UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933 

Release No. 10281 / January 18, 2017

SECURITIES EXCHANGE ACT OF 1934

Release No. 79815 / January 18, 2017

ACCOUNTING AND AUDITING ENFORCEMENT

Release No. 3845 / January 18, 2017

ADMINISTRATIVE PROCEEDING

File No. 3-17791

In the Matter of

ORTHOFIX INTERNATIONAL N.V.

Respondent.

ORDER INSTITUTING CEASE-ANDDESIST PROCEEDINGS PURSUANT TO 

SECTION 8A OF THE SECURITIES ACT OF 

1933 AND SECTION 21C OF THE 

SECURITIES EXCHANGE ACT OF 1934, 

MAKING FINDINGS, AND IMPOSING 

REMEDIAL SANCTIONS AND A CEASEAND-DESIST ORDER

I.

The Securities and Exchange Commission (“Commission”) deems it appropriate that 

cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the 

Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 

1934 (“Exchange Act”) against Orthofix International N.V. (“Orthofix” or “Respondent”).

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the 

facts set forth in Paragraphs 1 through 93 below, acknowledges that its conduct violated the 

federal securities laws, admits the Commission’s jurisdiction over it and the subject matter of 

these proceedings, and consents to the entry of this Order Instituting Cease-and-Desist 

Proceedings pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the 

Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a 

Cease-and-Desist Order (“Order”), as set forth below. 
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III.

On the basis of this Order and Respondent’s Offer, the Commission finds

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that:

SUMMARY

From at least 2011 to mid-2013 (“the relevant period”), Orthofix materially overstated its 

distributor revenue and operating income in various annual and quarterly reports and earnings 

releases filed with the Commission. The majority of this misconduct occurred at Orthofix’s 

then-largest segment, its Spine segment (“Spine”). In particular, Orthofix improperly recognized

revenue associated with several transactions with Spine’s distributors, including its largest 

international distributor during the relevant period. Among other things, it entered into 

contingent sales with that distributor and also recognized revenue for product sales when the 

product could not be resold due to Orthofix’s delay in providing a required associated product. 

Moreover, in the domestic section of Spine, Orthofix improperly accounted for certain 

transactions by treating certain price discounts as expenses instead of a reduction to revenue and 

recognizing revenue on transactions in which the purchaser had the ability to return or exchange 

products.

Orthofix’s misconduct, however, was not limited to Spine as it also improperly 

recognized revenue in its Orthopedics Segment through extra-contractual agreements used at its 

Brazilian subsidiary. Moreover, throughout the relevant period, Orthofix had inadequate internal 

accounting controls over its distributor revenue recognition and had a culture of setting 

aggressive internal sales targets and imposing pressure to meet those sales targets. 

As a result of its misconduct, Orthofix restated its financial results for the first quarter of 

fiscal year 2013, all reporting periods in fiscal years 2012 and 2011, and its annual reporting 

period in fiscal year 2010. For example, Orthofix announced that it had overstated its net sales 

for fiscal year 2011 by 6% and its operating income by over 430%. By engaging in the 

foregoing misconduct, Orthofix violated the antifraud, reporting, books and records, and internal 

accounting controls provisions of the federal securities laws, namely Sections 17(a)(2) and 

17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Exchange Act, 

and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.

RESPONDENT

Orthofix International N.V. (“Orthofix”) is a company organized under the laws of 

Curacao and is headquartered in Lewisville, Texas. It is a diversified medical device company 

that develops and sells products used by doctors and other medical specialists to treat and repair 

human spine and orthopedic conditions. Orthofix’s common stock is registered with the 

Commission pursuant to Section 12(b) of the Exchange Act and trades on the NASDAQ. 

 

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The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or 

entity in this or any other proceeding.
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Orthofix’s fiscal year ends on December 31. During the relevant period, Orthofix sold securities

to its employees pursuant to Form S-8 registration statements filed with the Commission. A 

broad range of employees could purchase Orthofix stock in these offerings via payroll 

deductions. During the relevant period, the Form S-8 registration statements incorporated by 

reference the company’s public filings with the Commission.

OTHER RELEVANT PERSONS

The Spine CFO served as the Chief Financial Officer of Orthofix’s Spine Segment from 

July 2010 until he resigned in approximately February 2013. 

The Spine President served as the President of Orthofix’s Spine Segment from 

November 2011 through November 2012. The Spine President is no longer employed by 

Orthofix.

The Spine Sales VP served as the Vice President of Global Sales and Development for 

the international portion of Orthofix’s Spine Segment from March 2011 until May 2013. The 

Spine Sales VP is no longer employed by Orthofix.

The Corporate CFO served as Orthofix’s Chief Financial Officer from March 2011 

through November 2012. In November 2012, the Corporate CFO became the President of

Orthofix’s Spine Segment until he left Orthofix in July 2013. In the Order, we use the term New 

Spine President/Prior Corporate CFO to describe this person’s conduct from November 2012 

and beyond.

