A class action lawsuit was filed against Paragon 28, Inc. (FNA) by Levi & Korsinsky on September 30, 2024. The plaintiffs (shareholders) alleged that they bought FNA stock at artificially inflated prices between May 5, 2023 and August 8, 2024 (Class Period) and are now seeking compensation for their financial losses. Investors who bought Paragon 28 stock during that period can click here to learn about joining the lawsuit.
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Paragon 28 operates as a medical device company that develops and markets devices for the foot and ankle segment of the orthopedic implant marketplace. The company claims to be on a mission to solve the problems and improve the conditions of patients with foot and ankle conditions.
The company’s claims about the accuracy of its financial statements and internal controls are at the heart of the current complaint.
Paragon 28’s Misleading Claims
According to the lawsuit, Paragon 28 and three of its current and/or former senior officers (Individual Defendants) repeatedly made false and misleading public statements throughout the Class Period. Particularly, they are accused of omitting truthful information about the adequacy of the company’s internal controls and ancillary issues from SEC filings and related material.
For instance, the company and the defendants consistently reiterated the effectiveness of its financial accounts. Furthermore, in a quarterly report filed on November 8, 2023, Paragon 28 noted that one of the errors related to the interest rate swap facilities with the Zions Facility had been evaluated and there was no material error from the same.
Once again during the annual report filed for Fiscal 2023, the company reiterated that the management believed its controls were adequate and concluded that no material weakness existed after the remedies as of December 31, 2023.
However, subsequent events (discussed below) revealed that Paragon 28 allegedly misled investors about the authenticity and reliability of its financial statements and financial condition.
Plaintiffs’ Arguments
The plaintiffs maintain that the Defendants deceived investors by lying and withholding critical information about the company’s business practices and prospects during the Class Period. Importantly, the Defendants are accused of misleading investors about the adequacy of internal controls on the financial reporting and accounts of the company.
The information became clear in a series of events that occurred between July 30, 2024 and August 8, 2024. The company first filed a “Restatement Announcement” report with the SEC, notifying investors that it was required to restate the financial statements with retrospective effect for certain periods due to accounting flaws. Accordingly, the company noted that its annual report for Fiscal 2023, and quarterly reports for Q1 FY23 up to Q1 FY24 should not be relied upon.
Furthermore, the company stated that for the year ended December 31, 2023, it had understated the cost of goods sold by $8.4 million and overstated inventories (net) by $8.0 million. Similarly, for Q1 FY24, the company had understated the cost of goods sold by $1.7 million and overstated inventories (net) by $9.7 million.
Paragon 28 filed the restated annual report for Fiscal 2023 and quarterly report for Q1 FY24 with the SEC on August 8, 2024, after the market closed. FNA shares plunged over 20% on August 9 on the news.
To conclude, Paragon 28 allegedly misrepresented its financial statements for certain periods, leading to overstated expectations for Fiscal 2024. Year-to-date, FNA shares have declined 19.6%, causing damage to shareholder returns.
