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`UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF COLUMBIA
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`SECURITIES AND EXCHANGE COMMISSION
`100 F Street NE
`Washington, DC 20549,
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`
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`Case No. 22-CV-2296
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`
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`JURY TRIAL DEMANDED
`
`
`
`v.
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`BRIAN K. HUTCHISON
`c/o Davis Wright Tremaine
`1001 G Street NW, Seventh Floor
`Washington, DC 20001,
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`
`
`
`
`
`Plaintiff,
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`Defendant.
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`COMPLAINT
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`Plaintiff Securities and Exchange Commission (“SEC”) alleges as follows:
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`SUMMARY
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`1.
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`This is a disclosure fraud and accounting fraud case in which Brian K. Hutchison
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`(“Hutchison”), the CEO of RTI Surgical Holdings (“RTI”), masked disappointing sales numbers
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`from Q1 2015 through Q2 2016 (the “Relevant Period”) by urging his subordinates to ship future
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`orders ahead of schedule and report the revenue early. Recognizing revenue for early shipments
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`jeopardized RTI’s ability to meet its revenue guidance for future quarters and alienated its
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`customers, who demanded discounts to accept product early and reduced their subsequent orders,
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`putting RTI further behind its aggressive revenue projections. Hutchison then repeatedly misled
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`the market, in both RTI’s periodic filings and his own public statements, to conceal the truth
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`behind RTI’s seemingly robust revenues.
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`2.
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`Throughout 2015, Hutchison approved a series of aggressive quarterly revenue
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`targets that RTI announced to investors and the market. Hutchison knew that he would receive
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`bonus compensation in the form of cash and stock awards if RTI hit its revenue targets. But
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`Hutchison found RTI repeatedly unable to reach its revenue targets with sales from the quarter.
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`Desperate to reach his targets, Hutchison urged his managers to ship products that were not due
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`to be sent until the next quarter — weeks or months in advance. By recognizing revenue for
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`these orders in the quarter they were shipped, not the quarter when RTI’s customers wanted them
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`to be delivered, RTI found a way to show investors that it had met its revenue targets. But this
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`practice of “pulling forward” revenue merely postponed the inevitable. RTI found it more and
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`more difficult to meet its quarterly guidance as it stripped more and more revenue from future
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`quarters.
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`3.
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`In 2016, Hutchison faced a cascade of problems that placed his position as CEO
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`in jeopardy. Although he had publicly announced an ambitious goal of achieving $500 million
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`in annual revenue, RTI’s reported revenue was only $282 million in 2015. Hutchison’s allies on
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`the Board of Directors resigned, and when the next Chairman of the Board was selected,
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`Hutchison was passed over. An influential Board member unexpectedly announced that he
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`would not support an acquisition championed by Hutchison. And an RTI investor launched a
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`proxy fight, blaming Hutchison for RTI’s poor financial performance. In the midst of these
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`challenges, RTI’s stock price dropped to a two-year low in Q1 2016.
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`4.
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`At Hutchison’s direction, RTI continued to scour its order books at quarter-end
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`for orders that were scheduled to be delivered in future quarters, to ship those orders early, and
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`then to book the revenue in the current quarter. Although Hutchison knew that RTI was
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`depleting future orders, angering customers, and in some instances violating accounting rules, he
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`publicly and falsely attributed RTI’s apparent success to growth in orders, claiming that RTI had
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`2
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`benefited from “higher-than-expected orders,” “industry consolidation,” or orders that “just keep
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`coming in.”
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`5.
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`Hutchison was ultimately unable to save his job. In August 2016, at the request
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`of RTI’s Board of Directors, Hutchison announced his resignation. In December 2016, he
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`formally stepped down.
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`6.
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`On March 16, 2020, following the start of an investigation by the SEC, RTI
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`announced that it would begin an internal investigation into its “revenue recognition practices
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`regarding the timing of revenue.” Over the next two days, RTI’s stock price dropped more than
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`27%, from $2.75 to $1.99. RTI’s investigation culminated in a five-year restatement, issued in
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`June 2020. In its restatement, RTI acknowledged improperly recognizing revenue for shipments
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`sent early to customers without advance approval. RTI also determined that its disclosure
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`controls and procedures were ineffective and that there were material weaknesses in its internal
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`controls over financial reporting.