FACTS

A. Orthofix’s Business and Structure

1. Orthofix’s business was primarily divided into two Global Business Segments during the 

relevant period – Spine and Orthopedics. During the relevant period, Spine was 

Orthofix’s largest segment and contributed two-thirds of the company’s overall revenues.

2. Spine had several operating divisions during the relevant period. For example, Orthofix 

Spinal Implants (“OSI”) was responsible for international sales of spinal implants and 

related instruments.

3. During the relevant period, the Spine CFO was responsible for the accounting and 

financial functions of Spine, including preparing its operating results (which were 

included in Orthofix’s public filings with the Commission). 

4. The Spine CFO reported directly to Spine’s President, a salesperson, during the relevant 

period. The Spine President was in charge of Spine’s sales and overall management. 

The Spine President had several sales persons who worked under him, including an 

individual who served as Spine’s Vice President of Global Sales and Development 

(“Spine Sales VP”).
4

5. In essence, the Spine Sales VP was the relationship manager for a number of 

relationships that OSI had with certain international distributors. The Spine Sales VP had 

a sales team of approximately four employees who reported to him and had day-to-day 

responsibility for certain distributor relationships.

6. While the Spine CFO reported directly to the Spine President during the relevant period, 

the Spine CFO also had dotted line reporting responsibility to Orthofix’s Corporate CFO 

(hereinafter “Corporate CFO”). The Corporate CFO was responsible for the preparation 

of Orthofix’s public filings, including its consolidated financial results. 

7. Spine sold various products including spinal and cervical implants and related

instruments. The instruments and implants were interconnected as implants could not be 

used in patients without functioning instrument sets. 

8. Spine sold the above products through two primary methods: (i) sales of its products to 

U.S. and international distributors who then sold the products to hospitals and physicians 

and (ii) sales of its products directly to hospitals and physicians in the U.S.

B. Orthofix’s Revenue Recognition Policies and Practices and Distributor Business Practices

a. Revenue Recognition Policies and Practices

9. ASC 605-10-25-1 provides that revenue may be recognized only when it is both realized 

or realizable and earned. Consistent with the authoritative literature, Orthofix’s financial 

statements disclosed four criteria as its revenue recognition policy.

10. The four criteria are: (i) persuasive evidence of an arrangement exists; (ii) delivery has 

occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed and 

determinable; and (iv) collectability is reasonably assured.

11. Other than the four criteria disclosed in its filings, Orthofix did not have any other 

revenue recognition policies during the relevant period and failed to adequately document 

how it satisfied the four criteria with respect to the sales transactions that were recognized 

as revenue. Moreover, Orthofix could not and did not reasonably estimate the revenue 

recognition impact of the amount of future returns when extra-contractual agreements 

included rights of return.

12. With limited exceptions, Orthofix recognized revenue during the relevant period based on 

the “sell-in” method, which provides for revenue recognition upon shipment of products

to the distributor.

b. Distributor Business Practices During the Relevant Period

13. Orthofix entered into written agreements with distributors of its product. These 

distributor agreements provided, among other things, standard payment terms for 

purchase of products. These standard payment terms ranged typically from 90 to 180 

days. 
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14. During the relevant period, Spine had an unwritten policy requiring that modifications to 

the terms in existing distributor agreements had to be approved by the Spine CFO. The 

Spine CFO’s approval authority in this regard extended to all aspects of distributor 

agreement terms, including pricing, commissions, discounts, extensions of payment 

terms, payment plans, returns, and exchanges. The Spine CFO was the only person 

within OSI who had any type of revenue recognition training.

15. Moreover, Orthofix did not have any policies and procedures requiring the analysis 

and/or documentation of the impact, from a revenue recognition perspective, of 

modifications to the standard contractual terms contained in distributor agreements.

C. Orthofix Aggressively Set Internal Sales Targets and Imposed Pressure to Meet those 

Targets

16. During the relevant period, Orthofix had a culture of aggressively setting internal sales 

targets and imposing pressure upon its sales personnel to meet those targets. 

17. Spine generally set sales targets in the following manner. Towards the end of a fiscal 

year, the Spine sales leaders prepared sales forecasts (by month, quarter, and for the year) 

for the upcoming fiscal year and sent those forecasts to the Spine President and Spine 

CFO. The Spine President and Spine CFO then reviewed and approved the forecasts 

before adding the costs components to prepare a budget which included the revenue 

targets. 

18. The budget was then sent to the then-Company CEO who approved the budget or rejected 

it. If the budget was rejected, it was revised for review and resubmitted to the Company

CEO for approval.

19. On August 28, 2012 – and reflecting the pressure imposed to meet revenue targets – the 

Spine Sales VP sent the following email to his sales team with the subject line 

“September Gut:”

I need your gut feeling on the revenue we can generate in September. We need $2 

million in addition to what is on the portal . . .based on the feedback I have received I 

have gotten so far, we are off about $1.5 million. I know what people say they need, 

but as you know this is important. We need to ask everyone to purchase just a bit 

more . . .if I have to walk into [the Spine President’s] office and tell him we are short 

again, that is going to be a major problem.

