UPDATE 1-Ex-Merge Healthcare execs settle SEC fraud charges

* Merge, ex-CEO, ex-CFO settle; none admits wrongdoing

* SEC says company recognized revenue too soon

NEW YORK Nov 4 (Reuters) - Two former top Merge Healthcare Inc (MRGE.O) executives agreed to pay $870,000 to settle U.S. Securities and Exchange Commission charges they fraudulently inflated revenue at the medical imaging software provider.

Chief Executive Richard Linden and Chief Financial Officer Scott Veech oversaw a process where the Milwaukee-based company, which was also charged, prematurely recognized revenue from 124 transactions between 2002 and 2005.

The SEC said these actions caused Merge to overstate profit by 230 percent and net revenue by 26 percent from the first quarter of 2002 to the second quarter of 2005. Once the fraud was discovered, Merge shares fell, wiping out more than $500 million of market value, the SEC said.

In addition, Linden, with Veech's knowledge, also instructed Merge sales staff to tell some customers not to disclose various side agreements to the company's auditor, the SEC said.

"Linden and Veech went to deliberate lengths to disguise the timing and truth behind the sales of their software products and enhancements," said Merri Jo Gillette, director of the SEC regional office in Chicago, in a statement.

Under the settlement, Linden will pay $590,000 and Veech $280,000 and both agreed not to be officers or directors of public companies for five years. Merge agreed not to violate various SEC requirements. None of the defendants admitted wrongdoing.

Merge did not immediately return a call seeking comment.

The company first announced plans for a restatement in March 2006 and its shares fell 45 percent over two days after it provided further details in October 2007.

Merge shares closed down 3 cents at $3.65 on the Nasdaq. (Reporting by Jonathan Stempel; editing by Andre Grenon)