WASHINGTON—The former chief executive officer (CEO) of ArthroCare Corporation was sentenced to serve 20 years in prison, and the former chief financial officer (CFO) was sentenced to serve 10 years in prison today for their leading roles in a $750 million securities fraud scheme. Two other former senior vice presidents of ArthroCare were also sentenced to prison terms for their roles in the scheme.
Principal Deputy Assistant Attorney General Marshall L. Miller of the Department of Justice’s Criminal Division and Special Agent in Charge Christopher H. Combs of the FBI’s San Antonio Field Office made the announcement. U.S. District Judge Sam Sparks in the Western District of Texas imposed the sentences.
On June 2, 2014, former ArthroCare’s CEO Michael Baker, 55, and former CFO Michael Gluk, 56, were convicted by a jury of wire fraud, securities fraud, and conspiracy to commit wire and securities fraud; Baker was also convicted of making false statements. On June 24, 2013, John Raffle, 46, the former Vice President of Strategic Business Units, pleaded guilty to conspiracy to commit securities, mail and wire fraud, and two false statements charges. On May 9, 2013, David Applegate, 55, the former Senior Vice President of the Spine Division, pleaded guilty to conspiracy to commit securities, mail and wire fraud, and a false statements charge. At sentencing, the court found that investors lost approximately $756 million as a result of the defendants’ scheme to artificially inflate the share price of ArthroCare stock through sham transactions.
According to court documents, between 2005 and 2009, Baker, Gluk, Raffle and Applegate executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors. Products were shipped to distributors at quarter end based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders. ArthroCare then fraudulently reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to appear to meet or exceed internal and external earnings forecasts. ArthroCare’s distributors agreed to accept these shipments of millions of dollars of excess inventory in exchange for lucrative concessions from ArthroCare, such as upfront cash commissions, extended payment terms, and the ability to return products. In some cases, like that of ArthroCare’s largest distributor, DiscoCare, the defendants agreed ArthroCare would acquire the distributor and the inventory so that the distributor would not have to pay ArthroCare for the products at all.
Between December 2005 and February 2009, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock. On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results to reflect the results of an internal investigation and account for the defendants’ fraud, the price of ArthroCare shares dropped from $40.03 to $23.21 per share. On Dec.19, 2008, ArthroCare again announced publicly that it had identified more accounting errors and possible irregularities related to the defendants’ fraud. That day, the price of ArthroCare shares dropped from approximately $16.23 to approximately $5.92 per share.
In addition to the underlying conduct, Baker was convicted of lying to the U.S. Securities and Exchange Commission during its investigation of the conduct. The court further found, as part of sentencing, that Baker and Gluk each lied under oath during their trial testimony, in which they attempted to escape responsibility for their actions.
In addition to their prison terms, Baker and Gluk were sentenced to serve five years of supervised release. In addition, the court ordered Gluk and Baker to forfeit $25,040,810, the amount of their profits from the scheme.
John Raffle was sentenced to serve 80 months in prison followed by three years of supervised release. David Applegate was sentenced to serve 60 months in prison followed by three years of supervised release.
The case was investigated by the FBI’s San Antonio Field Office. The case was prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William S.W. Chang of the Criminal Division’s Fraud Section. The Department recognizes the substantial assistance of the Criminal Division’s Asset Forfeiture and Money Laundering Section and the U.S. Securities and Exchange Commission, as well as the critical role of the U.S. Attorney’s Office for the Western District of Texas, which provided invaluable support to the prosecution team during all phases of the litigation.