20. After receiving the above email, one of the sales persons who reported to the Spine Sales 

VP emailed a colleague separately and wrote: 

I was just speaking with [the Spine Sales VP] and had finance listened to us last year 

we wouldn’t be in this mess. We all predicted our markets could not sustain this 

growth but they got greedy. Found this budget brutal because here we are for another 

year just estimating the dollars.
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D. Orthofix Improperly Recognized Revenue on Several Transactions with Brazilian 

Distributor

a. Orthofix Improperly Recognized $5 Million in Revenue in FY 2011 by Selling 

Implants without Instrument Sets

21. OSI had several international distributors during the relevant period, but its largest 

distributor of product was located in Brazil (hereinafter “the Brazilian Distributor”). In 

fact, for eight of the nine quarters from Q1 2011 to Q1 2013, the Brazilian Distributor 

was the Company’s second largest customer on a revenue per quarter basis.

22. Entering 2011, Orthofix had a receivable of approximately $5 million from the Brazilian 

Distributor from prior sales. After discussions with the Spine President and Spine Sales 

VP, the Brazilian Distributor forecasted that it would purchase approximately $8.5 

million of Orthofix implants and instruments in FY 2011.

23. Prior to this time, Orthofix had sold implants along with used instrument sets rather than 

new ones to the Brazilian Distributor. As discussed above, implants and instruments 

were interconnected because the implants could not be used in patients without related 

instrument sets.

24. At this time, however, the Brazilian Distributor could no longer purchase previously used 

instrument sets because ANVISA (the Brazilian equivalent of the U.S. Food and Drug 

Administration) imposed new regulations prohibiting the importation of used instrument 

sets.

25. Orthofix did not have the new instrument sets (105 in total) available to be shipped along 

with the implants it shipped to the Brazilian Distributor. Rather than waiting until the 

new instrument sets were available, Orthofix – in FY 2011 – shipped approximately $5 

million in implants to the Brazilian Distributor despite the fact that these implants could 

not be used in patients without the new instrument sets.

26. Orthofix recognized the approximately $5 million revenue upon shipment of the above 

implants. Orthofix’s recognition of revenue in this regard was improper as delivery of 

the interconnected product – the instruments – had not yet occurred. Orthofix knew that 

the implants could not be used in patients without the instruments. As such, payment 

timing and terms were contingent upon the instrument sets being made available and 

therefore, revenue recognition was inconsistent with Orthofix’s accounting policy 

because it did not meet the fixed or determinable criteria or the collectability criteria. 

27. This improper recognition of revenue caused Orthofix’s financial statements to be 

materially misstated in its Forms 10-Q for the second and third quarters of FY 2011 and 

its year-end Form 10-K for FY 2011 and corresponding earnings releases.

28. By the beginning of FY 2012, virtually none of the 105 instrument sets had been shipped

to the Brazilian Distributor. Thus, the Brazilian Distributor refused to pay for the 

implants because those implants that Orthofix had previously shipped to the Brazilian 
7

Distributor could not be used without the instrument sets. As a result, the Brazilian 

Distributor’s amounts payable to Orthofix increased from approximately $5 million at the 

beginning of FY 2011 to approximately $11 million at the beginning of FY 2012.

29. In March 2012, the Spine President and Spine Sales VP had discussions with the 

Brazilian Distributor concerning a payment plan to address the increasing amounts 

payable. The Brazilian Distributor agreed to pay approximately $4.2 million of the 

amounts payable by the end of FY 2012 but only if all the remaining 105 instrument sets 

were delivered by the end of April 2012.

30. The Spine President and Spine Sales VP agreed to this payment plan proposal without 

approval from the Spine CFO. 

31. By April 30, 2012, Orthofix had only shipped 40 of the 105 instrument sets. 

Accordingly, in June 2012, the Brazilian Distributor informed the Spine Sales VP and 

Spine President that it would only pay $1.6 million of its amounts payable in December 

2012 and $2.6 million in February 2013. 

32. The Spine President and Spine Sales VP agreed to this payment plan proposal without 

approval from the Spine CFO. More broadly – throughout the relevant period – Orthofix 

did not establish and maintain procedures to reasonably ensure proper communication to 

the Company’s finance and accounting departments of deviations from contractually 

established terms, which included written or unwritten agreements made with Company 

distributors.

b. Orthofix Improperly Recognized Even More Revenue with the Brazilian 

Distributor in Summer 2012

33. In late May 2012, the Spine President discussed a product launch plan with the Brazilian 

Distributor to purchase approximately $2.5 million of a new Orthofix implant product 

called Firebird. This product, however, had not yet been approved by ANVISA and,

therefore, could not be shipped into Brazil until such approval was obtained. 

34. The Brazilian Distributor agreed to place the order on the following conditions: (i) one 

year to pay for the implants contingent on ANVISA approval; (ii) 210 days to pay on all 

subsequent product orders; and (iii) all corresponding instrument sets needed to be 

available once ANVISA approved the implants. Neither Orthofix nor the Brazilian 

Distributor knew when ANVISA would grant approval.

