throbber
Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 1 of 42
`
`
`
`
`UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF COLUMBIA
`
`
`
`
`
`SECURITIES AND EXCHANGE COMMISSION
`100 F Street NE
`Washington, DC 20549,
`
`
`
`
`
`Case No. 22-CV-2296
`
`
`
`
`JURY TRIAL DEMANDED
`
`
`
`v.
`
`BRIAN K. HUTCHISON
`c/o Davis Wright Tremaine
`1001 G Street NW, Seventh Floor
`Washington, DC 20001,
`
`
`
`
`
`
`Plaintiff,
`
`Defendant.
`
`COMPLAINT
`
`Plaintiff Securities and Exchange Commission (“SEC”) alleges as follows:
`
`SUMMARY
`
`1.
`
`This is a disclosure fraud and accounting fraud case in which Brian K. Hutchison
`
`(“Hutchison”), the CEO of RTI Surgical Holdings (“RTI”), masked disappointing sales numbers
`
`from Q1 2015 through Q2 2016 (the “Relevant Period”) by urging his subordinates to ship future
`
`orders ahead of schedule and report the revenue early. Recognizing revenue for early shipments
`
`jeopardized RTI’s ability to meet its revenue guidance for future quarters and alienated its
`
`customers, who demanded discounts to accept product early and reduced their subsequent orders,
`
`putting RTI further behind its aggressive revenue projections. Hutchison then repeatedly misled
`
`the market, in both RTI’s periodic filings and his own public statements, to conceal the truth
`
`behind RTI’s seemingly robust revenues.
`
`2.
`
`Throughout 2015, Hutchison approved a series of aggressive quarterly revenue
`
`targets that RTI announced to investors and the market. Hutchison knew that he would receive
`
`
`
`1
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 2 of 42
`
`
`
`bonus compensation in the form of cash and stock awards if RTI hit its revenue targets. But
`
`Hutchison found RTI repeatedly unable to reach its revenue targets with sales from the quarter.
`
`Desperate to reach his targets, Hutchison urged his managers to ship products that were not due
`
`to be sent until the next quarter — weeks or months in advance. By recognizing revenue for
`
`these orders in the quarter they were shipped, not the quarter when RTI’s customers wanted them
`
`to be delivered, RTI found a way to show investors that it had met its revenue targets. But this
`
`practice of “pulling forward” revenue merely postponed the inevitable. RTI found it more and
`
`more difficult to meet its quarterly guidance as it stripped more and more revenue from future
`
`quarters.
`
`3.
`
`In 2016, Hutchison faced a cascade of problems that placed his position as CEO
`
`in jeopardy. Although he had publicly announced an ambitious goal of achieving $500 million
`
`in annual revenue, RTI’s reported revenue was only $282 million in 2015. Hutchison’s allies on
`
`the Board of Directors resigned, and when the next Chairman of the Board was selected,
`
`Hutchison was passed over. An influential Board member unexpectedly announced that he
`
`would not support an acquisition championed by Hutchison. And an RTI investor launched a
`
`proxy fight, blaming Hutchison for RTI’s poor financial performance. In the midst of these
`
`challenges, RTI’s stock price dropped to a two-year low in Q1 2016.
`
`4.
`
`At Hutchison’s direction, RTI continued to scour its order books at quarter-end
`
`for orders that were scheduled to be delivered in future quarters, to ship those orders early, and
`
`then to book the revenue in the current quarter. Although Hutchison knew that RTI was
`
`depleting future orders, angering customers, and in some instances violating accounting rules, he
`
`publicly and falsely attributed RTI’s apparent success to growth in orders, claiming that RTI had
`
`
`
`2
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 3 of 42
`
`
`
`benefited from “higher-than-expected orders,” “industry consolidation,” or orders that “just keep
`
`coming in.”
`
`5.
`
`Hutchison was ultimately unable to save his job. In August 2016, at the request
`
`of RTI’s Board of Directors, Hutchison announced his resignation. In December 2016, he
`
`formally stepped down.
`
`6.
`
`On March 16, 2020, following the start of an investigation by the SEC, RTI
`
`announced that it would begin an internal investigation into its “revenue recognition practices
`
`regarding the timing of revenue.” Over the next two days, RTI’s stock price dropped more than
`
`27%, from $2.75 to $1.99. RTI’s investigation culminated in a five-year restatement, issued in
`
`June 2020. In its restatement, RTI acknowledged improperly recognizing revenue for shipments
`
`sent early to customers without advance approval. RTI also determined that its disclosure
`
`controls and procedures were ineffective and that there were material weaknesses in its internal
`
