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In Securities Fraud Trial of MiMedx Shambarry of SEC Only Reviewed 2015 Not Other Years

By Matthew Russell Lee, Patreon
BBC - Guardian UK - Honduras - ESPN

SDNY COURTHOUSE, Nov 12 –William Taylor and Parker H. Petit were charged with conspiracy to commit securities fraud with respect to MiMedx. 

On October 5 U.S. District Court for the Southern District of New York Judge Jed S. Rakoff held a pre-trial proceeding. Inner City Press covered it, below. On October 26, the trial began, and Inner City Press live tweeted it. Now here and below.

  On November 10, an Atlanta-based auditor of MiMedx, then and now working for Cherry Bekaert, under government questions said that a $200,000 payment to Mark Brooks, characterized as a bribe, should have been discounted from the reported earnings, according to GAAP.

 But on November 11 under cross examination, the auditor admitted that John Cranston was his main contact at MiMedx, and was shown that Cranston was on the e-mail chain about the payment to Mark Brooks. So shouldn't Cranston have told the auditor?

  Inner City Press live tweeted the afternoon session on November 11, here:

Gov witness, seemingly the last, is SEC Financial Economist Carina Shambarry. There was another sidebar with Judge Rakoff before she started. AUSA: Did you review MiMedx? A: Yes. AUSA: Who asked you?

A: The US Attorney's Office... I looked at 2015 purchase orders

Shambarry: This is the inflated revenue of MiMedx for the 4th quarter of 2015... inflated by $2,990,675... that is, by 6.12%. They still missed guidance by about $600,000.

Now comes cross examination of Carina Shambarry. Q: So this stock sale by Mr Taylor was before any allegation of wrongdoing, right?

AUSA: Objection! Judge Rakoff: Lay a foundation.

Q: Were you given any info about purchase orders before the end of June 2015? A: No Now counsel says they're about to move on to another topic, suggests breaking for the day. 

Judge Rakoff: I'm disappointed, but I'll bear up. Come to the sidebar. After a time, to jury: The gov will wrap up tomorrow. The defense will put on a couple of witnesses. 

Judge Rakoff: We'll have the government's closing tomorrow afternoon, defense's on Friday. You can start deliberating sometime on Monday. We need to keep the pressure on. See you tomorrow at 9:45. [Jury leaves] Judge Rakoff, to lawyer: Let's make some motions.

Defense: We do have motions to make. Can we take a five minute break? Judge Rakoff: Sure. We'll deem that these motions are being made at the end of the government's case. Thread will continue.

Defense returns with a Second Circuit citation, 971 F.3d 380, about when making further objections would be unavailing - asks Judge Rakoff if that's the case here. It seems so. Talk turns to how the jury should be told about the power to grant immunity.

AUSA arguing that the evidence supports an instruction on conscious avoidance...

Judge Rakoff: Some judges don't like counsel to quote principles of law in summation. I am not one of those. Just make sure you quote my instructions, and not something you make up.

Judge Rakoff: You can says, the Government didn't meet its burden because no evidence of X or Y. What you cannot say is, They didn't call Mr. Jones as a witness... It's been a long day, and I still have to teach at Columbia."

  On the morning of November 12, the defense got Ms. Shambarry to admit she had not reviewed how bonuses were paid to Petit and Taylor in 2013 and 2015 - that is, whether they would have gotten the same bonus whether or not they early-recognized revenue. The cross examinations were punctuated by objections, many of them sustained. But still the point was made. Next up: closing arguments.

  Watch this site.

 On November 9, after the AUSA said now the government might close its case on November 11, Veterans Day, Judge Rakoff said he had noticed - and that he had notice that the jurors did not appear bored by focused. He congratulated both sides' lawyers and told them to keep it up. So will we as the trial winds down.

  On the morning of November 6, Bill Taylor's lawyer cross examined a government witness about why he had not complained internally if he thought the deal with Mark Brooks' company was wrong. It all got reported to Pete [Petit], he answered, adding that MiMedx General Counsel Lexi Hayden did whatever Petit said.

