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Wednesday, July 24, 2024 | Back issues
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ArthroCare Settles|With Feds for $30 Million

AUSTIN (CN) - ArthroCare will pay $30 million to settle a federal investigation of an alleged $400 million securities fraud involving former executives of the surgical device maker.

ArthroCare announced the deferred prosecution agreement with the Department of Justice on Tuesday, after a 5-year investigation.

Prosecutors will file a criminal information charging the Austin-based company with conspiracy to commit wire and securities fraud. If ArthroCare completes 2 years of probation, prosecutors will seek dismissal of the information.

"ArthroCare has agreed to pay a $30 million fine to the DOJ and to maintain a compliance program meeting certain criteria specified in the DPA," the company said in its statement. "ArthroCare also must report annually on the status of the compliance program to the DOJ. There is no independent monitor requirement pursuant to the DPA."

Former ArthroCare executives John Raffle and David Applegate were arrested in August 2012, and charged with conspiracy to commit wire fraud, mail fraud and securities fraud, four counts of wire fraud, eight counts of mail fraud and three counts of securities fraud.

Applegate pleaded guilty in May 2013 and Raffle pleaded guilty two months later.

Prosecutors claim the men and other senior executives and employees inflated ArthroCare's revenue through several of end-of-quarter transactions involving its distributors, from December 2005 to December 2008.

"After ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share," prosecutors said after Raffle and Applegate's arrest. "The drop in ArthroCare's share price caused an immediate loss in shareholder value of more than $400 million."

Shareholders sued the company and its executives in July 2008 after the restatement of earnings. They accused executives of dumping $12 million in personal holdings during the restatement and price drop.

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