Former CEO of Arthrocare Corporation Convicted for Orchestrating $750 Million Securities Fraud Scheme

A federal jury today convicted the former chief executive officer of ArthroCare Corporation, a publicly traded medical device company based in Austin, Texas, for his role in orchestrating a fraud scheme that resulted in shareholder losses of over $750 million.

Acting Assistant Attorney General Kenneth A. Blanco of the Justice Department’s Criminal Division, U.S. Attorney Richard L. Durbin, Jr. of the Western District of Texas and Special Agent in Charge Christopher Combs of the FBI’s San Antonio Field office made the announcement.

After a two-week trial, a jury in the Western District of Texas found the former CEO, Michael Baker, 58, of Austin, Texas, guilty of one count of conspiracy to commit wire fraud and securities fraud, seven counts of wire fraud, two counts of securities fraud and two counts of making false statements. Baker was charged in a superseding indictment unsealed on July 17, 2013.

Evidence at trial demonstrated that Baker, along with his co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors beginning in 2005 and continuing until 2009. Co-conspirators David Applegate and John Raffle, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme. Co-conspirator Michael Gluk, former chief financial officer of ArthroCare, pleaded guilty to conspiracy to commit wire and securities fraud on June 14, in connection with his participation in the scheme.

The trial evidence showed that Baker, along with his co-conspirators, 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. