Howard Root had 30 minutes to pitch his Maple Grove company, Vascular Solutions Inc., at a widely followed New York med-tech conference earlier this month. But before he could tout a decade of revenue growth and a potentially lucrative new contract to develop freeze-dried plasma for the battlefield, he had to address the matter of a federal indictment.
"All I can say is, the allegations are false and the truth will come out," Root told the Nov. 20 investors forum, using up a third of his time to rebut felony conspiracy charges lodged a week earlier against him and his company for allegedly selling varicose-vein surgery kits for unauthorized use. "These are serious charges; you take it seriously. But you need to go forward and run the company while you fight."
That could be easier said than done. A trial could be a year away, and observers expect the distractions and legal pressure will grow at Vascular Solutions as Root pursues a rare business strategy of running a publicly traded firm while under indictment for alleged crimes stemming directly from his management.
Already, the indictment has cost the company an $800,000 state subsidy tied to an expansion of its Maple Grove facilities and slammed the brakes on its stock price, paring some $80 million off its market valuation. At least nine law firms have said they're pursuing possible class-action shareholder litigation, and one of the key questions is whether the board is showing enough independence from its co-founder.
Root, 53, a former Dorsey & Whitney attorney, has been CEO since he co-founded Vascular Solutions in 1997. He declined to be interviewed for this story.
On Nov. 13, a San Antonio grand jury indicted Root and Vascular Solutions corporation on eight misdemeanor charges of illegally promoting a varicose-vein laser kit and a ninth felony charge of conspiring to commit, and then cover up, the illegal conduct.
The 25-page indictment draws heavily on internal company e-mails and sales presentations that prosecutors allege show that Root and company officials were aware the Food and Drug Administration never granted the sweeping approval suggested to doctors in sales pitches for the Vari-Lase "short kit." Approved to treat veins near the skin in June 2007, regulators specifically told the company it could not sell the device to treat veins deeper in the body because of safety concerns. The company did so anyway, prosecutors say.
Stakes are high for Root and the company. Each could be barred from doing business with Medicare if convicted of felony health care fraud, and the government would have the option of moving for exclusion with a misdemeanor conviction, the company has told investors in securities filings.
The criminal case is based on allegations in a 2010 whistleblower lawsuit filed by a former sales representative. The company in July paid $520,000 to resolve that case without admitting wrongdoing.
Vascular Solutions responded in a prepared statement that it "vehemently" disagreed with the charges included in the indictment. "We did not engage in any illegal off-label promotion," the statement said. "Nor did we engage in any false or misleading conduct."
Further, the company promised to release what it said is "astonishing" information that would undermine the charges. And, most notably, its CEO remained in firm control.
The response is unusual, observers say, raising questions about whether the Vascular Solutions board of directors is showing enough independence from Root, who was been CEO since co-founding the company.
"It would be more prudent to place him on paid leave," said Lewis Morris, a health care compliance attorney and former chief counsel to the inspector general of the U.S. Health and Human Services Department. "Their CEO is under indictment. I don't know how you could possibly argue that he represents the integrity and the tone at the top that the company aspires to."
Three health care lawyers interviewed for this story agreed that the Vascular Solutions board of directors should have commissioned an independent analysis of the CEO's assertions of innocence — particularly since the indictment quotes directly from internal company documents.
"If the board has done its investigation and it is confident that the CEO managed and oversaw the company properly, I wouldn't be surprised to see them keep him in place while the company and he fight the case," said Bret Puls, a litigator with Oppenheimer Wolff & Donnelly in Minneapolis. "It all turns on whether the board has conducted a thorough, independent investigation of the allegations of criminal activity."
A Vascular Solutions spokesman declined to elaborate on homework the board may have done before allowing Root to remain at the helm, deferring to this previous prepared statement:
"I have led the independent members of the board of directors in providing active direction to and oversight of the company's response to this investigation," board Chairman John Erb said in the Nov. 13 statement, minutes after the indictment was announced. "The board of directors unanimously supports management's handling of this matter and the company's defense against these unwarranted charges."
Root is a well-known figure in the Minnesota medical device industry who has a reputation for being outspoken. This past April, he inflamed passions when he accused the University of Minnesota of not adequately preparing undergrads for the modern workforce. "He has a strong voice and strong opinions," said Ryan Baird, spokesman for Minnesota's medical device trade group LifeScience Alley. "Not everyone loves that. But in the past we have asked him to lend his voice to discussions, and he has."
At the Nov. 20 meeting in New York, called the Canaccord Genuity Medical Technologies and Diagnostics Forum, Root asserted that the allegations against him and his company were "baseless"; that no patients were harmed in testing; and that the product itself, which uses laser energy to zap away diseased superficial veins, was discontinued because it was "insignificant" to the company's bottom line.
Vascular Solutions, primarily known for its surgical catheters and anti-bleeding products, saw sales top $110 million in 2013, up 12 percent over the previous year. Sales are on pace to rise another 14 percent this year.
Investors took flight the day after the Nov. 13 indictment, sending Vascular Solutions shares down nearly 25 percent, to $23.74 per share, despite a $20 million stock buyback plan rolled out by the company. Since then, shares have ticked up to around $26.
"We believe that VASC will weather this tempest in a teapot, and stock valuation will be unaffected … in the long term," Piper Jaffray stock analyst Thomas Gunderson wrote in a Nov. 13 investors' note, using Vascular Solutions' stock exchange abbreviation. He recommended investors continue to buy the stock.
In an interview last week, Gunderson said part of his rationale in judging the stock a "buy" was an independent review of the allegations conducted by the board of directors. But in follow-up comments, Gunderson clarified that the board has not said directly that it did an independent review of the indictment before deciding to keep Root in place.
"I think the board is waiting for vindication from the judge or the jury," he said.
Joe Carlson • 612-673-4779
Twitter: @_JoeCarlson