35. Moreover – despite the fact that the Brazilian Distributor was provided 210 days to pay 

on any subsequent purchase orders – the new payment terms were not reflected in any 

revised or amended distributor agreement with the Brazilian Distributor.

36. The Spine CFO learned of this transaction a few weeks after the product had been 

shipped but before the company filed its third quarter FY 2012 financial results. In 

particular – on July 24, 2012 – the Spine Sales VP forwarded the Spine CFO an email 
8

describing the transaction along with a series of emails containing prior discussions 

between him and the Brazilian Distributor’s President. 

37. The Spine CFO replied to the Spine Sales VP and the Spine President – “[Spine Sales 

VP], can you please address how we ended up with a full year to pay for the June order. I 

have a hard time managing that with a lot of pressure to reduce our ballooning [Days 

Sales Outstanding].” The Spine Sales VP replied, “we accepted this due to the need for 

that size of an order.”

38. Despite the contingent nature of the sale and the Spine CFO’s own concerns about how 

this transaction would impact the company’s Days Sales Outstanding, the over $2 million 

in revenue from this transaction was recognized immediately upon shipping the implants

to the Brazilian Distributor’s U.S. based subsidiary located in Atlanta, Georgia. 

39. Orthofix’s recognition of revenue in this regard was improper because the Brazilian 

Distributor’s obligation to pay, and the payment terms themselves, were contingent upon 

ANVISA approval and, therefore, revenue recognition was inconsistent with Orthofix’s 

accounting policy because it did not meet the fixed or determinable criteria or the 

collectability criteria.

c. Corporate CFO Became Aware of Issues with Implant Without Instruments 

Transactions

40. The Corporate CFO – soon after beginning in that role in early 2011 – implemented a 

general unwritten bad debt policy applicable to both Spine and Orthopedics. The policy 

required that any accounts receivable that had been outstanding at least 360 days from the 

invoice date of a shipment had to be fully reserved as bad debt. The Corporate CFO, 

along with the Corporate Controller and Segment CFOs, were responsible for the 

calculation of the bad debt reserve.

41. On August 1, 2012 – two days after Orthofix had filed its Form 10-Q for the second 

quarter of FY 2012 and as part of the process for handling Orthofix’s bad debt calculation 

– the Corporate Controller emailed the Spine CFO an aging schedule identifying that as 

of June 30, 2012 approximately $4 million of amounts owed to OSI was over one year 

old.

2 

42. The aging schedule contained in this email, however, demonstrated that the allowance for 

doubtful accounts as of the second quarter of FY 2012 was only $1.6 million (or 40% of 

accounts receivable over 360 days old). The Corporate Controller then wrote “what 

doesn’t make sense is that our policy is to reserve all amounts in the [over one year old 

bucket].”

 

2 Orthofix used the term “360+ day bucket” to denote amounts due over one year old.
9

43. The Corporate Controller then forwarded the email to the Corporate CFO and wrote the 

following:

I spoke with [the Spine CFO] on this. The rationale for not reserving all of the 

360+ bucket for [Spine] is that technically the receivable balance from [the 

Brazilian Distributor] is not >360 days old since they have extended terms in their 

contract. The aging schedule is based on days past the invoice date for all 

[accounts receivable]. To further exacerbate the situation, [the Brazilian 

Distributor] could not sell the Implants inventory that we sold to them in 2011 

since we were delayed in sending them the instrument sets that they needed to sell 

the Implants). This one-year delay was caused by [ANVISA] who required us to 

send new instruments (as opposed to our original plan to move used instruments).

44. The Corporate Controller further noted in the email that – based on discussions he had 

with the Spine CFO – the Brazilian Distributor planned to make a $4 million payment in 

December 2012 that would significantly reduce the 360+ day bucket in the year-end

aging presentation. 

45. Unbeknownst to the Corporate Controller and the Spine CFO, however – and as another 

example of Orthofix’s inadequate internal accounting controls surrounding distributor 

revenue recognition – the Brazilian Distributor had already informed the Spine President 

and Spine Sales VP that it would only pay $1.6 million in December 2012 and another 

$2.6 million in February 2013 because the 105 instrument sets had not been delivered in 

full in April 2012.

46. Through this email, the Corporate CFO was on notice that Orthofix had a significant 

outstanding receivable associated with implants for which there had been an at least one 

year delay in sending the corresponding instrument sets. 

47. The Corporate CFO, however, did not take steps to investigate the circumstances of the 

original transaction and to determine whether the revenue associated with the original 

transaction had been properly recognized. As noted earlier, Orthofix improperly 

recognized $5 million of revenue because the implants could not be used in patients 

without the instruments. As such, payment timing and terms were contingent upon the 

instrument sets being made available and, therefore, revenue recognition was inconsistent 

with Orthofix’s accounting because it did not meet the fixed or determinable criteria or 

the collectability criteria.