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`7.
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`Hutchison has not reimbursed RTI for the bonuses and other incentive- and
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`equity-based compensation he received from RTI, or for his substantial profits from sales of RTI
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`stock after he left RTI.
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`8.
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`By engaging in the misconduct described herein, Hutchison violated antifraud,
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`internal accounting controls, and books-and-records provisions of the Securities Exchange Act of
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`1934 (“Exchange Act”), Securities Act of 1933 (“Securities Act”), and Sarbanes-Oxley Act of
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`2002 (“Sarbanes-Oxley Act”), and the rules thereunder, and he aided and abetted violations by
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`RTI.
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`9.
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`The SEC seeks injunctive relief, civil penalties, disgorgement, a reimbursement
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`to RTI of Hutchison’s incentive-based compensation and profits from his sales of RTI stock, and
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`other appropriate and necessary equitable relief.
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`JURISDICTION AND VENUE
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`10.
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`This Court has jurisdiction over this action pursuant to Sections 20 and 22 of the
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`Securities Act [15 U.S.C. §§ 77t and 77v], Sections 21 and 27 of the Exchange Act [15 U.S.C.
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`§§ 78u and 78aa], and 28 U.S.C. § 1331.
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`11.
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` Venue is proper in this Court pursuant to Section 22(a) and (c) of the Securities
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`Act [15 U.S.C. § 77v(a), (c)] and Section 27(a) and (b) of the Exchange Act [15 U.S.C.
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`§ 78aa(a), (b)], because certain of the acts, practices, and courses of conduct constituting the
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`violations alleged herein occurred within the District of Columbia. Hutchison and RTI filed with
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`the SEC in this judicial district multiple materially false and misleading documents.
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`Additionally, Hutchison made false and misleading statements and omissions in at least five
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`different Forms 8-K that were filed with the SEC in this judicial district.
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`12.
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`Hutchison, directly and indirectly, made use of means or instruments of
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`transportation or communication in interstate commerce, or of the mails, or of any facility of a
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`national securities exchange in connection with the acts, practices, and courses of conduct
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`alleged herein.
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`DEFENDANT
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`13.
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`Brian K. Hutchison (“Hutchison”), age 63, resides in Asheville, North
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`Carolina. Hutchison served as RTI’s Chief Executive Officer and as a member of its Board of
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`Directors from 2001 through December 2016, when he left RTI. As RTI’s CEO, Hutchison
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`4
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`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 5 of 42
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`signed each of RTI’s Forms 10-Q and Forms 10-K and participated in each of RTI’s earnings
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`calls during the Relevant Period.
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`OTHER RELEVANT ENTITY
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`14.
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` The following entity relevant to this action has been charged by the SEC in a
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`separate action and proceeding: Surgalign Holdings, Inc. (formerly known as RTI Surgical
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`Holdings, Inc. and RTI Surgical, Inc. (“RTI”)) is a Delaware corporation with its principal
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`place of business in Deerfield, Illinois. During the Relevant Period, RTI’s common stock was
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`registered with the SEC pursuant to Section 12(b) of the Exchange Act and traded on the
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`NASDAQ exchange, under the symbol “RTIX.”
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`BACKGROUND
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`A. RTI Manufactured, Sold, and Shipped Medical Products to Large Distributors.
`RTI manufactured and sold surgical implants, such as orthopedic and spinal
`15.
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`implants. Its Commercial division, which generated a significant portion of RTI’s revenue,
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`primarily sold RTI’s products to large distributors for resale.
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`16.
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`RTI’s Commercial division primarily relied on advance orders from major
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`customers, which typically placed orders three months in advance of their requested delivery
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`dates. This gave RTI considerable visibility into its book of future orders. RTI’s customers
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`specified their delivery dates based on their predictions of the demand for RTI’s products, their
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`capacity to inspect and store the RTI products, and other factors.
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`17.