`controls over financial reporting.
`
`7.
`
`Hutchison has not reimbursed RTI for the bonuses and other incentive- and
`
`equity-based compensation he received from RTI, or for his substantial profits from sales of RTI
`
`stock after he left RTI.
`
`8.
`
`By engaging in the misconduct described herein, Hutchison violated antifraud,
`
`internal accounting controls, and books-and-records provisions of the Securities Exchange Act of
`
`1934 (“Exchange Act”), Securities Act of 1933 (“Securities Act”), and Sarbanes-Oxley Act of
`
`2002 (“Sarbanes-Oxley Act”), and the rules thereunder, and he aided and abetted violations by
`
`RTI.
`
`
`
`3
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 4 of 42
`
`
`
`
`9.
`
`The SEC seeks injunctive relief, civil penalties, disgorgement, a reimbursement
`
`to RTI of Hutchison’s incentive-based compensation and profits from his sales of RTI stock, and
`
`other appropriate and necessary equitable relief.
`
`JURISDICTION AND VENUE
`
`10.
`
`This Court has jurisdiction over this action pursuant to Sections 20 and 22 of the
`
`Securities Act [15 U.S.C. §§ 77t and 77v], Sections 21 and 27 of the Exchange Act [15 U.S.C.
`
`§§ 78u and 78aa], and 28 U.S.C. § 1331.
`
`11.
`
` Venue is proper in this Court pursuant to Section 22(a) and (c) of the Securities
`
`Act [15 U.S.C. § 77v(a), (c)] and Section 27(a) and (b) of the Exchange Act [15 U.S.C.
`
`§ 78aa(a), (b)], because certain of the acts, practices, and courses of conduct constituting the
`
`violations alleged herein occurred within the District of Columbia. Hutchison and RTI filed with
`
`the SEC in this judicial district multiple materially false and misleading documents.
`
`Additionally, Hutchison made false and misleading statements and omissions in at least five
`
`different Forms 8-K that were filed with the SEC in this judicial district.
`
`12.
`
`Hutchison, directly and indirectly, made use of means or instruments of
`
`transportation or communication in interstate commerce, or of the mails, or of any facility of a
`
`national securities exchange in connection with the acts, practices, and courses of conduct
`
`alleged herein.
`
`DEFENDANT
`
`13.
`
`Brian K. Hutchison (“Hutchison”), age 63, resides in Asheville, North
`
`Carolina. Hutchison served as RTI’s Chief Executive Officer and as a member of its Board of
`
`Directors from 2001 through December 2016, when he left RTI. As RTI’s CEO, Hutchison
`
`
`
`4
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 5 of 42
`
`
`
`signed each of RTI’s Forms 10-Q and Forms 10-K and participated in each of RTI’s earnings
`
`calls during the Relevant Period.
`
`OTHER RELEVANT ENTITY
`
`14.
`
` The following entity relevant to this action has been charged by the SEC in a
`
`separate action and proceeding: Surgalign Holdings, Inc. (formerly known as RTI Surgical
`
`Holdings, Inc. and RTI Surgical, Inc. (“RTI”)) is a Delaware corporation with its principal
`
`place of business in Deerfield, Illinois. During the Relevant Period, RTI’s common stock was
`
`registered with the SEC pursuant to Section 12(b) of the Exchange Act and traded on the
`
`NASDAQ exchange, under the symbol “RTIX.”
`
`BACKGROUND
`
`A. RTI Manufactured, Sold, and Shipped Medical Products to Large Distributors.
`RTI manufactured and sold surgical implants, such as orthopedic and spinal
`15.
`
`implants. Its Commercial division, which generated a significant portion of RTI’s revenue,
`
`primarily sold RTI’s products to large distributors for resale.
`
`16.
`
`RTI’s Commercial division primarily relied on advance orders from major
`
`customers, which typically placed orders three months in advance of their requested delivery
`
`dates. This gave RTI considerable visibility into its book of future orders. RTI’s customers
`
`specified their delivery dates based on their predictions of the demand for RTI’s products, their
`
`capacity to inspect and store the RTI products, and other factors.
`
`17.
`
`RTI typically recognized revenue upon shipment of its products. Under
`
`Generally Accepted Accounting Principles (“GAAP”), and specifically Accounting Standards
`
`Codification (“ASC”) 605-15, which was in effect during the relevant period, RTI was required
`
`to satisfy four elements at the time it recognized revenue: (1) there must be persuasive evidence
`
`of an arrangement; (2) collectability must be reasonably assured: (3) delivery must have
`5
`
`
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 6 of 42
`
`
`
`occurred, meaning that the customer must have taken title and assumed the risks and rewards of
`
`ownership; and (4) the price must be fixed or determinable. Until all four elements of ASC
`