48. Orthofix had inadequate internal accounting controls to evaluate the impact of these facts 

on the revenue that was previously recognized on this transaction. In particular, Orthofix 

did not establish and maintain procedures to reasonably ensure an assessment by the 

Company’s finance and accounting department of deviations from contractually 

established terms.

d. Orthofix Improperly Recognized Even More Revenue with the Brazilian 

Distributor in Fall 2012
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49. In the fall of 2012, Orthofix improperly recognized even more revenue with the Brazilian 

Distributor. By the fall of 2012, the Spine President had left the company and was 

replaced in that role by the Corporate CFO (hereinafter “New Spine President/Prior 

Corporate CFO”).3

50. Beginning in September 2012, the Spine Sales VP solicited the Brazilian Distributor to 

purchase approximately $1.5 million of Orthofix implants that had not yet been approved 

by ANVISA. Thus – as with the summer 2012 sales transaction with the Brazilian 

Distributor – this product could not be shipped into Brazil until that approval occurred.

51. The Brazilian Distributor indicated that it would agree to the purchase but only under the 

following two conditions: (i) the ability to renegotiate the payment terms if ANVISA 

approval did not occur by the end of 2012 (just three months away) and (ii) one year to 

pay for the product. Neither Orthofix nor the Brazilian Distributor knew when ANVISA 

would grant approval.

52. Despite the conditions noted above, Orthofix recognized the revenue from this

transaction immediately upon shipping the implants to the Brazilian Distributor’s 

warehouse located in the United States. In particular, Orthofix’s recognition of revenue 

in this regard was improper because the Brazilian Distributor’s obligation to pay, and the 

payment terms themselves, were contingent upon ANVISA approval and, therefore, 

revenue recognition was inconsistent with Orthofix’s accounting policy because it did not 

meet the fixed or determinable criteria or the collectability criteria.

53. This improper recognition of revenue – in combination with the improper recognition of 

revenue for other transactions in FY 2012 described previously and later – caused 

Orthofix’s financial results in its FY 2012 Form 10-K (and corresponding earnings 

release) to be materially misstated.

e. The Brazilian Distributor’s President Described Transactions to Spine CFO and 

Spine Sales VP

54. As discussed previously, in March 2012, the Spine President and Spine Sales VP 

discussed a payment plan proposal such that the Brazilian Distributor would pay 

approximately $4.2 million of its amounts owed by the end of 2012. The Brazilian 

Distributor responded that it would only agree to this payment if all of the 105 instrument 

sets were delivered by the end of April 2012. When these instrument sets were not 

delivered by April 2012, the Brazilian Distributor informed the Spine President and Spine 

Sales VP in June 2012 that it would only pay $1.6 million in December 2012 and $2.6 

million in February 2013. 

 

3 The then-CFO of Orthofix’s Orthopedics Segment replaced the New Spine President/Prior Corporate CFO 

as the Corporate CFO.
11

55. On December 1, 2012, the Spine Sales VP emailed the Brazilian Distributor’s President 

and wrote “I believe you have been speaking with [the Spine CFO] about the end of the 

year payment of $4 million. They are all extremely anxious about this. This has to 

happen as agreed.” 

56. The Brazilian Distributor’s President replied “No [the Spine CFO] did not communicate 

with me, certainly because it is quite clear this was agreed with [the Spine President]. 

We will pay $1.6 million in December.”

57. The Spine Sales VP forwarded this email to the Spine CFO, writing “this is a disaster,” 

despite the fact that the Spine Sales VP had been informed in June 2012 that the Brazilian 

Distributor would only pay $1.6 million in December 2012. The Spine CFO then 

forwarded the above email to the New Spine President/Prior Corporate CFO and wrote:

[The Brazilian Distributor’s President] says below they made a payment agreement 

with [the Spine President] . . .I have no idea what may have been promised. I do 

know that I fought pricing and terms concessions, but those were ultimately given at 

some point despite my denials. This was commonplace. I was told that I was the 

decision maker on pricing and terms and then secretly overridden. [The Spine Sales 

VP] did it all of the time – don’t know how much [the Spine President] was involved.

58. On December 7, 2012, the Brazilian Distributor’s President travelled to the U.S. to meet 

with the Spine CFO and Spine Sales VP. At that meeting, the Brazilian Distributor’s 

President provided a Power Point presentation to the Spine CFO and Spine Sales VP with 

a detailed chronology of events on each of the sales transactions described previously, 

including the implant-without-instruments transactions, the June and September 2012 

transactions, and the payment plan related issues.

59. The Spine CFO subsequently forwarded the Power Point presentation to the New Spine 

President/Prior Corporate CFO. The Spine CFO did not forward this Power Point 

presentation to the company’s then Corporate CFO and did not reassess the revenue that 

the company had previously recognized and disclosed in its financial statements. 

60. The New Spine President/Prior Corporate CFO failed to confirm that this Power Point 

presentation had been brought to the attention of the then Corporate CFO and did not 

separately confirm that the transactions outlined in the Power Point presentation had been 

separately discussed with the Corporate CFO. Moreover, the New Spine President/Prior 

Corporate CFO failed to evaluate the impact that the information contained in the Power 

Point had on the revenue that the company had previously recognized and disclosed in its 

financial statements when he served as the company’s Corporate CFO. 

