A BAD PLAN POORLY EXECUTED
The definition of securities fraud under federal law, essentially a misrepresentation of information useful to an investor in making investment decisions, seems pretty straight forward. The perpetrators of the fraud can be a stockbroker or an executive, or an organization such as a brokerage firm, corporation or investment bank. Individuals with no corporate affiliation can also be guilty of fraud through insider trading, or Ponzi or pyramid schemes.
But what about a different kind of scheme, one in which a medical device manufacturer convinces patients to undergo unnecessary surgery to implant the manufacturer’s device in their bodies that is totally ineffectual? The most immediate victims are patients, who probably do not own shares in the manufacturer, not investors. Is that the kind of fraud which the anti-fraud provisions of our securities laws target? The SEC thinks that it can be.
Laura Tyler Perryman is the founder and former chief executive officer of Stimwave Technologies Inc., a privately held medical device startup. According to a complaint instituted by the United States Attorney for the Southern District of New York on behalf of the SEC,[i] Perryman concocted a scheme to sell a completely non-functional device. The result of the scheme was millions of dollars in fraudulent bills to government insurance programs and some very unhappy patients.
Stimwave was founded to provide alternatives to opioid drugs for the relief of chronic pain. It marketed a device called the StimQ PNS System, which consisted of implantable electrodes, an external battery and another implantable component called the receiver, which transmitted energy from the battery to the electrodes. Stimwave’s business model was based on selling the device for about $16,000 to doctors and other medical health providers, who would implant the two components. They were then able to claim a total reimbursement from insurance ranging from $20,000 to $24,000.
Shortly after the PNS System was released for sale, doctors complained that the receiver was too long to implant in certain spaces of the body. Because the receiver needed a specific length of copper cord, it could not be reduced in size. Since approximately 80% of the reimbursement from insurers was for implantation of the receiver, it was not economically viable for doctors to implant only the electrodes. The anatomical problem completely upended Stemware’s business model.
Perryman’s solution was to direct Stimwave employees to create a smaller receiver capable of implantation throughout the body. The altered receiver was not a functional component at all. It was merely a cylindrical piece of medical-grade plastic, without the copper cord to transmit energy to the electrodes, or any functioning parts. In other words, it was a fake.
Stimwave had submitted the original version of the device to the FDA, which cleared it for commercial distribution in 2017. At Perryman’s direction, Stimwave did not submit the modification, the one with the non-functioning parts, for FDA approval. Since Perryman’s plan involved keeping the doctors in the dark, they unwittingly submitted fraudulent claims to insurers for reimbursement for performing unnecessary surgeries to implant useless components into patients’ bodies.
During a Series D Funding round, Perryman falsely represented to potential investors that the PNS System could be implanted in small spaces, that the modified device had been FDA approved and that Stimwave had a reliable business model, all of which, according to the SEC, constituted securities fraud. The SEC claims the investors were bilked out of $41 million.
The SEC case may not even be the worst of Perryman’s problems. In March 2023, the same United States Attorney had filed a criminal complaint against her based on the same conduct, charging her with one count of conspiracy to commit wire fraud and health care fraud and one count of health care fraud.[ii] The prosecutors then filed a superseding indictment against Perryman on the same day it filed the complaint against her on behalf of the SEC (December 19, 2023), adding criminal securities fraud charges. Perryman faces the possibility of decades in jail. Stimwave, which has filed for bankruptcy, has pleaded guilty and agreed to pay a total of $10 million to settle the criminal complaint and a related whistleblower lawsuit.[iii]
Perryman also faces a number of civil suits, including one instituted by Stimwave itself, charging her with using corporate funds for personal expenses. So she is going to be pretty busy for a while.
Is the scope of securities fraud elastic enough to encompass a manufacturer’s misrepresentations about its medical device to doctors, who recommend the device to patients for treatment? Almost certainly. Investors would no doubt have had an interest in knowing that Stimwave’s principal product was totally worthless. This is so, even though those who suffered the most immediate harm as a result of the scheme are patients who expected relief from chronic pain and medical insurers who ultimately footed the bill for both the unnecessary surgeries and the device.
[i] Securities and Exchange Commission v. Laura Tyler Perryman, Docket No. 1:23-cv-10985 (S.D.N.Y. filed December 19, 2023).
[ii] United States v. Perryman, Docket No. 23-cr-117 (S.D.N.Y. 2023).
[iii] United States ex rel. SWFC LLC v. Stimwave Technologies Inc., Docket No. No 18-cv-4599 (S.D.N.Y. 2019).