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Ex-ArthroCare CEO, CFO finally indicted in $400M fraud scheme

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ArthroCare's ($ARTC) former CEO and ex-CFO are charged with masterminding a $400 million securities fraud scheme a few years back, the latest arrests in an ongoing FBI dragnet that has already snared other previous employees of the Austin, TX, surgical-tool-maker.

Both ex-CEO Michael Baker, and Michael Gluk, ArthroCare's former CFO, surrendered to authorities yesterday in the face of a wide-ranging indictment in the U.S. District Court for the Western District of Texas, according to an FBI release announcing the action. They're each charged with one count of conspiracy to commit wire and securities fraud, 11 counts of wire fraud, and two counts of securities fraud. The feds slapped Baker alone with three counts of false statements.

If convicted, each of the men face up to 25 years in jail for the conspiracy charge, and 20 years for every count of wire fraud. Additionally, each securities fraud count carries a maximum 25-year sentence, and Baker risks a 5-year sentence for each count of making false statements.

The government accuses Baker and Gluk, along with other senior executives and ArthroCare employees, of falsely inflating the company's sales and revenue from at least December 2005 through December 2008 by way of a massive scheme involving bogus end-of-quarter orders, piling those devices with distributors and then reporting those shipments as sales to meet earnings forecasts.

The indictment against the pair claims that distributors agreed to do this in exchange for major upfront cash commissions, extended payment terms and the ability to return affected products. With the deal in place, the feds allege, ArthroCare could illegally boost its revenue by tens of millions of dollars.

So what was one of the major distributors involved? That would be DiscoCare, which prosecutors say accepted ArthroCare product shipments far beyond what it needed. ArthroCare ultimately bought DiscoCare, which the indictment alleges helped conceal the scheme. Baker, Gluck and others are alleged to have lied to investors and analysts about this, as well as the U.S. Securities and Exchange Commission, when questioned about the DiscoCare relationship.

According to the U.S. Justice Department narrative, everything started crashing down on July 21, 2008, when ArthroCare announced that it would restate its financial results from late 2006 through early 2008 to account for an internal investigation into the matter. That caused share prices at the time to drop from $40.03 to $23.21, which the indictment says led to a more than $400 million loss of shareholder value. (ArthroCare's stock traded around $37.20 early on July 18.)

Last August, the FBI arrested two other people also charged in the case: John Raffle, the former senior president of strategic business units, and David Applegate, former senior vice president of ArthroCare's spine division. ArthroCare did not respond to a FierceMedicalDevice email request for comment. But last August, after the FBI's two other arrests, the company said in a statement that it was aware of the arrests and that it would continue to cooperate with the Department of Justice as it always had.

In 2011, ArthroCare paid $74 million to settle a series of class-action securities suits against it relating to the alleged fraud.

- read the FBI's announcement

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