`605-15 were satisfied, RTI was not permitted to recognize revenue for a transaction.
`
`18.
`
`Under Item 303(a) of Regulation S-K [17 C.F.R. § 229.303(a) (2011)], which
`
`was issued under Section 13(a) of the Exchange Act, the Management’s Discussion and Analysis
`
`(“MD&A”) sections of RTI’s Forms 10-K and 10-Q were required to disclose “any known trends
`
`or uncertainties that have had or that are reasonably likely to have a material favorable or
`
`unfavorable impact on net sales or revenues or income.” The MD&A was also required to
`
`“[d]escribe any unusual or infrequent events or transactions . . . that materially affected the
`
`amount of reported income from continuing operations,” as well as “any other significant
`
`components of revenues or expenses that, in the registrant’s judgment, should be described in
`
`order to understand the registrant’s results of operations.”
`
`19.
`
`Instruction 3 to Item 303(a) of Regulation S-K required that the “discussion and
`
`analysis shall focus specifically on material events and uncertainties known to management that
`
`would cause reported financial information not to be necessarily indicative of future operating
`
`results or of future financial condition.” 17 C.F.R. § 229.303(a). Item 303(b) of Regulation S-K
`
`required discussion in quarterly reports on Form 10-Q of material changes in such known trends
`
`or uncertainties. 17 C.F.R. § 229.303(b).
`
`20.
`
`The SEC has previously stated that the MD&A is “intended to give the investor
`
`an opportunity to look at the company through the eyes of management by providing both a short
`
`and long-term analysis of the business of the company.” Securities Act Release No. 6711 (Apr.
`
`17, 1987). The Commission further stated, in a 2003 MD&A interpretive release: “[o]ne of the
`
`most important elements necessary to an understanding of a company’s performance . . . is the
`
`
`
`6
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 7 of 42
`
`
`
`discussion and analysis of known trends . . . and uncertainties.” Companies should consider
`
`whether information available to them “may reveal a trend or general pattern in activity” or “an
`
`uncertainty.” Moreover, the Commission emphasized, when companies describe trends or
`
`uncertainties, their analysis “should reveal the underlying material causes of the matters
`
`described,” and companies “should consider including, and may be required to include, an
`
`analysis explaining the underlying reasons or implications, [or] interrelationships between
`
`constituent elements.” Commission Guidance Regarding Management’s Discussion and
`
`Analysis of Financial Condition and Results of Operations (Dec. 19, 2003), available at
`
`http://www.sec.gov/rules/interp/33-8350.htm. The Commission also stated that the MD&A
`
`should describe “unusual or non-recurring items” about which disclosure was “necessary for
`
`investors to ascertain the likelihood that past performance is indicative of future performance.”
`
`21.
`
`RTI’s Forms 10-K and 10-Q were also required to contain “a discussion of the
`
`material factors that make an investment in the registrant or offering speculative or risky.” 17
`
`C.F.R. § 229.105(a).
`
`22.
`
`RTI’s reliance on pull-forwards, including unauthorized early shipments,
`
`disguised RTI’s true business performance and resulted in known uncertainties for RTI’s
`
`business and future revenue and profits that RTI and Hutchison did not disclose. The use of pull-
`
`forwards cannibalized future sales and resulted in revenue shortfalls in future quarters, which
`
`RTI filled with additional pull-forwards. RTI and Hutchison did not disclose that RTI was using
`
`early shipments to address revenue shortfalls, that RTI did not have enough orders to achieve its
`
`quarterly revenue guidance without using pull-forwards, or that earlier pull-forwards had
`
`significantly reduced the amount of available future orders. Nor did RTI or Hutchison disclose
`
`that RTI was recognizing revenue prematurely for unauthorized early shipments in violation of
`
`
`
`7
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 8 of 42
`
`
`
`GAAP, or that unauthorized early shipments made up an increasingly large proportion of RTI’s
`
`total early shipments over time. RTI and Hutchison also failed to disclose that RTI’s use of pull-
`
`forwards jeopardized RTI’s future revenue streams when its most significant customers imposed
`
`restrictions on future early shipments, and required RTI to agree to substantial discounts or forgo
`
`annual fee increases to convince customers to accept pull-forwards. Further, RTI and Hutchison
`
