Former ArthroCare Execs Convicted of Fraud

     AUSTIN (CN) - Two former executives with surgical device manufacturer ArthroCare have been convicted for their roles in a securities fraud that cost investors more that $400 million.
     An Austin federal jury on Monday found former CEO Michael Baker and former CFO Michael Gluk guilty, after a four-week trial.
     Baker, 55, was convicted of conspiracy to commit wire and securities fraud, wire fraud, securities fraud and false statements.
     Gluk, 56, was found guilty of conspiracy to commit wire and securities fraud, wire fraud and securities fraud.
     No sentencing date has been set.
     Both men face up to 25 years in federal prison for each conspiracy charge, 20 years for each count of wire fraud and 25 years for each count of securities fraud, prosecutors said. Baker faces an additional 5 years for each count of making false statements. Immediately after the verdict, U.S. District Judge Sam Sparks remanded Baker into custody.
     "Evidence at trial demonstrated that Baker and Gluk, along with their co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare's distributors beginning in 2005 and continuing until 2009," prosecutors said in a statement Monday. "Co-conspirators John Raffle and David Applegate, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme."
     ArthroCare sold medical devices directly to end-users, including physicians and surgery centers. It also sold devices to distributors who would resell them to other end-users.
     The conspirators determined the type and amount of product to be shipped to distributors based on the need to meet Wall Street analysts' forecasts instead of the distributors actual orders, prosecutors said.
     "Baker, Gluk 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," prosecutors said. "ArthroCare then reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts."
     Both Baker and Gluk received bonuses, restricted stock and stock options that were tied to the company's performance, according to the indictment.
     In exchange for accepting the shipments, distributors received special conditions, such as "substantial" cash commissions, extended payment terms and the ability to return products, prosecutors said.
     Baker was accused of lying to SEC officials in a sworn deposition on Nov. 18, 2009. Prosecutors said the conspirators bought distributor DiscoCare to cover shortfalls in ArthroCare's revenue, shipping products that far exceeded DiscoCare's needs.
     "Baker falsely stated the DiscoCare acquisition was not done to avoid having to disclose the size of DiscoCare's receivable, and that he was never part of a discussion regarding the acquisition being used to avoid disclosing the size of the DiscoCare receivable," the indictment stated. "Baker falsely stated that the $25 million purchase price for DiscoCare was not related to the $25 million termination fee in ArthroCare's existing contract with DiscoCare, and that there was never any discussion of basing the $25 million purchase price on the termination fee."
     When ArthroCare announced on July 21, 2008 that it would be restating its financial results for seven previous quarters to reflect the results of an internal investigation, shares plummeted from $40.03 to $23.21, knocking more than $400 million off shareholders' holdings.
     When the company announced on Dec. 19, 2008, that it had identified accounting errors and possible irregularities in its revenue recognition practices dating back to 2005, shares plummeted that day from $16.23 to $5.92 per share, the indictment states.
     ArthroCare agreed in January to pay $30 million to settle a 5-year-long federal investigation into the matter. Prosecutors agreed to file a criminal information charging the company with conspiracy to commit wire and securities fraud that will be dismissed if the company completes two years of probation.
     ArthroCare did not immediately respond to a request for comment Monday evening.
     Baker's attorney, Rusty Hardin in Houston, told the Austin American-Statesman they "disagree strongly" with the jury's findings.
     "But we respect their opinion and very much appreciate their conscientious service," Hardin said Monday. "We will certainly appeal because we sincerely believe Mike is innocent."