COMPANY TO PAY $30 MILLION PENALTY TO RESOLVE CHARGES OF FRAUD AGAINST EXECUTIVES

FROM: JUSTICE DEPARTMENT 
Tuesday, January 7, 2014
Medical Device Manufacturer Charged With Major Securities Fraud Scheme

ArthroCare Corporation, a medical device manufacturer based in Austin, Texas, and that trades on the NASDAQ stock exchange, has agreed to pay a $30 million monetary penalty to resolve charges that senior executives at the company engaged in a securities fraud scheme that resulted in more than $400 million in shareholder losses, announced Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division and U.S. Attorney Robert Pitman of the Western District of Texas.

John Raffle and David Applegate, both former senior vice presidents of ArthroCare, previously pleaded guilty to conspiracy to commit securities and wire fraud in connection with the fraud scheme.   ArthroCare’s former chief executive officer, Michael Baker, and chief financial officer, Michael Gluk, are scheduled to stand trial on related charges on May 5, 2014.   Defendants are presumed innocent unless and until proven guilty at trial.

As part of the agreed-upon resolution, the department today filed a criminal information in the Western District of Texas charging ArthroCare with one count of conspiracy to commit securities fraud and wire fraud.   In addition to the monetary penalty, ArthroCare also agreed to cooperate with the department in its continuing investigation and prosecution of individuals responsible for the scheme and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect violations of the federal securities laws and federal laws relating to the company’s relationships and transactions with health care providers.   ArthroCare had previously entered into a multi-million dollar settlement agreement with shareholder victims.

In the deferred prosecution agreement, ArthroCare admitted that senior executives of the company inflated ArthroCare’s revenue by tens of millions of dollars; concealed the nature and financial significance of ArthroCare’s relationship with its largest distributor, DiscoCare Inc., and other distributors; and used a series of sham transactions to manipulate ArthroCare’s revenue and earnings as reported to investors.   ArthroCare admitted that its executives determined the type and amount of product to be shipped to distributors, notably DiscoCare, based on ArthroCare’s need to meet sales forecasts, rather than the distributors’ actual orders.

ArthroCare further admitted that these executives and others then caused ArthroCare to “park” millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter so the company could report these shipments as sales in its quarterly and annual filings and so the company would appear to have met or exceeded internal and external earnings forecasts.

According to the Information, between December 2005 and December 2008, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.   On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.  The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

This case was investigated by the FBI’s Austin Field Office.  The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William Chang of the Criminal Division’s Fraud Section.   Significant assistance was provided by the SEC’s Fort Worth, Texas, Office.