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`RTI typically recognized revenue upon shipment of its products. Under
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`Generally Accepted Accounting Principles (“GAAP”), and specifically Accounting Standards
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`Codification (“ASC”) 605-15, which was in effect during the relevant period, RTI was required
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`to satisfy four elements at the time it recognized revenue: (1) there must be persuasive evidence
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`of an arrangement; (2) collectability must be reasonably assured: (3) delivery must have
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`occurred, meaning that the customer must have taken title and assumed the risks and rewards of
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`ownership; and (4) the price must be fixed or determinable. Until all four elements of ASC
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`605-15 were satisfied, RTI was not permitted to recognize revenue for a transaction.
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`18.
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`Under Item 303(a) of Regulation S-K [17 C.F.R. § 229.303(a) (2011)], which
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`was issued under Section 13(a) of the Exchange Act, the Management’s Discussion and Analysis
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`(“MD&A”) sections of RTI’s Forms 10-K and 10-Q were required to disclose “any known trends
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`or uncertainties that have had or that are reasonably likely to have a material favorable or
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`unfavorable impact on net sales or revenues or income.” The MD&A was also required to
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`“[d]escribe any unusual or infrequent events or transactions . . . that materially affected the
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`amount of reported income from continuing operations,” as well as “any other significant
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`components of revenues or expenses that, in the registrant’s judgment, should be described in
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`order to understand the registrant’s results of operations.”
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`19.
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`Instruction 3 to Item 303(a) of Regulation S-K required that the “discussion and
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`analysis shall focus specifically on material events and uncertainties known to management that
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`would cause reported financial information not to be necessarily indicative of future operating
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`results or of future financial condition.” 17 C.F.R. § 229.303(a). Item 303(b) of Regulation S-K
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`required discussion in quarterly reports on Form 10-Q of material changes in such known trends
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`or uncertainties. 17 C.F.R. § 229.303(b).
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`20.
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`The SEC has previously stated that the MD&A is “intended to give the investor
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`an opportunity to look at the company through the eyes of management by providing both a short
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`and long-term analysis of the business of the company.” Securities Act Release No. 6711 (Apr.
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`17, 1987). The Commission further stated, in a 2003 MD&A interpretive release: “[o]ne of the
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`most important elements necessary to an understanding of a company’s performance . . . is the
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`6
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`discussion and analysis of known trends . . . and uncertainties.” Companies should consider
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`whether information available to them “may reveal a trend or general pattern in activity” or “an
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`uncertainty.” Moreover, the Commission emphasized, when companies describe trends or
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`uncertainties, their analysis “should reveal the underlying material causes of the matters
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`described,” and companies “should consider including, and may be required to include, an
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`analysis explaining the underlying reasons or implications, [or] interrelationships between
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`constituent elements.” Commission Guidance Regarding Management’s Discussion and
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`Analysis of Financial Condition and Results of Operations (Dec. 19, 2003), available at
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`http://www.sec.gov/rules/interp/33-8350.htm. The Commission also stated that the MD&A
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`should describe “unusual or non-recurring items” about which disclosure was “necessary for
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`investors to ascertain the likelihood that past performance is indicative of future performance.”
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`21.
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`RTI’s Forms 10-K and 10-Q were also required to contain “a discussion of the
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`material factors that make an investment in the registrant or offering speculative or risky.” 17
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`C.F.R. § 229.105(a).
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`22.
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`RTI’s reliance on pull-forwards, including unauthorized early shipments,
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`disguised RTI’s true business performance and resulted in known uncertainties for RTI’s
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`business and future revenue and profits that RTI and Hutchison did not disclose. The use of pull-
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`forwards cannibalized future sales and resulted in revenue shortfalls in future quarters, which
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`RTI filled with additional pull-forwards. RTI and Hutchison did not disclose that RTI was using
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`early shipments to address revenue shortfalls, that RTI did not have enough orders to achieve its
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`quarterly revenue guidance without using pull-forwards, or that earlier pull-forwards had
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`significantly reduced the amount of available future orders. Nor did RTI or Hutchison disclose
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`that RTI was recognizing revenue prematurely for unauthorized early shipments in violation of
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`7
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`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 8 of 42
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`GAAP, or that unauthorized early shipments made up an increasingly large proportion of RTI’s
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`total early shipments over time. RTI and Hutchison also failed to disclose that RTI’s use of pull-
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`forwards jeopardized RTI’s future revenue streams when its most significant customers imposed
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`restrictions on future early shipments, and required RTI to agree to substantial discounts or forgo
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`annual fee increases to convince customers to accept pull-forwards. Further, RTI and Hutchison
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`did not disclose the use of a material one-time transaction to help achieve its revenue guidance,
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`even when that transaction made past performance unlikely to be indicative of future
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`performance.
