Surgical Instruments Maker ArthroCare Settles Securities Fraud Case

Chris Newmarker

January 8, 2014

2 Min Read
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ArthroCare Corp. of Austin, TX will pay $30 million to settle securities fraud-related charges with the U.S. Department of Justice, the DOJ recently announced.

Federal prosecutors say shareholders lost more than $400 million in mid-2008 from the alleged scheme, which involved the company "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 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.

ArthroCare--which makes surgical devices that use coblation, a non-heat driven process, to remove tissue in the joints, spine and other areas--trades on the Nasdaq under the symbol ARTC. Its stock presently trades around $50 per share--its best since the Great Recession.

John Raffle and David Applegate, both former senior vice presidents of ArthroCare, have both pleaded guilty to conspiracy to commit securities and wire fraud. The company's former CEO Michael Baker and former chief financial officer Michael Gluk are scheduled to stand trial this May.

In addition the the monetary penalty, ArthroCare also agreed to cooperate with the Justice Department in its continuing investigation into the securities fraud case. Federal prosecutors on Tuesday formally charged the company in the Western District of Texas with one count of conspiracy to commit securities fraud and wire fraud. But the company said in a news release that the DOJ will seek a dismissal, as long as the company abides by its 24-month deferred prosecution agreement.

In the deferred prosecution agreement, ArthroCare admitted that senior executives of the company inflated ArthroCare's revenue by tens of millions of dollars and concealed the nature and financial significance of ArthroCare's relationship with its largest distributor, DiscoCare Inc., and other distributors. ArthoCare would "park" millions of dollars worth of its medical devices at its distributors at the end of each relevant quarter in order to count the shipments as sales.

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