ArthroCare Corp.’s Former CEO and CFO Charged in $400 Million Securities Fraud Scheme

ArthroCare Corp.’s former CEO and director Michael Baker and Michael Gluck, former ArthroCare Corp. CFO were charged on July 17, 2013 in the U.S. District Court for the Western District of Texas for their alleged leading roles in a $400 million dollar scheme to defraud the company’s shareholders and public investors by falsely inflating ArthoCare Corp.’s earnings by tens of millions of dollars.

The criminal indictment returned on July 16, 2013 charged the former CEO and CFO with one count of conspiracy to commit wire and securities fraud, eleven counts of wire fraud and two counts of securities fraud.  Former CEO Baker also was charged with three counts of false statements.

ArthroCare Corp. (ArthroCare) is a publicly traded medical device company based in Austin, Texas.  From at least December 2005 through December 2008, CEO Baker, CFO Gluck, and other senior executives and employees were alleged to have falsely inflated ArthroCare’s sales and revenues through a series of end-of-quarter transactions involving several distributors.

One scheme involved Baker, Gluck and other employees determining the type and amount of product to be shipped to distributors based on meeting ArthroCare’s Wall Street analyst forecasts rather than the distributors’ actual orders.  Another scheme involved ArthroCare “parking” millions of dollars of product with distributors at the end of each fiscal quarter.  ArthroCare would report these shipments as sales in its quarterly and annual filings which would enbable the company to meet or exceed internal and external earnings forecasts.  ArthoCare provided substantial, upfront cash commissions, extended payment terms, the ability to return the products, as well as, other special conditions in exchange for the distributors’ cooperation and participation in the schemes.  The distributors’ participation allowed ArthroCare to falsely inflate its revenue.

Another scheme involved DiscoCare, a privately owned Delaware corporation that Baker and Gluck caused ArthroCare to acquire in order to conceal from its public investors the true nature of the two companies’ financial relationship.  That relationship involved using DiscoCare, ArthroCare’s large distributor, to cover short falls in ArthroCare’s revenue.  One way that was acheived was by shipping DiscoCare far more product that it needed.  The criminal indictament alleged that Gluck, Baker and others lied to investors and analysts about its relationship with DiscoCare and other distributors.  It also alleged that Baker lied on multiple occasions regarding the relationship with DiscoCare during his deposition to the U.S. Securities and Exchange Commission in November 2009.

During the time period between 2005 and 2008 more than 25 million shares of ArthroCare stock was held by its shareholders.  On July 21, 2008 the price of the stock fell from $40.03 to $23.21 a share following the company’s announcement it was restating its previously reported financial results from the third quarter of 2006 to the first quarter 2008 to reflect the results of an internal investigation.  That prescipitous drop caused shareholders to lose more than $400 million in value.

An indictment is meraly a charge, and the defendants are presumed innocent until proven guilty.

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