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Ex-ArthroCare Executives Convicted Of Fraud

Two former executives of ArthroCare, a surgical device manufacturer, have been convicted for their roles in a securities fraud that cost investors more than $400 million, having been found guilty by a federal jury on Monday in Austin, Texas after a four week trial. Former CEO Michael Baker was convicted of conspiracy to commit wire and securities fraud, wire fraud, securities fraud, and false statements. Former CFO Michael Gluk was convicted of conspiracy to commit wire and securities fraud, wire fraud, and securities fraud.

No sentencing date has been set yet, but both former executives face up 25 years in federal prison for each conspiracy charge, 20 years for each count of wire fraud, and 25 years for each count of securities fraud. Additionally, Baker faces 5 more years for each count of making false statements.

Evidence at trial showed that Baker, Gluk, and their co-conspirators developed and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving numerous ArthroCare distributors from 2005 to 2009. Co-conspirators John Raffle and David Applegate, former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme.

ArthroCare sold medical devices directly to end-users as well as distributors who would resell them to other end-users. The conspirators determined the type and amount of product to be shipped to distributors based on the need to meet Wall Street analysts’ forecasts instead of the distributors’ actual orders. They then caused ArthroCare to park millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter, and ArthroCare then reported these shipments as sales in its quarterly and annual filings at the time of the shipment, allowing the company to meet or exceed internal and external earning forecasts. In return for accepting the shipments, distributors received special conditions, including substantial cash commissions, extended payment terms, and the ability to return products.

The conspirators bought distributor DiscoCare to cover shortfalls in ArthroCare’s revenue, shipping products that vastly exceeded DiscoCare’s needs. Baker was accused of lying to SEC officials in a sworn deposition on November 18, 2009, falsely stating that the DiscoCare acquisition was not done to avoid having to disclose the size of DiscoCare’s receivable and that he was never part of a discussion regarding the acquisition being used to avoid disclosing the size of the DiscoCare receivable. Baker also falsely stated that the $25 million purchase price of DiscoCare was not related to the $25 million termination fee in ArthroCare’s existing contract with DiscoCare and that there was never a discussion of basing the price on the termination fee.

On July 21, 2008, ArthroCare announced that it would be restating its financial results for seven previous quarters to reflect the results of an internal investigation. Subsequently, shares dropped from $40.03 to $23.21, knocking $400 million off shareholders’ holdings. On December 19, 2008, ArthroCare announced that it had identified accounting errors and potential irregularities in its revenue recognition practices as far back as 2005. Afterwards, shares dropped from $16.23 to $5.92. Earlier this year, ArthroCare agreed to pay $30 to settle a 5-year federal investigation into the matter.

Baker’s attorney stated that they strongly disagree with the jury’s finding and that they plan to appeal the case.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.