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Merge Healthcare Faces Multiple Lawsuits

March 18, 2014
by Gabriel Perna
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Suit alleges the company put out false and misleading statements.

Merge Healthcare, the Chicago-based provider of imaging informatics software, is facing separate lawsuits from stockholders, one of which claims the company put out false and misleading statements.

The lawsuits, publicized in the company’s public annual finance report, were filed by Fernando Rossy on Jan. 16, 2014 and William B. Federman on Feb. 14, 2014. Both are stockholders and Merge says it is considering consolidating them into one or two actions.

 Rossy’s suit, filed on behalf of others in similar circumstances, alleges that a number of stockholders suffered damages due to the reported dissemination or approval of false and misleading statements by Merge. Specifically, in the lawsuit, the lawyers for Rossy outline examples where Merge reportedly contradicted itself over finance reports. It rehashes a series of statements from Aug. 1, 2012 through Jan. 7, 2014, which it says ended up being contradictory.

“For the quarter, Merge Technology reported a 9% decline year-over-year in revenue to $57.2 million despite reporting an 82% increase in its subscription backlog from the 2Q 2012 period,” is an example of one of the alleged contradictions in the lawsuit.

Further, the claim alleges that Merge misrepresented or failed to disclose that both the existence and value of millions of dollars of its eClinical customer contracts had been falsified. As a result the company’s subscription backlog was overstated during the six quarters ended September 30, 2013.  This information was noted in a Wall St. Journal piece on Jan. 8, 2014 and something the company admitted to.

This in particular is the basis of Federman’s lawsuit against Merge. Federman says that the contracts, falsely valued at $15.2 million, represented nearly 14 percent of the $69.5 million subscription backlog reported in 2013 for the eClinical subscription backlog.  

Rossy’s lawyers conclude that the false and misleading statements led the stock to track at an artificially high price. Rossy and others, the suit alleges, purchased stock based on the integrity of the market price of the Merge stock and market information. “When the true facts about [Merge] were revealed to  the market, the inflation in the price of Merge Healthcare common stock was removed and the price of Merge Healthcare common stock declined dramatically,” it says in the suit.

The Shareholders Foundation, which is a professional portfolio legal monitoring and settlement claim filing service, released a statement around the same time as Rossy’s suit, asking if people have purchased a significant amount of shares of Merge’s stock from Aug 1, 2012 to Jan 7, 2014.

 “While we intend to defend the claims vigorously and carry directors and officers insurance, it is reasonably possible that we may incur a loss in this matter.  At this stage of the proceedings, however, it is not possible for management to reasonably estimate either the likelihood of such a loss or its magnitude,” Merge said in its report.

Merge has had a tumultuous year. In August, CEO Jeffery Surges resigned following a disappointing financial performance in its second quarter. The finances continued to struggle in the first quarter under the new regime.

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