Merge Technologies Comes Undone

Shares of Merge Technologies (MRGE) plummeted Monday after the Milwaukee-based medical software company announced the negative conclusions of an internal audit and a major management shakeout, including the resignation of its CEO and CFO.

In recent trading on this holiday-shortened session, the stock was down $5.01, or 40.7%. to $7.30. More than 5.7 million shares have been traded as of 12:25 p.m. EDT, approximately 10 times its daily average for the past three months.

In a press release, the company said that some of its financial statements "should no longer be relied upon due to material errors, including improper accounting and financial reporting" for the fiscal period 2002 to 2005. In a board meeting on Sunday, three top senior officials stepped down: CEO William Mortimore; CFO and Treasurer Scott Veech, and David Noshay, head of business development.

Mortimore was replaced by chairman Michael Dunham, who was appointed CEO on an interim basis. Brian Pedlar and Robert White were named interim co-president and co-chief executives.

Dunham declined to comment for this article.

The company also disclosed that it will be unable to meet its July 7 deadline to file its 2005 annual report and first-quarter 2006 results. In a desperate attempt to avoid delisting by the Nasdaq, Merge said that it requested an additional extension until Sept. 30.

The stock was a popular crisis investing pick among some hedge funds, which were hoping to see the stock jump based on compliance with the July 7 deadline. The assumption was that the company's accounting problems were relatively minor.

Clearly, that is not the case.

"I think it's pretty likely that the stock is going to be delisted," says David Sackler, founder of $20 million hedge fund Moab Partners. Sackler had a position in the stock but sold it at the end of last month. "The longer this has taken, the more I got nervous," he says.

The stock is a "hedge fund stock," Sackler adds, making a delisting more likely. No mutual funds own a significant amount of shares, and only mutual funds, not hedge funds, are forced to sell when a stock gets delisted. In this particular scenario, hedge funds can hold onto the name, although "some of the hedge funds are bailing out this morning," Sackler says. "It's a lot of knee-jerk selling. We bought a tiny back today and if it's lower, we'll continue to do that."

While some had feared fraud, Sackler and others continue to argue that the accounting problems were only technical and minor, mainly due to how revenues were booked or recognized.

"The restatements are what they are," he says. "But if you have contracts that are signed and cash coming in, how you account that is important, but at the end of the day, what matters is the cash coming in."

Meanwhile, it's a bumpy road for some of the major investors.

On June 7, Silver Point Capital, a hedge fund and private equity firm, disclosed a 5.28% in the company with 1.15 million shares. The stock then was trading at $12.60. In less than a month, the hedge fund lost $5.7 million on this position, assuming it did not sell within the last month.

Calls to Bob O'Shea, co-founder of Silver Point, were not returned.

In keeping with TSC's editorial policy, Trincal doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

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