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`23.
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`As RTI’s CEO, Hutchison was required to certify that each of RTI’s Form 10-Q
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`and Form 10-K filings “fully complies with the requirements of section 13(a)” of the Exchange
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`Act, “does not contain any untrue statement of a material fact or omit to state a material fact
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`necessary to make the statements made, in light of the circumstances under which such
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`statements were made, not misleading,” and “fairly presents, in all material respects, the
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`financial condition and results of operations of the issuer.” 18 U.S.C. § 1350; 17 C.F.R.
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`§§ 240.13a-14, 229(b)(31). Hutchison falsely certified that there were no untrue statements of
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`material fact or omissions of material fact in RTI’s Forms 10-Q and 10-K, and that those reports
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`fairly presented, in all material respects, RTI’s financial condition and results of operations,
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`when he knew that RTI had failed to disclose its reliance on pull-forwards to achieve its revenue
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`guidance.
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`B. Hutchison, RTI’s Experienced CEO, Urged Managers to Pull Forward Revenue
`From Shipments to Meet His Aggressive Revenue Targets.
`
`24.
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`Hutchison became RTI’s CEO in 2001 after a twenty-year career in corporate
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`management and finance, including roles as Controller, Vice President of Finance, Division
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`President, and Chief Operating Officer at a large medical technology company.
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`25.
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`As RTI’s CEO, Hutchison was deeply involved in RTI’s business and financials,
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`and worked to transform RTI’s business and strategy. He familiarized himself with RTI’s
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`financial statements, and developed initiatives to expand RTI’s lines of business and grow the
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`company through acquisitions, new product development, and outside investment.
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`26.
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`Each quarter during the Relevant Period, RTI provided guidance to investors
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`regarding its revenue expectations, analysts published expectations for RTI’s quarterly revenue,
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`and analysts reported on whether RTI had achieved its revenue guidance and analyst revenue
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`expectations. As CEO, Hutchison encouraged his senior managers to shift, or “pull forward,”
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`revenue from future quarters, typically by shipping orders earlier than customers had originally
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`requested, as a means of achieving RTI’s public revenue guidance, analyst revenue estimates,
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`and internal revenue targets.
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`27.
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`Adopting the euphemism “order book management” to refer to the practice of
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`pull-forwards, Hutchison regularly participated in discussions about RTI’s use of pull-forwards,
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`including during his weekly staff meetings. Hutchison set unrealistic revenue targets and did not
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`establish effective internal accounting controls, pushing employees to ship large quantities of
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`product without ensuring that they first obtained and documented customer approval.
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`28.
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`Although RTI sometimes requested customer permission to ship orders early, at
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`other times RTI sent large quarter-end early shipments without customer approval. RTI sent
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`unauthorized early shipments to each of its major customers in 2015 and 2016. Each of those
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`customers responded by instructing RTI to stop sending early shipments. Hutchison knew that
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`customers were protesting, but did not take any steps to ensure that RTI only sent shipments with
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`customer approval, or to ensure that RTI only recognized revenue for shipments that had been
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`sent with customer approval.
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`29.
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`Hutchison created an environment in which employees understood that they
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`should prioritize the achievement of revenue targets over adhering to the acceptable delivery
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`windows specified in customer orders. Specifically, although RTI employees were concerned
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`that continuing to ship early would damage RTI’s relationships with important customers,
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`Hutchison instructed his employees to continue early shipments to address revenue shortfalls,
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`and insisted that RTI needed to continue with this practice of “order book management.”
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`Hutchison also rejected conservative budgets prepared by his employees, instead insisting that
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`his employees prepare budgets that would allow RTI to achieve predetermined revenue targets,
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`including an unrealistic annual revenue target of $500 million that Hutchison had announced.
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`HUTCHISON’S MISSTATEMENTS, OMISSIONS, AND MISCONDUCT
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`A.
`30.
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`Hutchison Concealed RTI’s Improper Use of Pull-Forwards From Investors.
