational maturity from the 2013 challenges and are a far stronger and better-prepared organization to lead (our) various opportunities …
"On the reimbursement front, fortunately or unfortunately, because of my tenure in the industry - 47 years - I have been involved with health plans for the majority of that period of time. I know a lot of people. I'm experienced more than anybody can even imagine … I am very optimistic about what we're doing, but it is something I'll work on every day. I'm looking forward to the day that I can work on some other things, but reimbursement is the very key to a company like ours - our future …
"In summary, we continue to feel very strong as a company that has some wonderful opportunities. (NYSEARCA:AND) we have the right management team in place at the right time to explore these opportunities in what should be a very optimal fashion."
Point made. And taken. Yet again.
Disclosure: The owners of TheStreetSweeper established a short position in MDXG prior to the publication of this article, and they stand to profit from any future declines in the price of the stock. As a matter of policy, however, TheStreetSweeper prohibits members of its editorial team from taking any financial positions in the companies that they cover. To contact Melissa Davis, senior editor of TheStreetSweeper and the author of this story, please send an email to firstname.lastname@example.org.
Additional disclosure: While the owners of TheStreetSweeper hold a short position in MDXG, the author of this story holds no financial position in the company at all.