Ex CEO and CFO of Arthrocare Corporation Convicted in $400 Million Securities Fraud Scheme

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A federal jury this week convicted the former chief executive officer and the former chief financial officer of ArthroCare Corporation, a publicly traded medical device company based in Austin, Texas, for orchestrating a fraud scheme that resulted in shareholder losses of over $400 million.

After a four-week trial, a jury in the Western District of Texas found the former CEO, Michael Baker, 55, guilty of conspiracy to commit wire and securities fraud, wire fraud, securities fraud and false statements.   Michael Gluk, 56, the former CFO, was found guilty of conspiracy to commit wire and securities fraud, wire fraud and securities fraud.   Baker and Gluk were charged in a superseding indictment returned on April 1, 2014.

Evidence at trial demonstrated that Baker and Gluk, along with their co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors beginning in 2005 and continuing until 2009.   Co-conspirators John Raffle and David Applegate, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme.

Baker, Gluk and other ArthroCare employees determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.   Baker, Gluk 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.   ArthroCare then reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

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Evidence at trial further showed that ArthroCare’s distributors agreed to accept shipment of millions of dollars of products in exchange for special conditions, including substantial, upfront cash commissions, extended payment terms and the ability to return products, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

“These corporate executives cooked the books to prop up their stock, and when the truth came out investors lost more than $400 million,” said Principal Deputy Assistant Attorney General Marshall L. Miller.  “Today’s convictions are the first step in holding them accountable for undermining our financial markets for their own personal gain.”

“This case demonstrates the FBI’s commitment to unraveling elaborate and complex fraud schemes leaving no financial stone unturned,” said FBI SAC Christopher Combs. “Those who abuse their position of trust to illegally enrich themselves, at the expense of shareholders and members of the investing public, will be held accountable for their actions.”

Baker, Gluk and others lied to investors and analysts about ArthroCare’s relationships with its distributors, including DiscoCare.   Baker and Gluk caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare’s relationship with DiscoCare.
Evidence at trial also established that Baker lied when he was deposed by the U.S. Securities and Exchange Commission in November 2009 about the DiscoCare relationship.

Following today’s verdict, U.S. District Judge Sam Sparks remanded Baker into custody.    A sentencing date for Baker and Gluk has not yet been scheduled.

Source: DOJ