`did not disclose the use of a material one-time transaction to help achieve its revenue guidance,
`
`even when that transaction made past performance unlikely to be indicative of future
`
`performance.
`
`23.
`
`As RTI’s CEO, Hutchison was required to certify that each of RTI’s Form 10-Q
`
`and Form 10-K filings “fully complies with the requirements of section 13(a)” of the Exchange
`
`Act, “does not contain any untrue statement of a material fact or omit to state a material fact
`
`necessary to make the statements made, in light of the circumstances under which such
`
`statements were made, not misleading,” and “fairly presents, in all material respects, the
`
`financial condition and results of operations of the issuer.” 18 U.S.C. § 1350; 17 C.F.R.
`
`§§ 240.13a-14, 229(b)(31). Hutchison falsely certified that there were no untrue statements of
`
`material fact or omissions of material fact in RTI’s Forms 10-Q and 10-K, and that those reports
`
`fairly presented, in all material respects, RTI’s financial condition and results of operations,
`
`when he knew that RTI had failed to disclose its reliance on pull-forwards to achieve its revenue
`
`guidance.
`
`B. Hutchison, RTI’s Experienced CEO, Urged Managers to Pull Forward Revenue
`From Shipments to Meet His Aggressive Revenue Targets.
`
`24.
`
`Hutchison became RTI’s CEO in 2001 after a twenty-year career in corporate
`
`management and finance, including roles as Controller, Vice President of Finance, Division
`
`President, and Chief Operating Officer at a large medical technology company.
`
`
`
`8
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 9 of 42
`
`
`
`
`25.
`
`As RTI’s CEO, Hutchison was deeply involved in RTI’s business and financials,
`
`and worked to transform RTI’s business and strategy. He familiarized himself with RTI’s
`
`financial statements, and developed initiatives to expand RTI’s lines of business and grow the
`
`company through acquisitions, new product development, and outside investment.
`
`26.
`
`Each quarter during the Relevant Period, RTI provided guidance to investors
`
`regarding its revenue expectations, analysts published expectations for RTI’s quarterly revenue,
`
`and analysts reported on whether RTI had achieved its revenue guidance and analyst revenue
`
`expectations. As CEO, Hutchison encouraged his senior managers to shift, or “pull forward,”
`
`revenue from future quarters, typically by shipping orders earlier than customers had originally
`
`requested, as a means of achieving RTI’s public revenue guidance, analyst revenue estimates,
`
`and internal revenue targets.
`
`27.
`
`Adopting the euphemism “order book management” to refer to the practice of
`
`pull-forwards, Hutchison regularly participated in discussions about RTI’s use of pull-forwards,
`
`including during his weekly staff meetings. Hutchison set unrealistic revenue targets and did not
`
`establish effective internal accounting controls, pushing employees to ship large quantities of
`
`product without ensuring that they first obtained and documented customer approval.
`
`28.
`
`Although RTI sometimes requested customer permission to ship orders early, at
`
`other times RTI sent large quarter-end early shipments without customer approval. RTI sent
`
`unauthorized early shipments to each of its major customers in 2015 and 2016. Each of those
`
`customers responded by instructing RTI to stop sending early shipments. Hutchison knew that
`
`customers were protesting, but did not take any steps to ensure that RTI only sent shipments with
`
`customer approval, or to ensure that RTI only recognized revenue for shipments that had been
`
`sent with customer approval.
`
`
`
`9
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 10 of 42
`
`
`
`
`29.
`
`Hutchison created an environment in which employees understood that they
`
`should prioritize the achievement of revenue targets over adhering to the acceptable delivery
`
`windows specified in customer orders. Specifically, although RTI employees were concerned
`
`that continuing to ship early would damage RTI’s relationships with important customers,
`
`Hutchison instructed his employees to continue early shipments to address revenue shortfalls,
`
`and insisted that RTI needed to continue with this practice of “order book management.”
`
`Hutchison also rejected conservative budgets prepared by his employees, instead insisting that
`
`his employees prepare budgets that would allow RTI to achieve predetermined revenue targets,
`
`including an unrealistic annual revenue target of $500 million that Hutchison had announced.
`
`HUTCHISON’S MISSTATEMENTS, OMISSIONS, AND MISCONDUCT
`
`A.
`30.
`
`Hutchison Concealed RTI’s Improper Use of Pull-Forwards From Investors.