61. Ultimately, Orthofix filed its FY 2012 Form 10-K in March 2013 and took no steps to 

correct the revenue that it had previously improperly recognized on the implants-without 

instruments, Firebird, and September 2012 transactions with the Brazilian Distributor. 

Moreover, Orthofix did not adequately assess the collectability of the significant 

receivables it had with the Brazilian Distributor. 
12

62. As a result of this and other errors described below, Orthofix materially misstated its 

financial results in its FY 2012 Form 10-K and corresponding earnings release.

E. Orthofix Improperly Recognized Revenue with Other Spine International Distributors

a. Introduction

63. In addition to the Brazilian Distributor, OSI had relationships with other international 

distributors including in Italy, Spain, and Mexico. In total, these four international 

distributors accounted for over 70% of OSI’s revenue and almost 4% of Orthofix’s 

consolidated revenue in FY 2011 and 2012. 

64. Orthofix improperly recognized revenue with each of these distributors and did not have 

adequate internal accounting controls to provide reasonable assurance that transactions 

with these distributors were recorded as necessary to permit the preparation of financial 

statements in conformity with GAAP. 

b. Italy

65. On October 22, 2011, the Spine President emailed the Company CEO, Corporate CFO, 

Spine CFO, and Spine Sales VP concerning the need for OSI to meet its fourth quarter 

fiscal year 2011 forecast of $6 million in revenue. The Spine President wrote “if we fail 

at this endeavor then the company will be at risk and next year will be Hell on Earth for 

all of us.”

66. In early December 2011 – in an attempt to meet Spine’s internal sales targets for the 

fourth quarter of FY 2011 – the Spine Sales VP emailed the Italian Distributor and 

solicited it to make a $400,000 order. The Italian Distributor’s President responded that 

it could make the order if they had extended payment terms of 180 days and the ability 

“in case of cash difficulties” to extend those payment terms. Moreover, the Italian 

Distributor’s President noted that “it is a very bad moment for Italy.”

67. The Spine CFO was copied on these email exchanges and, despite the specifically 

identified financial difficulties in Italy, Orthofix recorded the revenue upon shipment of 

the products. This revenue recognition upon shipment was improper because payment 

terms were contingent upon timing of the Italian Distributor’s sell-through and payment 

receipt of the products and, therefore, revenue recognition was inconsistent with 

Orthofix’s accounting policy because it did not meet the fixed or determinable criteria or 

the collectability criteria.

c. Spain

68. In early December 2011, the Spine Sales VP, by email, solicited the Spanish Distributor 

to make a $300,000 order. The Spanish Distributor noted the difficult conditions in the 

Spanish economy at the time. The Spine Sales VP responded that “based on the expected 

challenges in Europe due to the instability of the financial institutions,” he could offer 

extended payment terms of 180 days for instruments and 150 days for implants. 
13

69. In late December 2011, the Spine Sales VP forwarded this email exchange to the Spine 

CFO for his approval of the extended payment terms. The Spine CFO provided his 

approval. Orthofix recognized the revenue from this transaction upon shipment of the 

products and this was improper because it did not meet the fixed or determinable criteria.

70. In July 2012, the Spine Sales VP, without getting the approval of the Spine CFO, 

solicited the Spanish Distributor to place an $810,000 order in which he offered the 

Distributor certain concessions, which he characterized as the “deal of the century.” The 

concessions included extended payment terms on the order and the right to return 

$250,000 of excess distributor inventory that resulted from the order. Orthofix’s 

recognition of revenue from this transaction upon shipment of the products was improper 

because payment terms and timing were contingent upon certain extra-contractual 

concessions and, therefore, revenue recognition was inconsistent with Orthofix’s 

accounting policy because it did not meet the fixed or determinable criteria or the 

collectability criteria.

d. Mexico

71. In September 2012, the Spine Sales VP, without getting the approval of the Spine CFO, 

solicited the Mexican Distributor to place a $300,000 order in which he offered the 

Distributor a number of concessions. The concessions included extended payment terms 

on the order, and expansion of sales territory and reduction in sales quotas for the next 

year. Orthofix’s recognition of revenue from this transaction upon shipment of the 

products was improper because payment terms and timing were contingent upon certain 

extra contractual concessions and, therefore, revenue recognition was inconsistent with 

Orthofix’s accounting policy because it did not meet the fixed or determinable criteria or 

the collectability criteria.

F. Orthofix Improperly Accounted for Spinal Stimulation Product Transactions

72. Orthofix’s revenue recognition issues were not just limited to transactions with certain of 

its international distributors for spinal products. Orthofix also improperly accounted for 

certain domestic distributor transactions in Spine involving spine stimulation products.

73. Beginning in the first quarter of FY 2012, the Spine President began exploring 

opportunities to generate more revenue in the domestic spine market by selling spine 

stimulation products to wholesale distributors. Prior to this time, Orthofix sold these 

products directly to patients, doctors and hospitals. The Spine President began exploring 

selling these products directly to wholesale distributors who would then resell them to 

doctors and hospitals.

