Hansen Medical Settles SEC Probe; Two Former Execs Charged

Talk about a lucky break: Robotic surgery specialist Hansen Medical Inc. has resolved a U.S. Securities & Exchange Commission (SEC) probe without admitting any wrongdoing or paying a fine.

By agreeing to the settlement, the Mountain View, Calif.-based firm remained mum on charges that it provided misleading financial data to public investors and the SEC several years ago, violating two sections of the Securities Act and six sections of the Exchange Act—specifically, filing inaccurate earnings reports, failing to keep precise financial records and failing to devise and/or maintain an “adequate system of accounting controls.” An SEC order drafted earlier this fall commands Hansen Medical to comply with specific sections of the Securities and Exchange acts it violated.

The SEC investigation launched its investigation into Hansen Medical’s finances after the company discovered that revenue from several sales transactions had been improperly reported in 2008. Hansen Medical submitted modified financial reports to the agency in November 2009 that covered the fiscal years ended Dec. 31, 2007, Dec. 31, 2008, each of the quarters in 2008 and the first two quarters in 2009.

The questionable sales transactions were spearheaded by Christopher Sells, Hansen Medical’s former vice president of commercial operations, and Timothy Murawski, a former vice president of sales who reported to Sells. The pair, according to an SEC news release, orchestrated bogus sales transactions to inflate the company’s revenues and raise additional capital from investors. An SEC complaint alleges the duo schemed to temporarily install the Sensei Robotic Catheter System—sold primarily to hospitals for use in cardiac surgeries—before customers were ready so Hansen Medical could record the product sale (in many cases, before the end of a fiscal quarter or year).

Most of Hansen Medical’s sales contracts for the Sensei system required the company to install the system at the customer site, which could take up to two days due to the complexity of the equipment and the battery of tests installers would run to ensure the system worked properly. The contracts also required the company to provide training at its facilities in either Mountain View or Cleveland, Ohio, to at least one doctor who intended to use the Sensei system. “As evidence that physician training had been completed, Hansen’s clinical group, which was responsible for conducting physician training, would submit to Hansen’s finance department a training acknowledgement form signed by the Hansen trainer and the physician. These completed forms were included in the revenue recognition files that were reviewed by Hansen’s finance group and the company’s outside auditors to allow them to determine whether and when Hansen could recognize revenue on particular sales transactions,” the SEC complaint stated.

On at least four occasions, Sells (of Dallas, Texas) and Murawski (of Lake Zurich, Ill.) convinced hospitals to install the Sensei system before they were ready so the company could record the sale. To appease their customers’ complaints and/or concerns about the early installations, Sells and Murawski would have the equipment dismantled and put in storage until the hospitals truly were ready to handle the system. Such a scheme enabled the pair to collect $700,000 from one hospital by the end of the third quarter (Sept. 30) in 2008. In another instance, Sells threatened a hospital in Connecticut with a price increase if it did not install the Sensei system by the end of the 2008 calendar year. Though the hospital received proper approvals from state officials to purchase the system, its doctors never received training on the equipment by the end of the year, thus jeopardizing Hansen Medical’s chances of recording the $660,000 sale in time for 2008.

Sells and Murawski, however, were not be deterred. They directed a clinical training employee to email doctors and ask that they sign a form stating they had been trained on the Sensei system even though they had not yet received such instruction. When the doctors did not respond to the email, the pair had an employee forge a doctor’s signature on one of the acknowledgement forms, the SEC complaint stated.

After their scheme was revealed, Hansen Medical requested Sells’ resignation and fired Murawski. Both have been charged with fraud by the SEC.

Besides firing Murawski and forcing Sells’ resignation, Hansen Medical executives issued oral and written reprimands to eight employees, and provided better training to all employees about the company’s revenue recognition policies. It also reorganized management, requiring the sales, clinical and field service teams report to different supervising officers to ensure proper oversight.