Two former top executives for Austin-based medical device maker ArthroCare Corp. are facing criminal charges in connection with an alleged $400 million fraud scheme to misstate the company’s earnings, the U.S. Justice Department said Wednesday.
Michael Baker, ArthroCare’s former CEO, and Michael Gluk, the company’s former chief financial officer, were each indicted on a charge of conspiracy to commit wire and securities fraud, 11 counts of wire fraud and two counts of securities fraud. Baker also faces three counts of making false statements, the Justice Department said.
ArthroCare, which develops and makes surgical products, moved its headquarters from Sunnyvale, Calif., to Austin in 2004. In November 2011, the company agreed to a $74 million settlement in an investors’ class-action lawsuit over the alleged scheme to misstated company earnings. The company’s stock was delisted from the Nasdaq exchange in 2008 during the SEC investigation but was reinstated in 2010.
An ArthroCare spokesman did not return a call seeking comment Wednesday.
The indictment alleges that from at least December 2005 through December 2008, Baker, Gluk and other senior executives and employees of ArthroCare falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving ArthroCare’s distributors.
Baker, Gluk and other ArthroCare employees “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 a news release.
Baker, Gluk and others allegedly took steps to have ArthroCare shift millions of dollars of ArthroCare’s medical devices to 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 Justice Department said.
If convicted, Baker and Gluk could face a maximum prison sentence of 25 years for the conspiracy charge, 20 years for each count of wire fraud, and 25 years for each securities fraud count, the Justice Department said. Baker also could five years for each count of making false statements.
Baker resigned in February 2009 after the company announced that the U.S. Securities and Exchange Commission and U.S. attorneys were investigating its business practices. Gluk resigned in December 2008.
In 2011, two other former ArthroCare executives were sanctioned by the U.S. Securities and Exchange Commission and ordered to repay part of the money they made from the alleged scheme to misstated company earnings.
David Applegate and John Raffle, both former company vice presidents, accepted a five-year ban from serving as officers at any company that offers registered securities and agreed they would not violate federal securities laws, according to court documents. Both had resigned from ArthroCare in December 2009. In May, Applegate pleaded guilty to his role in the scheme.