 The government on re-direct tried to rehabilitate him, that he had been afraid of Petit's retaliation and had a family to support. But what about Taylor?

 On the afternoon of November 6, talk turned to an informal application for a loan from Capital One by Jerry Morrison, whose business was said to be the sale of human tissue (for medical purposes). After a cooperator, or witness with a Non Prosecution Agreement, the AUSA said the government may rest its case by the end of next week. Judge Rakoff said he'll draft jury instructions and that the charging conference shouldn't take more than 72 hours, "bring your sleeping bag." We'll continue on this.

  On the morning of November 5, cross examination of a government witness who worked for previous witness Carlton continued, focusing on his role as an "advocate" for Mark Brooks, and his characterization of the $200,000 payment to Brooks as being a bribe.

There were diversions into a text message about pizza -- "I like pizza too much, that's my problem," the witness said, perhaps ingratiating him to the jury. Judge Rakoff told the jurors to take 11 am to 12:05 pm  for lunch, as he gave a Zoom speech to NYU; he told the lawyers to return at 12:01.

Day 5, Oct 30: Witness: Brooks had a lot of complaints, so I don't remember what was per se settled... We got the order afterwards. Defense: Call up Gov Exh 1018. Take a look at this. This is an email from Mr Petit to Mark Brooks, right? Witness: Right.

We're back. Carlton still on the stand. Q: You see Mr. Carlton this email says Mr Brooks had to forego the stock, for the $200,000? Carlton: Yes. Q: And Mr. Petit was on the email, as you were, and said - Judge Rakoff (to jurors) This is for state of mind 

Q: You wrote that the $200,000 to Mr. Brooks was for lost business? Carlton: Not the case. It was for the stock. 

Q: So you sent Bill [Taylor]'s email to Bassam? Carlton: Yeah because he missed the first one.

Q: But Mr Taylor's email said repurchase the product. It does not say returned.

 AUSA: Objection! Asked and answered!

Judge Rakoff: I'll let it go for now... Have a good weekend.

 [On the morning of October 30, Inner City Press formally asked for access to the government exhibits in this US v. Petit case. Watch this site.]

Day 4, Oct 29: AUSA: Government offers Exhibit 1134... Mr. Taylor wrote to Pete Petit and you. What did he say?

A: This will becoming a revenue recognition issue.

Q: You testified that the revenue numbers were too high, right? A: Aggressive, I wouldn't say unrealistic. Q: Your testimony is that it was not unrealistic? A: We always had a high growth number.

Q: On the sales side, you thought the tender would happen? Objection. Overruled. A: We felt confident we would win the tender.

Q: GX1098, you testified about this email from you to many at MiMedx, including Brent Miller - he reported to Mr. Taylor? A: Yes

Q: This is your email to Bassam al Hajj, let's read it - it is our expectation the tender will be issued in March 2016-
Objection, the relevance of his expectation. Overruled.
A: It's what I was hoping for.

Q: But a right for repurchase, as it's phrased in the email, is different from a right of return, correct?  A: In the negotiation, we always called it right of return. But yes.

Q: So Bill Taylor had a hostile relationship with Mark Brooks, right? A: Yes. Q: Because MiMedx was trying to sell into Texas to end users, around distributors, they talked about that, right? Objection to hearsay! Judge Rakoff: I'll grant it on asked and answered.

Q: But you only get immunity if you tell the truth as defined by the prosecutors, right? Witness (with immunity) - I'm not sure who decides on truth. Q: Nothing further. Judge Rakoff: Ladies and gentlemen, I think that's it. Have a good evening.

Addendum: After jury leaves, Petit's lawyer previews his cross of witness Carleton tomorrow: They call the $200,000 payment a bribe, but it was a negotiated settlement. Let me put the Rule on the record- Judge Rakoff: Oh, a Rule. I'm learning so much in this trial

Petit's lawyer cites to Judge Rakoff his fellow judge Kaplan's decision in US v. Stein (for some reason using only the Westlaw citation).

Judge Rakoff: I've read it.... Last I heard, when the US brings a charge, that's not the end of the story. We have a trial.

Petit's lawyer says he'll file documents with the Court and the government overnight.

