A painful way to relieve pain.

This case could really get under your skin. Literally.

On December 19, 2023, the SEC charged the former CEO of medical device startup Stimwave Technologies Inc., with defrauding investors out of approximately $41 million by making false and misleading statements about one of the company's key medical device products. The SEC complaint indicates that the medical device was comprised of several components, one of which was a fake, non-functional component made solely of plastic that was implanted into patient's bodies.

The product was meant to help treat chronic pain in peripheral nerves away from the spinal cord using electrical currents.

The non-functional component in the product served no medical purpose, but it was included as part of the device in order to make the product financially viable for doctors to purchase. Ironically, the FDA has approved a prior version of the product that included a "functional receiver", but these receivers were found to be too large to implant in some cases and this issue spawned the idea of including the smaller "fake receiver".

This case includes a grab bag of bad actor allegations including false and misleading statements, creation of a fake product, misleading investors about the product, deceiving doctors, defrauding Medicare and health insurance companies, causing patients to have unnecessary surgeries, and overstatements of historical revenue and revenue projections. Phew!

In a lesson to board members, auditors and regulators, beware of the executive who wears too many hats in the organization. A person with multiple functional roles within a company provides the opportunity to abuse their powers. The defendant, Laura Tyler Perryman, was the co-founder and co-CEO...and co-Chair of the Board...and directed the company's operations, product design, finance and investor relations functions.

The SEC complaint states, "She had her own password to personally input financial information into the Company’s bookkeeping software, which was used to keep track of revenues and cash flow numbers. She also personally interacted with the doctors and medical practices that bought Stimwave’s products, and even signed sales contracts that set forth the negotiated prices each customer had agreed to pay."

A well-planned organization structure with adequate segregation of duties and functions is critical to avoid internal control failures, potential fraud, and abuse.