Merge prepares to defend itself against fake contract lawsuits

Merge Healthcare ($MRGE) shareholders got a nasty shock at the start of the year after the discovery of falsified contracts prompted the company to wipe $15 million off its eClinical backlog. A string of press releases discussing potential legal action followed, but Merge has dismissed the criticisms as meritless.

The eClinical and healthcare IT provider discussed the potential lawsuits following the release of its fourth-quarter results. While multiple law firms published press releases about potential class actions, Merge said it has so far only been served with one complaint. The lead plaintiff in the complaint owned less than 3,000 shares. At the end of December, Merge's outstanding common shares stood at 94 million, meaning the plaintiff never held a substantial stake in the company.

Merge has played down the strength of the case. "Simply put, we do not believe these allegations have any merit. In this instance, Merge was the victim. Merge discovered the problem and investigated thoroughly," Merge CEO Justin Dearborn told investors on the company's fourth-quarter conference call. Merge plans to file a motion to dismiss any securities claims related to the fake contracts and then "vigorously defend" itself against any cases that survive this initial action.

While Merge appears unconcerned about potential legal actions, its business has nonetheless been affected by the fake contracts. Merge allocated internal resources to investigating the fraud and then paid an outside legal counsel and forensic accounting firm $200,000 for their assistance. Having completed the internal and third-party investigations, Merge is confident only one employee was involved with the falsified deals. Merge has referred the case to the U.S. Attorney's Office for criminal prosecution.

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- read the call transcript