Inner City Press: So when will those be docketed? In any event, NOW the trial day, Day 4, is done.

Day 3, Oct 28: Day 3 - controller Anderson still on the stand, now cross by William Weinreb for Taylor

Weinreb: Mr. Anderson, you testified that customers were paying later than provided for under the purchase order, correct? Anderson: Correct. Weinreb: Customers whose revenue has been recognized upon shipment? AUSA: Objection! Judge Rakoff: Overruled.

Judge Rakoff returns from a sidebar and himself asks Anderson a question: Did this cause you to look further into the situation? Anderson: Yes. Judge Rakoff: The objection is sustained. Followed by another objection, based on vagueness. [This could take a while]

Weinreb: Do you remember MiMedx general counsel Lexi Hayden (sp) being there, taking notes? AUSA: Objection! Judge Rakoff: Sustained. Weinreb: Was someone taking notes? A: Yes Q: Was it Lexi Hayden? A: Yes. [Cured]

Now we're onto the Saudi deal: First Medical, payments conditioned on tender by Saudi minister of health. Weinreb asked about "right of return" - [not what's usually meant in Saudi by right of return]

Still re-direct of MiMedx controller Anderson AUSA: You were asked by defense lawyers about your conversation with the audit committee? Anderson: Yes. AUSA: ... I'm done. Judge Rakoff: Any re-cross?

Weinreb: Who was taking notes? Let me show your a document Judge Rakoff to jurors: These documents can be used to refresh a witness' recollection, but the notes are not evidence. Weinreb: Look at page 12, down to the words 'it sounds'... no further questions. Judge Rakoff: Lunch break for an hour.

[The next witness in #MiMedx trial, who will begin at 2 pm, has just been given an immunity deal. And, apparently Parker Petit's lawyer has something she wants to bring up to Judge Rakoff at 1:45 pm, before this next witness' direct examination.]

The witness with immunity was a VP at #MiMedx. He is describing Monday morning meetings about revenue and meeting guidance, attended by Petit, Taylor, the 3 EVPs and VPs at the witness' level. AUSA: Top line revenue? Witness: Total sales added up.

 ...So in this email, Mr. Petit says, Typical analysis, no leadership. AUSA: So Mr. Carlton, these are your text messages? Carlton: Yes. AUSA: What does P.O. mean? Carlton: Purchase order.

Judge Rakoff is telling the parties, "with apologies," to clear out - he has another matter in 5 minutes.

Day 2, Oct 27:  Judge Rakoff is reviewing again Juror #4's prostate, & another juror who didn't say she lives in Queens (not in the Southern District)....

They're back from sidebar - Judge Rakoff tells Juror #4 is is "an excellent juror," so just raise his hand when he needs to go to bathroom. He responds: He can't hold it on the train down from the Bronx. Judge Rakoff: Let's see how it goes today.

Judge Rakoff: We have all the jurors except Alternate Number Two. Defense Lawyer: We are all getting tested for COVID, we are working in a pod. Can I pass documents to my pod-mate? Judge Rakoff: Partners don't know anything about documents, so sure.

AUSA: The defendant has a website about the allegations. We ask that the jurors be told not to look online. And that Mr. Petit lost a son to cancer, we understand the defense does not intend to raise it. But we will be putting in his SEC testimony...

 OK, Alternate Juror 2 has arrived, and the direct examination of MiMedx accountant continues. To be continued

 MiMedx redux: Witness: When I met Mr. Petit, I was not concerned I'd be fired at that time. Q: They why'd you send the email? Witness: I was uncomfortable with the revenue recognition.

 Q: You told Mr. Petit you didn't think it was about his integrity? Witness: Correct. I wasn't aware of any facts that hadn't been disclosed to me. Now with jury out to lunch, the lawyers are again discussing Juror #4's prostate. Both sides agree to strike him. Judge Rakoff agrees. Judge Rakoff: Sidebars should be in the robing room because everyone can hear them when we do them here, due to social distance

 Lunch break is over, and Judge Rakoff asks if he has to deal with multi-colored exhibit list now. No, AUSA says, not given what the defense has said about the length of cross. Judge Rakoff: Juror 14 wants off, due to financial difficulties - daily commute costs

Judge Rakoff: Juror 14 does not have a credit card and can't afford out of checking account. The solution, I think, is to see if she can get paid commuting funds in advance. Let's bring in the jury.