74. At this time, the wholesale market for these products was dominated by an Orthofix 

competitor. To draw market share away from this competitor, the Spine President and 

Spine CFO determined that they would need to sell Orthofix spinal stimulation products 

at deeply discounted prices.
14

75. Accordingly, the Spine President and Spine CFO decided they would offer the 

wholesalers products at deeply discounted prices-per-unit. Moreover, Orthofix paid a 

referral fee to the wholesaler that was termed as a “commission.” 

76. For example, if Orthofix agreed to sell 100 units for $1,500 per unit, or $150,000, 

Orthofix also agreed to pay the wholesaler a commission of 25%, or $37,500, which 

essentially reduced the amount being paid for the product to $112,500 ($150,000 less 

$37,500).

77. Orthofix improperly treated these commissions as expenses rather than as reductions to 

revenue. Orthofix’s accounting treatment was improper because where the vendor does 

not receive an identifiable benefit for the commissions, sales discounts such as these are 

presumed to be a reduction in the seller’s price pursuant to ASC 605-50-45-2. Thus, 

these commissions should have been treated as further price discounts and as a reduction 

in revenue.

78. Due to this improper accounting, Orthofix overstated its revenue by approximately $1.7 

million in FY 2012, with the overwhelming majority of this amount (approximately $1.4 

million) being overstated in the third quarter of FY 2012.

79. Moreover, Orthofix improperly recognized revenue upon shipment on two of the spinal 

stimulation transactions in which the purchaser was granted a right to exchange the 

products for cervical stimulation products. 

80. In particular – because Orthofix could not and did not reasonably estimate the revenue 

recognition impact of the amount of future returns – Orthofix was precluded from 

recognizing revenue upon shipment in the above transactions pursuant to ASC 605-15-

25-1(f).

81. As a result, Orthofix overstated its revenue by over $650,000 in FY 2012, with all of this 

revenue being improperly recognized in the third quarter of FY 2012.

G. Orthofix Engaged in Improper Accounting at its Orthopedics Brazilian Subsidiary

82. As noted earlier, Orthofix had two primary business segments during the relevant period 

– Spine and Orthopedics. Within Orthopedics, Orthofix had a Brazilian subsidiary 

known as Orthofix do Brazil. During the relevant period, the Orthofix do Brazil 

subsidiary had inadequate internal accounting controls surrounding revenue recognition 

and, as a result, improperly recognized revenue associated with certain distributor 

transactions upon shipment.

83. In particular, Orthofix do Brazil used side agreements that included extended payment 

terms and other concessions, and therefore, did not meet the revenue recognition 

requirements upon shipment of the product.

84. Moreover, Orthofix do Brazil improperly recognized revenue upon shipment in at least 

FY 2011 and FY 2012 as a result of providing distributors with rights to both exchange 

and return products. 
15

H. Orthofix Improperly Calculated its Excess and Obsolete Reserve for Certain of Its 

Inventory

85. During the relevant period, Orthofix calculated an excess and obsolete (E&O) reserve for 

its inventory. In essence, the E&O calculation serves as an estimated reserve against 

inventory based on – among other things – assumptions related to the marketability or 

saleability of inventory on hand. 

86. During the relevant period, Orthofix improperly calculated or accounted for its E&O 

reserve in two respects. First – in the third quarter of FY 2011 – Orthofix launched a new 

product called FORZA. Orthofix experienced issues with FORZA’s launch and therefore 

took an E&O reserve totaling approximately $1.2 million in the second quarter of fiscal 

year 2012.

87. In the fourth quarter of fiscal year 2012, a new E&O calculation policy was implemented 

at Spine to conform the E&O calculation performed at another Orthofix segment since at 

least 2007. 

88. The updated E&O policy, among other things, provided that an E&O reserve would not 

be taken in the first four years of a product’s launch. Applying that policy, in the fourth 

quarter of FY 2012 the Spine CFO reversed the reserve originally booked in the second 

quarter of FY 2012 (which resulted in a $1.2 million gross margin increase in the fourth 

quarter of FY 2012).

89. On restatement, however, Orthofix concluded that the FORZA E&O reserve should not 

have been reversed due to the fact that issues with FORZA’s launch had indeed impacted 

demand.

90. Second, in connection with the company’s restatement process and based on a previously 

known design deficiency in the company’s controls over the computation and recording 

of its E&O reserve, Orthofix reviewed the broader methodology it used to compute and 

record its inventory reserve. Based on this review, Orthofix determined that it had 

improperly made reductions to previously recorded reserves based on changes in 

forecasted demand in contravention of ASC 330.4

91. As a result of its improper reserve accounting for this broader issue and the FORZA issue 

noted above, Orthofix understated its E&O reserve by $3.4 million and $5.6 million in 

FY 2011 and 2012, respectively.

I. Orthofix’s Restatement

 

4 ASC Topic 330, Inventory (specifically ASC 330-10-35-14) states that a write-down below cost at the 

close of a fiscal year creates a new cost basis.
16

92. In late March 2014, Orthofix restated its financial statements for the first quarter of fiscal 

year 2013, all quarterly and annual periods in fiscal years 2012 and 2011, and the annual 

period for fiscal year 2010. 