`
`Hutchison knew that RTI was underperforming during the Relevant Period and
`
`was relying on pull-forwards to achieve its revenue guidance and meet analysts’ estimates of RTI
`
`revenue, and that pull-forwards thus constituted a significant component of RTI’s revenues. He
`
`knew that RTI’s use of pull-forwards meant that RTI was cannibalizing and creating
`
`uncertainties in future revenue and creating a constant cycle of dependence on pull-forwards. He
`
`knew that pulling forward revenue from RTI’s Commercial division helped to mask poor
`
`performance by RTI’s other businesses. And he knew that, under GAAP, RTI should not ship
`
`orders early without customer approval or recognize revenue for unapproved shipments.
`
`31.
`
`Despite this knowledge, Hutchison misled investors in RTI’s SEC filings and
`
`earnings calls throughout the Relevant Period about the reasons for RTI’s apparent successes,
`
`and hid the truth about RTI’s condition and the risks and uncertainties that the pull-forwards
`
`posed to RTI’s future revenue and business with its largest customers. Hutchison did not
`
`disclose that RTI did not have enough orders to meet its revenue guidance and analyst revenue
`10
`
`
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 11 of 42
`
`
`
`estimates each quarter without pulling in transactions scheduled for delivery in future periods.
`
`Nor did he disclose that RTI repeatedly needed to borrow from future quarters to address that
`
`gap, in part because RTI had depleted its orders through earlier pull-forwards. Hutchison did not
`
`disclose the risks and uncertainties created by RTI’s reliance on early shipments, including that
`
`its major customers had all told RTI to stop engaging in these practices, that RTI was draining
`
`orders from future quarters, and that its customers were reducing their orders because RTI was
`
`sending them more inventory than they could resell. The lengths to which Hutchison went to
`
`have RTI hit its revenue targets illustrates just how important these targets were to the market.
`
`32.
`
`By disguising the company’s true business performance and cannibalizing future
`
`sales, RTI’s use of pull-forwards created an uncertainty or event that was known to Hutchison,
`
`that was reasonably expected to have a material effect on RTI’s future revenue, and that caused
`
`reported financial information not to be necessarily indicative of future operating results.
`
`Likewise, RTI’s quarterly earnings releases, filed as exhibits to RTI’s current reports, stated that
`
`RTI’s revenues had exceeded its revenue guidance without disclosing the use of or effect of pull-
`
`forwards, thereby rendering the disclosures misleading.
`
`i.
`
`In 2015, Hutchison Concealed RTI’s Growing Reliance on Pull-Forwards.
`
`33.
`
`On February 27, 2015, RTI’s CFO told Hutchison that RTI had begun showing
`
`“not a good trend” of generating a disproportionate amount of its revenue at the end of each
`
`quarter. The next day, February 28, 2015, Hutchison learned that RTI was likely to fall short of
`
`its Q1 revenue guidance, both because of shortfalls in its international sales and because RTI had
`
`already shipped a large portion of its Q1 2015 orders the previous quarter. On March 23, 2015,
`
`Hutchison was informed that RTI was planning to pull forward sales from Q2 2015 to achieve
`
`RTI’s revenue guidance for Q1.
`
`
`
`11
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 12 of 42
`
`
`
`
`34.
`
`RTI employees examined the orders received for delivery in Q2 2015,
`
`determined which orders RTI could satisfy with its available inventory, and then shipped those
`
`orders early to help boost RTI’s Q1 revenue and compensate for the shortfalls. RTI only met its
`
`revenue guidance and analyst revenue estimates for Q1 because it had pulled forward $5.8
`
`million in future orders under Hutchison’s direction and oversight.
`
`35.
`
`Hutchison knowingly, recklessly, or negligently hid RTI’s reliance on pull-
`
`forwards from investors. On April 23, 2015, during RTI’s Q1 2015 earnings call, he was
`
`specifically asked what was “driving the growth” in RTI’s business. In response, Hutchison said
`
`that RTI’s “really strong growth” was continuing, and “the orders from our commercial partners
`
`just keep coming in.”
`
`36.
`
`That same day, RTI filed a press release with the Commission announcing RTI’s
`
`Q1 2015 earnings, as an attachment to a Form 8-K. In that press release, Hutchison said, “We
`
`saw solid growth in the first quarter, exceeding our expectations and keeping us on track for the
`
