ArthroCare Accused Of Insurance Scam

AUSTIN (CN) - Shareholders say directors of ArthroCare inflated share price by colluding with personal injury attorneys and physicians to overprescribe its products and bilk insurers, and when the scheme came to light, share price tanked and the NASDAQ warned that it might delist the stock. Plaintiffs say directors went so far as to pay $25 million to buy a company they had created to run the scam.

"In furtherance of their illegal scheme, ArthroCare created phony 'third-party' providers whose sole purpose was to enable ArthroCare to bilk medical insurers into paying inflated prices for unnecessary medical procedures using ArthroCare's products," according to the derivative complaint in Travis County Court.

It continues: "One of these purported third-party providers, DiscoCare, Inc., was used by ArthroCare to inflate its purported sales and revenue. When ArthroCare's sham transactions with DiscoCare were uncovered by financial analysts critical of the company's dubious business practices, the individual defendants caused ArthroCare to acquire DiscoCare in a $25 million cash transaction. By acquiring DiscoCare, the individual defendants were hoping to conceal the improper relationship between the two companies. In addition to DiscoCare, other purported third-party providers, State of the Art Medical Procedures ('SOTA'), Boracchia & Associates and Clinical Technologies were used by ArthroCare to inflate the company's reported sales and revenue."

Plaintiffs claim the directors knowingly filed false and misleading financial statements, in violation of Generally Accepted Accounting Principles, and that after PriceWaterhouseCoopers detected the frauds, ArthroCare had to restate all of its financial statements since September 2006, and "the NASDAQ informed the company that ArthroCare's shares were subject to delisting."

Here are the individual defendants: Michael A. Baker, David F. Fitzgerald, Peter Wilson, Terrence Geremski, Tord Lendau, Jerry Widman, Barbara Boyan, James Foster, and Michael Gluk.

Plaintiffs are represented by Michael Klein with Smith, Robertson, Elliott.

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