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`Hutchison knew that RTI was underperforming during the Relevant Period and
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`was relying on pull-forwards to achieve its revenue guidance and meet analysts’ estimates of RTI
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`revenue, and that pull-forwards thus constituted a significant component of RTI’s revenues. He
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`knew that RTI’s use of pull-forwards meant that RTI was cannibalizing and creating
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`uncertainties in future revenue and creating a constant cycle of dependence on pull-forwards. He
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`knew that pulling forward revenue from RTI’s Commercial division helped to mask poor
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`performance by RTI’s other businesses. And he knew that, under GAAP, RTI should not ship
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`orders early without customer approval or recognize revenue for unapproved shipments.
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`31.
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`Despite this knowledge, Hutchison misled investors in RTI’s SEC filings and
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`earnings calls throughout the Relevant Period about the reasons for RTI’s apparent successes,
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`and hid the truth about RTI’s condition and the risks and uncertainties that the pull-forwards
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`posed to RTI’s future revenue and business with its largest customers. Hutchison did not
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`disclose that RTI did not have enough orders to meet its revenue guidance and analyst revenue
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`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 11 of 42
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`estimates each quarter without pulling in transactions scheduled for delivery in future periods.
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`Nor did he disclose that RTI repeatedly needed to borrow from future quarters to address that
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`gap, in part because RTI had depleted its orders through earlier pull-forwards. Hutchison did not
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`disclose the risks and uncertainties created by RTI’s reliance on early shipments, including that
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`its major customers had all told RTI to stop engaging in these practices, that RTI was draining
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`orders from future quarters, and that its customers were reducing their orders because RTI was
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`sending them more inventory than they could resell. The lengths to which Hutchison went to
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`have RTI hit its revenue targets illustrates just how important these targets were to the market.
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`32.
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`By disguising the company’s true business performance and cannibalizing future
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`sales, RTI’s use of pull-forwards created an uncertainty or event that was known to Hutchison,
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`that was reasonably expected to have a material effect on RTI’s future revenue, and that caused
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`reported financial information not to be necessarily indicative of future operating results.
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`Likewise, RTI’s quarterly earnings releases, filed as exhibits to RTI’s current reports, stated that
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`RTI’s revenues had exceeded its revenue guidance without disclosing the use of or effect of pull-
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`forwards, thereby rendering the disclosures misleading.
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`i.
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`In 2015, Hutchison Concealed RTI’s Growing Reliance on Pull-Forwards.
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`33.
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`On February 27, 2015, RTI’s CFO told Hutchison that RTI had begun showing
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`“not a good trend” of generating a disproportionate amount of its revenue at the end of each
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`quarter. The next day, February 28, 2015, Hutchison learned that RTI was likely to fall short of
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`its Q1 revenue guidance, both because of shortfalls in its international sales and because RTI had
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`already shipped a large portion of its Q1 2015 orders the previous quarter. On March 23, 2015,
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`Hutchison was informed that RTI was planning to pull forward sales from Q2 2015 to achieve
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`RTI’s revenue guidance for Q1.
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`34.
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`RTI employees examined the orders received for delivery in Q2 2015,
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`determined which orders RTI could satisfy with its available inventory, and then shipped those
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`orders early to help boost RTI’s Q1 revenue and compensate for the shortfalls. RTI only met its
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`revenue guidance and analyst revenue estimates for Q1 because it had pulled forward $5.8
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`million in future orders under Hutchison’s direction and oversight.
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`35.
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`Hutchison knowingly, recklessly, or negligently hid RTI’s reliance on pull-
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`forwards from investors. On April 23, 2015, during RTI’s Q1 2015 earnings call, he was
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`specifically asked what was “driving the growth” in RTI’s business. In response, Hutchison said
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`that RTI’s “really strong growth” was continuing, and “the orders from our commercial partners
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`just keep coming in.”
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`36.
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`That same day, RTI filed a press release with the Commission announcing RTI’s
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`Q1 2015 earnings, as an attachment to a Form 8-K. In that press release, Hutchison said, “We
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`saw solid growth in the first quarter, exceeding our expectations and keeping us on track for the
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`year. . . . Based on results from the first quarter, I am confident in our ability to meet our goals
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`for the year.”