93. As a result of certain improper distributor revenue recognition practices, Orthofix 

announced that it had overstated – for example – fiscal year 2011 net sales by 

approximately 6% and operating income by over 430%. Moreover, in the restatement, 

Orthofix acknowledged certain material weaknesses in its internal control over financial 

reporting. 

VIOLATIONS

94. Securities Act Section 17(a)(2) prohibits any person from obtaining money or property in 

the offer or sale of securities by means of any untrue statement of a material fact or any 

omission to state a material fact necessary in order to make the statements made, in light 

of the circumstances under which they were made, not misleading.

95. Securities Act Section 17(a)(3) prohibits any person from engaging in any transaction, 

practice, or course of business which operates or would operate as a fraud or deceit upon 

the purchaser in the offer or sale of securities.

96. Section 13(a) of the Exchange Act requires issuers to file such periodic and other reports 

as the Commission may prescribe and in conformity with such rules as the Commission 

may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of 

annual, current, and quarterly reports, respectively. In addition to the information 

expressly required to be included in such reports, Rule 12b-20 of the Exchange Act 

requires issuers to add such further material information, if any, as may be necessary to 

make the required statements, in the light of the circumstances under which they are 

made not misleading. “The reporting provisions of the Exchange Act are clear and 

unequivocal, and they are satisfied only by the filing of complete, accurate, and timely 

reports.” SEC v. Savoy Industries, 587 F.2d 1149, 1165 (D.C. Cir. 1978) (citing SEC v. 

IMC Int’1, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974)). A violation of the reporting 

provisions is established if a report is shown to contain materially false or misleading 

information. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975).

97. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, 

records, and accounts, which, in reasonable detail, accurately and fairly reflect the 

transactions and dispositions of the assets of the issuer.” Section 13(b)(2)(B) of the 

Exchange Act requires issuers to devise and maintain a system of internal accounting 

controls sufficient to provide reasonable assurances that transactions are recorded as 

necessary to permit the preparation of financial statements in conformity with generally 

accepted accounting principles.

98. As a result of the conduct described above, Orthofix violated Securities Act Sections

17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and 

Rules 12b-20, 13a-1, 13a-11, and 13a-13.
17

COOPERATION AND REMEDIAL ACTION

In determining to accept Respondent’s Offer, the Commission considered remedial acts 

undertaken by Orthofix, including its enhancement of internal controls, the restructuring and 

strengthening of the Company’s accounting and finance group (which includes retention of 

additional accounting personnel), and Orthofix’s cooperation with the staff’s investigation.

IV.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions 

agreed to in Respondent’s Offer.

Accordingly, it is hereby ORDERED that:

A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange 

Act, Respondent cease and desist from committing or causing any violations and any future 

violations of Securities Act Section 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a), 

13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.

B. Respondent shall, within 30 days of the entry of this Order, pay a civil money 

penalty in the amount of $8,250,000 to the Securities and Exchange Commission. If timely 

payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment 

must be made in one of the following three ways:

(1) Respondent may transmit payment electronically to the Commission, which 

will provide detailed ACH transfer/Fedwire instructions upon request

5

;

(2) Respondent may make direct payment from a bank account via Pay.gov 

through the SEC website at http://www.sec.gov/about/offices/ofin.htm; or

(3) Respondent may pay by certified check, bank cashier’s check, or United 

States postal money order, made payable to the Securities and Exchange 

Commission and hand-delivered or mailed to:

Enterprise Services Center

Accounts Receivable Branch

HQ Bldg., Room 181, AMZ-341

6500 South MacArthur Boulevard

Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter identifying 

Orthofix as a Respondent in these proceedings, and the file number of these proceedings; a copy 

 

5

The minimum threshold for transmission of payment electronically is $1,000,000. For amounts below the 

threshold, respondents must make payments pursuant to option (2) or (3) above.
18

of the cover letter and check or money order must be sent to Antonia Chion, Division of 

Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-

5720.

C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair 

Fund is created for the penalties referenced in paragraph IV.B above. This Fair Fund may receive 

the funds from and/or be combined with fair funds established for civil penalties paid by other 

respondents for conduct arising in relation to the violative conduct at issue in this Orthofix 

proceeding, in order for the combined fair funds to be distributed to harmed investors affected by 

the violative conduct. Amounts ordered to be paid as civil money penalties pursuant to this Order 

shall be treated as penalties paid to the government for all purposes, including all tax purposes. 

To preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related 

Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction 

of any award of compensatory damages by the amount of any part of Respondent’s payment of a 

civil penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants 

such a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order 

granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of 

the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be 

deemed an additional civil penalty and shall not be deemed to change the amount of the civil 

penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” 

means a private damages action brought against Respondent by or on behalf of one or more 

investors based on substantially the same facts as alleged in the Order instituted by the 

Commission in this proceeding.

By the Commission.

Brent J. Fields

Secretary