`year. . . . Based on results from the first quarter, I am confident in our ability to meet our goals
`
`for the year.”
`
`37.
`
`As Hutchison knew or was reckless or negligent in not knowing, increased
`
`orders alone did not account for the increase in RTI’s reported revenue. Hutchison knew or was
`
`reckless or negligent in not knowing that RTI only met its revenue guidance by stripping sales
`
`away from Q2. Hutchison’s statements were half-truths that created the false and misleading
`
`impression that RTI had achieved its revenue guidance because of growth in orders, rather than
`
`RTI’s aggressive efforts to pull in sales from the future.
`
`38.
`
`Hutchison signed RTI’s Form 10-Q for Q1 2015, which RTI filed with the
`
`Commission on May 4, 2015. In that filing, Hutchison knowingly, recklessly, or negligently
`
`
`
`12
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 13 of 42
`
`
`
`failed to disclose RTI’s reliance on pull-forwards, namely that customer orders were not growing
`
`sufficiently to allow RTI to hit its revenue targets without the use of pull-forwards, and the risks
`
`and uncertainties created by RTI’s reliance on pull-forwards, specifically the risk and uncertainty
`
`that the company would not meet its revenue targets in future quarters because it had already
`
`booked revenue it planned to recognize in Q2. Furthermore, although the Form 10-Q stated that
`
`period-over-period revenue comparisons (which were provided in the MD&A portion of the
`
`filing) could be affected by variations in the timing of orders from its commercial customers,
`
`Hutchison and RTI misleadingly omitted to state that pull-forwards, rather than merely customer
`
`orders, were also affecting the amount of revenue that RTI was reporting during these periods.
`
`39.
`
`Hutchison and RTI made material misrepresentations regarding RTI’s Q1 2015
`
`results and omitted to state material facts necessary, in light of the circumstances under which
`
`they were made, to make their statements not misleading. Reasonable investors would have
`
`wanted to know that RTI was only able to achieve its quarterly revenue guidance and analyst
`
`revenue estimates by pulling forward sales from Q2. Reasonable investors would also have
`
`wanted to know that the early delivery of products created a potential for a material decline in
`
`RTI’s future revenue and jeopardized its ability to meet future revenue targets.
`
`40.
`
`In Q2 2015, Hutchison learned that RTI was again likely to fall short of its
`
`quarterly guidance. At Hutchison’s weekly staff meetings with senior management and at other
`
`times, his subordinates briefed him on potential pull-forwards, as well as the specific pull-
`
`forwards that RTI was pursuing or had already shipped to specific customers. Hutchison
`
`therefore was fully informed as to the ongoing issues with RTI’s revenues and was deeply
`
`involved in the ongoing manipulation of RTI’s orders.
`
`
`
`13
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 14 of 42
`
`
`
`
`41.
`
`On April 18, 2015, Hutchison received an e-mail explaining that one of RTI’s
`
`largest customers, after receiving an unauthorized early shipment from RTI, had made it
`
`“abundantly clear” that RTI should not “ship early” again. The e-mail also told Hutchison that
`
`following this direction could result in RTI missing its Q2 forecasts because RTI had planned to
`
`pull forward that customer’s Q3 orders.
`
`42.
`
`On June 4, 2015, Hutchison received an e-mail stating that RTI was falling short
`
`of its quarterly guidance. On June 26, 2015, Hutchison sent an e-mail to his senior managers
`
`announcing that although the Commercial division had already “stepped up big this quarter to
`
`offset shortfalls” by using early shipments, they still had “a long way to go” to achieve the Q2
`
`forecast and should “accelerate” their sales.
`
`43.
`
`RTI met its Q2 2015 revenue guidance and analyst revenue estimates only by
`
`pulling forward $6.2 million of future orders, including shipments sent early to customers
`
`without their approval. Hutchison knew or was reckless or negligent in not knowing that RTI
`
`was only able to meet revenue targets by manipulating orders and pulling forward revenue from
`
`future quarters. Hutchison knowingly, recklessly, or negligently failed to disclose RTI’s reliance
`
`on pull-forwards to achieve its Q2 revenue guidance, and the risks and uncertainties associated
`
`with that practice.
`
`44.
`
`In its earnings release for Q2 2015, which RTI filed with the Commission as an
`
`attachment to a Form 8-K on July 30, 2015, RTI announced that its quarterly revenues had
`
`“exceed[ed] guidance,” and quoted Hutchison saying, “‘Our results for the second quarter were