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`37.
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`As Hutchison knew or was reckless or negligent in not knowing, increased
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`orders alone did not account for the increase in RTI’s reported revenue. Hutchison knew or was
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`reckless or negligent in not knowing that RTI only met its revenue guidance by stripping sales
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`away from Q2. Hutchison’s statements were half-truths that created the false and misleading
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`impression that RTI had achieved its revenue guidance because of growth in orders, rather than
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`RTI’s aggressive efforts to pull in sales from the future.
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`38.
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`Hutchison signed RTI’s Form 10-Q for Q1 2015, which RTI filed with the
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`Commission on May 4, 2015. In that filing, Hutchison knowingly, recklessly, or negligently
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`failed to disclose RTI’s reliance on pull-forwards, namely that customer orders were not growing
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`sufficiently to allow RTI to hit its revenue targets without the use of pull-forwards, and the risks
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`and uncertainties created by RTI’s reliance on pull-forwards, specifically the risk and uncertainty
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`that the company would not meet its revenue targets in future quarters because it had already
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`booked revenue it planned to recognize in Q2. Furthermore, although the Form 10-Q stated that
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`period-over-period revenue comparisons (which were provided in the MD&A portion of the
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`filing) could be affected by variations in the timing of orders from its commercial customers,
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`Hutchison and RTI misleadingly omitted to state that pull-forwards, rather than merely customer
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`orders, were also affecting the amount of revenue that RTI was reporting during these periods.
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`39.
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`Hutchison and RTI made material misrepresentations regarding RTI’s Q1 2015
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`results and omitted to state material facts necessary, in light of the circumstances under which
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`they were made, to make their statements not misleading. Reasonable investors would have
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`wanted to know that RTI was only able to achieve its quarterly revenue guidance and analyst
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`revenue estimates by pulling forward sales from Q2. Reasonable investors would also have
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`wanted to know that the early delivery of products created a potential for a material decline in
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`RTI’s future revenue and jeopardized its ability to meet future revenue targets.
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`40.
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`In Q2 2015, Hutchison learned that RTI was again likely to fall short of its
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`quarterly guidance. At Hutchison’s weekly staff meetings with senior management and at other
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`times, his subordinates briefed him on potential pull-forwards, as well as the specific pull-
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`forwards that RTI was pursuing or had already shipped to specific customers. Hutchison
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`therefore was fully informed as to the ongoing issues with RTI’s revenues and was deeply
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`involved in the ongoing manipulation of RTI’s orders.
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`13
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`41.
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`On April 18, 2015, Hutchison received an e-mail explaining that one of RTI’s
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`largest customers, after receiving an unauthorized early shipment from RTI, had made it
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`“abundantly clear” that RTI should not “ship early” again. The e-mail also told Hutchison that
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`following this direction could result in RTI missing its Q2 forecasts because RTI had planned to
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`pull forward that customer’s Q3 orders.
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`42.
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`On June 4, 2015, Hutchison received an e-mail stating that RTI was falling short
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`of its quarterly guidance. On June 26, 2015, Hutchison sent an e-mail to his senior managers
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`announcing that although the Commercial division had already “stepped up big this quarter to
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`offset shortfalls” by using early shipments, they still had “a long way to go” to achieve the Q2
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`forecast and should “accelerate” their sales.
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`43.
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`RTI met its Q2 2015 revenue guidance and analyst revenue estimates only by
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`pulling forward $6.2 million of future orders, including shipments sent early to customers
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`without their approval. Hutchison knew or was reckless or negligent in not knowing that RTI
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`was only able to meet revenue targets by manipulating orders and pulling forward revenue from
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`future quarters. Hutchison knowingly, recklessly, or negligently failed to disclose RTI’s reliance
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`on pull-forwards to achieve its Q2 revenue guidance, and the risks and uncertainties associated
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`with that practice.
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`44.
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`In its earnings release for Q2 2015, which RTI filed with the Commission as an
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`attachment to a Form 8-K on July 30, 2015, RTI announced that its quarterly revenues had
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`“exceed[ed] guidance,” and quoted Hutchison saying, “‘Our results for the second quarter were
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`strong with revenues and earnings exceeding our expectations.’” In that filing, Hutchison
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`knowingly, recklessly, or negligently omitted to state that RTI had only exceeded its revenue
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`guidance and analyst expectations by relying on pull-forwards, creating the false and misleading
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`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 15 of 42
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`impression that RTI’s reported revenues accurately reflected its actual performance in the
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`quarter.