[Inner City Press' sense is that some jurors during voir dire didn't understand how long the trial was going to be, or how boring (?) or financial / accounting it would be] Deputy: Jury entering the courtroom! Judge Rakoff: Please be seated. Cross-examination.

 Jennifer Loeb of Freshfields, for Pete Petit: Mr Anderson, You understand Mr. Sankin (sp) had evaluated your concerns you raised in your email? AUSA: Objection! Judge Rakoff: Sustained. Loeb: May we approach? [Sidebar]

 Judge Rakoff, returning: Ladies and gentlemen, you may wonder why we have sidebars. It's so the lawyers can tell me what they expect the testimony to be. Let's proceed. Loeb: Mr. Sankin told you everyone disagreed with your concerns?

 Anderson: Correct.

Judge Rakoff is commending to the lawyers the US v. Simon case from 1960 ("when you were all unborn or in your knickers") for the proposition that compliance with GAAP doesn't mean you can't be convicted. Judge Rakoff: How many gov lawyers are here? 3.

To be continued.

Day 1, Oct 26: Assistant US Attorney Daniel Tracer's open statement explains "revenue.. ladies and gentlemen, hitting the guidance was critical to the defendants. So they cheated and lied to make sure they met their guidance. MiMedx sold skin patches to distributors...

AUSA Tracer: They report the revenue before they get it. They recognized the revenue as soon as they shipped. It's allowed but only if certain requirements are met. If not met, you can't - and it's a crime to lie to auditors.

Now Pete Petit's lawyer says, When you look at the world through windows that are dirty, everything looks dirty. But this is far from a typical fraud case. All you'll see is the sale of real products, for real money.

Defense lawyer: Pete Petit is a self made man. But he is not an accountant. He came back into business in 2009 to rescue MiMedx. He probably met the definition of a workaholic. He pressed the staff to meet sales goals. He was tough and demanding.

Now it's Bill Taylor's lawyer: The US claims my client, not an accountant, should go to jail for the timing of revenue recognition. They don't even say he got money on the side. You're going to be here for a long time over complex accounting rules. He's innocent.

NOTE: Taylor's lawyer is describing a contract MiMedx had with the Saudi Arabia government. Inner City Press' interest in this trial is even more piqued...

Now on the witness stand: former Comptroller of MiMedx, who came from Lilly.  AUSA: Why did you take the position if the compensation was lower?

Witness: It fit where I wanted to go in my career. I was interviewed by Pete Petit.

Judge Rakoff is letting the Petit jury go for the day at 3:40 (he has a sentencing scheduled for 4 pm). He asks for a sidebar with Counsel. "Juror Number 4 wants to inform us of further information."

The issue involves bathroom breaks; Juror 4 says his prostate condition requires use of bathroom every 15 minutes which wasn't done today.  Both sides say, Let's wait and see.

Judge Rakoff: 30 years ago I was giving a summation in Alexandria, Virginia, a juror raised his hand and asked to go to the bathroom. Defense asks that government witnesses not dial in. OK

At the final pre-trial conference Judge Rakoff answered more than 30 questions, ranging from whether paper exhibits will be accepted (they are not favored but will be accepted on cross-examination) to if the defense lawyers could bring food in. 

  Judge Rakoff noted that the SDNY cafeteria is open, and he doesn't expect lawyers to bring food into his courtroom. He said to expect an audio feed - as it should be, despite a recent audio-less sentencing in EDNY, here - but not a defense lawyer's "war room" like T-Mobile had in their antitrust bench trial last year.  

At the end of the proceeding it emerged that there may be a request to put off the whole thing.

 Judge Rakoff said he wouldn't prejudge it. But Inner City Press wrote that would not bet on this motion being granted. And it was not.

The case is US v. Petit et al., 19-cr-850 (Rakoff)


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