`
`strong with revenues and earnings exceeding our expectations.’” In that filing, Hutchison
`
`knowingly, recklessly, or negligently omitted to state that RTI had only exceeded its revenue
`
`guidance and analyst expectations by relying on pull-forwards, creating the false and misleading
`
`
`
`14
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 15 of 42
`
`
`
`impression that RTI’s reported revenues accurately reflected its actual performance in the
`
`quarter.
`
`45.
`
`Hutchison signed RTI’s Form 10-Q for Q2 2015, which RTI filed with the
`
`Commission on July 31, 2015. In that filing, Hutchison knowingly, recklessly, or negligently
`
`failed to disclose the underlying trends that were causing RTI to rely on pull-forwards, including
`
`that customer orders were not growing fast enough to allow RTI to meet revenue projections
`
`without pull-forwards. He also knowingly, recklessly, or negligently failed to disclose the risks
`
`and uncertainties created by RTI’s reliance on pull-forwards, including that RTI might not meet
`
`revenue projections in future periods because it had already recognized revenue initially planned
`
`for Q3 and that RTI might alienate its customers by shipping product outside the requested
`
`delivery window. Indeed, the Form 10-Q specifically stated that there had been “no material
`
`change” in the risk factors that RTI had disclosed in its 2014 Form 10-K, which was filed on
`
`March 4, 2015. The 2014 Form 10-K noted the risk that the company could “fail to maintain
`
`existing strategic relationships” with distributors, but did not disclose that the company’s pull-
`
`forward practice was exacerbating that risk. Furthermore, although the Form 10-Q stated that
`
`period-over-period revenue comparisons (which were provided in the MD&A portion of the
`
`filing) could be affected by variations in the timing of orders from its commercial customers,
`
`Hutchison and RTI misleadingly omitted to state that pull-forwards, rather than merely customer
`
`orders, were affecting the amount of revenue that RTI was reporting during these periods.
`
`46.
`
`Hutchison and RTI made material misrepresentations regarding RTI’s Q2 2015
`
`results and omitted to state material facts necessary, in light of the circumstances under which
`
`they were made, to make their statements not misleading. Reasonable investors would have
`
`wanted to know that RTI was only able to achieve its quarterly revenue guidance and analyst
`
`
`
`15
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 16 of 42
`
`
`
`revenue estimates by pulling forward sales from Q3, and that the amount of revenue being pulled
`
`forward had increased from Q1 to Q2. Reasonable investors would have also wanted to know
`
`that RTI was recognizing revenue prematurely for unauthorized early shipments, in violation of
`
`GAAP, and that these practices were harming customer relationships. Moreover, reasonable
`
`investors would have wanted to know that the early delivery of products created a potential for a
`
`material decline in RTI’s future revenue and jeopardized its ability to meet future revenue
`
`targets.
`
`47.
`
`Hutchison approved revenue guidance for Q3 2015 at a level that he was told
`
`“does not leave us much breathing room.” As in Q2, Hutchison was regularly informed about
`
`the amount of pull-forwards, both at his staff meetings during the quarter and in a quarter wrap-
`
`up memorandum he received shortly after the quarter. When RTI’s Q3 sales again fell short of
`
`expectations, Hutchison wrote in an e-mail to his managers that this was “really unacceptable”
`
`and that they should use early shipments to bridge the gap to RTI’s revenue guidance and
`
`“deliver on our commitment to the street.” In a September 17, 2015 e-mail, Hutchison wrote that
`
`he had “talked with most of the revenue folks” and warned his managers that “[w]e would all be
`
`better off” if RTI did not disappoint investors by falling short of its revenue guidance.
`
`48.
`
`To achieve its guidance, RTI shipped $8.4 million of orders that customers had
`
`placed for delivery in future quarters. This included a $2 million early shipment sent to a
`
`customer at the end of the quarter without the customer’s approval. That customer e-mailed RTI
`
`complaining about the unauthorized early shipment because it had caused the customer’s
`
`“inventory levels [to] go sky high,” and directed RTI “to not ship ANYTHING early without
`
`prior approvals.” Even though the customer had not approved the Q3 2015 delivery, RTI
`
`recognized revenue for that shipment in Q3 2015, in violation of GAAP.
`
`
`
`16
`
`

