ArthroCare Execs Get Long Prison Terms

     AUSTIN (CN) – Four former executives of surgical device maker ArthroCare were sentenced Friday to lengthy federal prison terms for their roles in a $756 million securities fraud scheme.
     Former CEO Michael Baker, 55, was sentenced to 20 years. He was convicted of conspiracy to commit wire and securities fraud, wire fraud, securities fraud and false statements, after a four-week trial in June.
     Former CFO Michael Gluk, 56, was sentenced to 10 years. He was convicted at the same trial of conspiracy to commit wire and securities fraud, wire fraud and securities fraud.
     Former senior vice presidents John Raffle and David Applegate were sentenced 80 months and 5 years, respectively. Raffle pleaded guilty in June 2013 to conspiracy to commit securities, mail and wire fraud, and two charges of false statements.
     Applegate pleaded guilty in May 2013 to conspiracy to commit securities, mail and wire fraud and false statements.
     Principal Deputy Assistant Attorney General Marshall L. Miller called the sentences “the culmination of an epic tale of greed” and that the defendants “ran a successful business, but they wanted more.”
     “Their greed led to fraud, and their fraud caused investors to lose hundreds of millions of dollars,” Miller said in a statement.
     Prosecutors said at trial that the defendants inflated sales and revenue through several end-of-quarter transactions involving ArthroCare’s distributors from 2005 to 2009.
     The company sold medical devices directly to end users, including physicians and surgery centers, while also selling them to distributors who would resell them to 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.
     “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,” prosecutors.
     “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.”
     When ArthroCare announced on July 21, 2008 that it would restate 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 the company’s market capitalization.
     When the company announced on Dec. 19, 2008, that it had identified more 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, prosecutors said.
     Baker also was convicted of lying to SEC officials in a sworn deposition on Nov. 18, 2009.
     “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,” prosecutors said.
     ArthroCare agreed in January to pay $30 million to settle the 5-year-long federal investigation into the scheme .
     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 Friday evening.

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