7 Suits Accuse Urohealth of Securities Fraud

Urohealth Systems Inc., a collection of medical device companies amassed by deal-maker Charles A. Laverty, is facing mounting litigation by shareholders who claim the company has misled them about its financial prospects.

Seven lawsuits, filed in federal district court in Los Angeles and Orange counties in the last three months, claim the Newport Beach-based company engaged in securities fraud in the last year by exaggerating its financial results.

Shareholders allege that the company was attempting to inflate the price of its stock and boost sales of securities to finance Urohealth’s aggressive acquisition strategy. Urohealth has snapped up a dozen companies in the last two years.

The defendants also include Laverty and James L. Johnson, the company’s former chief financial officer, who recently resigned. Some suits also name company officers and directors, as well as the company’s investment banking firms, Bear Stearns & Co., Piper Jaffray Inc. and Needham & Co.

The company disclosed the litigation in a document filed recently with the Securities and Exchange Commission. Defendants haven’t yet filed responses to the claims and company officials wouldn’t comment. A lawyer for the investment firms said they “intend to contest the litigation vigorously.”

U.S. District Judge Gary L. Taylor in Santa Ana is expected to consolidate the actions in Orange County. He has scheduled a hearing for Oct. 6.

The suits were filed by shareholders who bought Urohealth stock between mid-summer last year and July 1 this year.

They allege that last year the company began artificially inflating its reported revenue by including certain surgical products and related items that had been shipped to distributors but had not been sold to other customers.

Shareholders cited auditors’ objections to Urohealth’s accounting practice. The auditors’ concerns prompted the company to cut its reported sales for last year and its projections for this year. Urohealth also posted an unexpectedly huge loss of $89 million for last year.

Concerned investors triggered a free fall in its stock price from $9.50 in mid-June to as low as $4.75 on July 21. Urohealth shares closed Wednesday at $4.38, off 13 cents, in Nasdaq trading.

One lawsuit, filed in Orange County, also alleged that Urohealth engaged in a “slash-and-burn” approach to cost-cutting by terminating executives and managers of acquired companies--a risky strategy for a firm trying to integrate disparate operations.

That lawsuit claimed the company’s investment bankers assisted the company in defrauding investors by pushing sales of its securities and issuing overly positive research reports on the company.

The decline in Urohealth’s stock price forced the company to increase the number of shares that it is offering in its proposed acquisition of Imagyn Medical Inc., a Laguna Niguel biomedical company.

Urohealth and Imagyn shareholders are scheduled to meet later this month to vote on the merger, in which Imagyn shareholders would receive 1.4 shares of Urohealth’s common stock for every Imagyn share they hold.

If the deal is approved, Imagyn shareholders would own 32% of the resulting company, which would be called Imagyn Medical Technologies Inc.

Urohealth’s recent securities filing also said the company relied mostly on increased borrowings and sale of common stock to provide operating cash during its past fiscal year.

It also stated that the company remains highly leveraged and that, as of June 30, its shareholders’ equity totaled a negative $24 million.

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Urohealth Systems at a Glance

Headquarters: Newport Beach

Founded: 1985 as Davstar Industries Ltd.

Business: Designs and develops products to diagnose and treat urological/gynecological disorders

Chairman/CEO: Charles A. Laverty

Employees: 936

Status: Public

Exchange: Nasdaq

Acquisitions

1995: DacoMed Corp., Osbon Medical Systems and Advanced Surgical Inc.

1996: Richard-Allan Medical Industries

1997: Microsurge Inc., X-Cardia Corp. and Imagyn Medical (pending stockholder approval)

Source: Bloomberg News

Researched by JANICE L. JONES / Los Angeles Times

Finances in Question

Urohealth Systems’ shareholders have filed lawsuits claiming the company misled them about its finances. Net income, in millions, for these fiscal years:

(line chart of 1996 though 1998) Source: Bloomberg News

Researched by JANICE L. JONES / Los Angeles Times