Referring to its January settlement with the SEC, Orthofix spokeswoman Denise Landry said the company had self-reported to the regulator and fully cooperated with the government during the investigation.
"We are pleased these matters are behind us," she said, declining to comment further.
By entering the SEC whistleblower program the duo showed how outsiders with analytical skills and tools and time to spare can accomplish what is typically done by those with inside access to confidential information.
The program, established in 2011 under the Dodd-Frank financial reform law, aimed to bolster the SEC's enforcement program by encouraging insiders to report potential fraud.
However, since its inception through Sept. 30, 2016, just over a third of the more than $111 million awarded to whistleblowers went to outsiders such as analysts or short-sellers, according to the SEC. "Sometimes outsiders have a particular expertise and they are able to independently piece things together that might not be as obvious to those close to the matter," said Jane Norberg, the head of the SEC's Office of the Whistleblower.
'Channel Stuffing'
In Orthofix's case, what the two analysts pieced together suggested that Orthofix was goosing its earnings by "channel stuffing."
If not disclosed to investors, the practice of flooding distributors with more products than they can use or pay for is illegal. It lets the company smooth earnings by prematurely recognizing revenue, and pushing shortfalls into the future.
As the SEC settlement later showed, Orthofix was sending various implants from its spine division to distributors in Brazil that either lacked regulatory approval, or lacked medical instruments needed to use the implants.
It then was recording products that could not be resold as revenue, and also treating some of the price discounts as expenses instead of a revenue reduction, the SEC said. (Graphic: http://tmsnrt.rs/2pYNwgY)