Medical Device Manufacturer To Pay $30M For Role In Securities Fraud Scheme

WASHINGTON, D.C. — (Mealey’s) Medical device manufacturer ArthroCare Corp. will pay a $30 million monetary penalty to settle claims that certain of its senior executives engaged in a securities fraud scheme that bilked the company’s shareholders out of more than $400 million, according to a press release issued Jan. 7 by the U.S. Department of Justice. 

Under the terms of a deferred prosecution agreement between the Justice Department and ArthroCare, the Justice Department filed a criminal information in the U.S. District Court for 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 has also agreed to work with the Justice 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.” 

Inflated Revenue 

“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,” according to the press release. 

“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.” 

Two former senior vice presidents of the company, John Raffle and David Applegate, have already pleaded guilty to conspiracy to commit securities fraud and wire fraud in connection with the scheme, while former CEO Michael Baker and CFO Michael Gluk are slated to stand trial on related charges on May 5. 

Shareholder Victims 

According to the press release, ArthroCare “previously entered into a multi-million dollar settlement agreement with shareholder victims.” 

A copy of the Justice Department’s press release may be found online at www.justice.gov/opa/pr/2014/January/14-crm-013.html

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