A lesson in disclosure at Wright Medical Group…
By way of background, Wright Medical is an orthopedic medical-device maker that last fall settled [PDF] a U.S. Justice Department investigation into its relationship with surgeons, involving the company’s hip and knee products. In addition to paying $7.9 million, the company entered into a deferred prosecution agreement, admitting no wrongdoing but promising to keep to the straight and narrow in return for seeing charges dropped at the end of four years. Since then, Wright Medical’s CEO quit, and it forced out another executive. To all appearances, these problems seemed to be receding into the past.
Then on Thursday last week, the company issued an earnings release and disclosed that three other executives had resigned “without cause” (and thus without severance). Maybe more significantly, it also said the U.S. Attorney that oversaw its settlement “believes that the Company has knowingly and willfully breached material provisions of the DPA.” The company, Wright Medical noted in the press release, has three weeks to respond before any action is taken — in other words, it can try to persuade the prosecutor not to come down on the company like a ton of bricks.
Yet if you had read Wright Medical’s filings carefully — or saw our FootnotedPro report on the subject Wednesday evening — you would have been prepared for this, and had nearly a day’s head-start on other investors. Just glancing at the company’s press releases (as every news outlet we could find seems to have done), would have left you flat-footed.
Here’s why: The company issued an earlier press release and 8-K the previous day. This Wednesday press release disclosed the company’s preliminary quarterly results — and mentioned in an offhand sort of way that it had received the results of an internal investigation, which it passed along to the authorities. Here’s the bulk of that section:
“The Board received a report on the investigation and notified the independent monitor and the U.S. Attorney’s Office for the District of New Jersey (USAO) pursuant to the Deferred Prosecution Agreement (DPA). The same notice was also provided to the Office of the Inspector General of the U.S. Department of Health and Human Services (OIG). The Board also took a number of measures to enhance the Company’s compliance environment.”
It goes on to say that “communications” with the authorities “are ongoing.” No mention of, for example, potentially willful breaches of the settlement agreement. Yet, in the 8-K that accompanied that press release, Wright Medical warned precisely that prosecutors might have reason to be suspicious. Here’s the key sentence, missing entirely from the press release, that caught our attention in the 8-K:
“On May 4, 2011, pursuant to Paragraph 20 of the DPA, WMT provided written notice to the independent monitor and the USAO of ‘credible evidence of serious wrongdoing.'”
Passing along the results of an internal inquiry “pursuant” to a prior settlement vs. notifying the authorities of “credible evidence of serious wrongdoing” — strikes us as being pretty different. Moreover, in Wednesday’s 8-K, Wright Medical went on to warn that, should the U.S. Attorney’s office conclude that the company “has knowingly and willfully breached” the agreement, it
“could expose us to significant liability including, but not limited to, extension of the term of the DPA by up to 6 months, exclusion from federal healthcare program participation, including Medicaid and Medicare, which would have a material adverse effect on our financial condition, results of operations and cash flows, potential prosecution, including under the previously-filed criminal complaint, civil and criminal fines or penalties, and additional litigation cost and expense.”
In other words, Wright Medical found serious new problems, prosecutors could conclude (as they did, within a day) that the problems were willful, and all of this could have dire consequences for the company. None of that was in the press release, or in the articles based on the press release that we found.
Armed with that kind of knowledge, you might have been able to avoid some of the 6.4% decline in Wright Medical’s shares on Thursday. In fact, in after-hours trading last Wednesday, the stock was actually up 2% as we put together our report; it opened down 5% on Thursday morning. The stock only recovered a little of that ground on Friday.
Nor are we convinced the company is really being much more transparent than earlier in the week. For one thing, even the second press release skipped over the fact that the company could see serious repercussions if it can’t convince prosecutors to back off. And Wright Medical also managed to omit another detail. Specifically, (emphasis ours)
“that the USAO believes that WMT has knowingly and willfully committed at least two breaches of material provisions of the DPA.”
Where did we find that bit if it wasn’t in the press release? You guessed it: in the 8-K that Wright Medical filed with Thursday’s press release. (Scroll down to near the bottom of the last page to find it.)
As we said, it pays to read the fine print in addition to the spin.