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`45.
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`Hutchison signed RTI’s Form 10-Q for Q2 2015, which RTI filed with the
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`Commission on July 31, 2015. In that filing, Hutchison knowingly, recklessly, or negligently
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`failed to disclose the underlying trends that were causing RTI to rely on pull-forwards, including
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`that customer orders were not growing fast enough to allow RTI to meet revenue projections
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`without pull-forwards. He also knowingly, recklessly, or negligently failed to disclose the risks
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`and uncertainties created by RTI’s reliance on pull-forwards, including that RTI might not meet
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`revenue projections in future periods because it had already recognized revenue initially planned
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`for Q3 and that RTI might alienate its customers by shipping product outside the requested
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`delivery window. Indeed, the Form 10-Q specifically stated that there had been “no material
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`change” in the risk factors that RTI had disclosed in its 2014 Form 10-K, which was filed on
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`March 4, 2015. The 2014 Form 10-K noted the risk that the company could “fail to maintain
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`existing strategic relationships” with distributors, but did not disclose that the company’s pull-
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`forward practice was exacerbating that risk. Furthermore, although the Form 10-Q stated that
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`period-over-period revenue comparisons (which were provided in the MD&A portion of the
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`filing) could be affected by variations in the timing of orders from its commercial customers,
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`Hutchison and RTI misleadingly omitted to state that pull-forwards, rather than merely customer
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`orders, were affecting the amount of revenue that RTI was reporting during these periods.
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`46.
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`Hutchison and RTI made material misrepresentations regarding RTI’s Q2 2015
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`results and omitted to state material facts necessary, in light of the circumstances under which
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`they were made, to make their statements not misleading. Reasonable investors would have
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`wanted to know that RTI was only able to achieve its quarterly revenue guidance and analyst
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`15
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`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 16 of 42
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`revenue estimates by pulling forward sales from Q3, and that the amount of revenue being pulled
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`forward had increased from Q1 to Q2. Reasonable investors would have also wanted to know
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`that RTI was recognizing revenue prematurely for unauthorized early shipments, in violation of
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`GAAP, and that these practices were harming customer relationships. Moreover, reasonable
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`investors would have wanted to know that the early delivery of products created a potential for a
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`material decline in RTI’s future revenue and jeopardized its ability to meet future revenue
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`targets.
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`47.
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`Hutchison approved revenue guidance for Q3 2015 at a level that he was told
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`“does not leave us much breathing room.” As in Q2, Hutchison was regularly informed about
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`the amount of pull-forwards, both at his staff meetings during the quarter and in a quarter wrap-
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`up memorandum he received shortly after the quarter. When RTI’s Q3 sales again fell short of
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`expectations, Hutchison wrote in an e-mail to his managers that this was “really unacceptable”
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`and that they should use early shipments to bridge the gap to RTI’s revenue guidance and
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`“deliver on our commitment to the street.” In a September 17, 2015 e-mail, Hutchison wrote that
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`he had “talked with most of the revenue folks” and warned his managers that “[w]e would all be
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`better off” if RTI did not disappoint investors by falling short of its revenue guidance.
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`48.
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`To achieve its guidance, RTI shipped $8.4 million of orders that customers had
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`placed for delivery in future quarters. This included a $2 million early shipment sent to a
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`customer at the end of the quarter without the customer’s approval. That customer e-mailed RTI
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`complaining about the unauthorized early shipment because it had caused the customer’s
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`“inventory levels [to] go sky high,” and directed RTI “to not ship ANYTHING early without
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`prior approvals.” Even though the customer had not approved the Q3 2015 delivery, RTI
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`recognized revenue for that shipment in Q3 2015, in violation of GAAP.
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`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 17 of 42
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`49.
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`Those pull-forwards were not enough to close RTI’s gap to its Q3 2015 revenue
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`guidance and analyst revenue estimates. With Hutchison’s knowledge, RTI negotiated