`

`Case 1:22-cv-02296 Document 1 Filed 08/03/22 Page 17 of 42
`
`
`
`
`49.
`
`Those pull-forwards were not enough to close RTI’s gap to its Q3 2015 revenue
`
`guidance and analyst revenue estimates. With Hutchison’s knowledge, RTI negotiated

This document is available on Docket Alarm but you must sign up to view it.


Or .

Accessing this document will incur an additional charge of $.

After purchase, you can access this document again without charge.

Accept $ Charge
throbber

Still Working On It

This document is taking longer than usual to download. This can happen if we need to contact the court directly to obtain the document and their servers are running slowly.

Give it another minute or two to complete, and then try the refresh button.

throbber

A few More Minutes ... Still Working

It can take up to 5 minutes for us to download a document if the court servers are running slowly.

Thank you for your continued patience.

This document could not be displayed.

We could not find this document within its docket. Please go back to the docket page and check the link. If that does not work, go back to the docket and refresh it to pull the newest information.

Your account does not support viewing this document.

You need a Paid Account to view this document. Click here to change your account type.

Your account does not support viewing this document.

Set your membership status to view this document.

With a Docket Alarm membership, you'll get a whole lot more, including:

  • Up-to-date information for this case.
  • Email alerts whenever there is an update.
  • Full text search for other cases.
  • Get email alerts whenever a new case matches your search.

Become a Member

One Moment Please

The filing “” is large (MB) and is being downloaded.

Please refresh this page in a few minutes to see if the filing has been downloaded. The filing will also be emailed to you when the download completes.

Your document is on its way!

If you do not receive the document in five minutes, contact support at support@docketalarm.com.

Sealed Document

We are unable to display this document, it may be under a court ordered seal.

If you have proper credentials to access the file, you may proceed directly to the court's system using your government issued username and password.


Access Government Site

We are redirecting you
to a mobile optimized page.





Document Unreadable or Corrupt

Refresh this Document
Go to the Docket

We are unable to display this document.

Refresh this Document
Go to the Docket