Medical Execs Charged|With $400 Million Fraud

     AUSTIN (CN) – Two former executives of medical device maker Arthrocare were arrested Wednesday and charged with defrauding investors of more than $400 million, federal prosecutors said.
     John Raffle, a former senior vice president of strategic business units, and David Applegate, a former senior vice president of ArthroCare’s spine division, were arrested Wednesday morning, Raffle in Morristown, N.J., and Applegate in Orange County, Calif.
     Both men are 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, the Justice Department said in a statement.
     The indictment, unsealed Wednesday, claims 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.
     “Raffle and Applegate determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders,” the Justice Department said in the statement.
     “Raffle, Applegate, and others then allegedly caused ArthroCare to ‘park’ millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter. ArthroCare would then report 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.”
     The distributors agreed to accept shipment of millions of dollars of product in exchange for “substantial, upfront cash commissions, extended payment terms, and the ability to return product, as well as other special conditions,” which Arthrocare did not disclose to investors, according to the indictment.
     Prosecutors also accuse the defendants of using DiscoCare, a privately owned company, as a distributor to cover shortfalls in Arthrocare’s revenue by shipping product far in excess of what it needed, product that DiscoCare was not required to pay for and which resulted in more than $7 million in reported revenue. To conceal how much DiscoCare owed, the defendants bought DiscoCare in December 2007, prosecutors said.
     “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. “The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.”
     If convicted, Raffle and Applegate face up to 5 years in federal prison for conspiracy, 20 years on each mail fraud and wire fraud charge and up to 25 years on each securities fraud count.
     Shareholders suedArthrocare and its executives in July 2008, after the company restated its earnings.

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