Chris Newmarker

September 2, 2014

3 Min Read
Former ArthroCare CEO Gets 20 Years for Securities Fraud

A federal judge in Texas has sentenced former ArthroCare CEO Michael Baker to 20 years in prison for a securities fraud scheme that cost investors $756 million. 

Michael Baker

Michael Baker

Michael Gluk, who was chief financial officer, meanwhile received a 10-year sentence for his role in the scheme, which prosecutors say artificially pumped up sales and revenue numbers for the surgical devices maker between 2005 and 2009. 

"While it is important to recognize the financial losses sustained by all victims, which includes individual investors and institutional investment firms, many of the victims will never recover from the financial ruin caused by the defendants' greed," FBI agent Christopher H. Combs said in a news release.

"Many of the victims worked hard their entire lives, saving money for retirement or their children's college funds," Combs said. "Some were already living on fixed incomes and are now struggling to make ends meet."

London-based Smith & Nephew completed a $1.5 billion acquisition of Austin, TX-based ArthroCare in May. ArthroCare earlier in the year agreed to pay $30 million to settle charges with the U.S. Department of Justice.

Baker's LinkedIn profile and a Standford Biodesign guest speaker profile show him staying active in the business, even running a company called Pulmonx, since leaving ArthroCare in 2009.

Prosecutors say the scheme orchestrated by Baker, Gluk and other top executives involved ArthroCare "parking" medical device products at its distributors near the end of each quarter so that it could falsely pump up its sales numbers.

ArthroCare's distributors agreed to accept the shipments of millions of dollars of excess inventory in exchange for lucrative concessions including upfront cash commissions, extended payment terms, and the ability to return products. In the case of ArthroCare's largest distributor, DiscoCare, an acquisition was even agreed on so that the distributor would not have to pay ArthroCare for the products at all. 

ArthroCare's stock price fell from $40.03 to $23.21 per share on July 21, 2008, when the company announced it would be restating financial results going back to the third quarter of 2006.

The stock took another plunge, from $16.23 to $5.92 per share, on December 19, 2008, after ArthroCare announced more accounting errors and possible irregularities related to the fraud.  

John Raffle and David Applegate, both former senior vice presidents of ArthroCare, pleaded guilty earlier this year to conspiracy to commit securities and wire fraud. Raffle was sentenced to serve 80 months in prison followed by three years of supervised release, while Applegate was sentenced to serve 60 months in prison followed by three years of supervised release.

In additional to the prison sentences, Baker and Gluk must also forfeit more than $22 million--the amount they allegedly made off the scheme.

Refresh your medical device industry knowledge at MEDevice San Diego, September 10-11, 2014.

Chris Newmarker is senior editor of MPMN and Qmed. Follow him on Twitter at @newmarker.

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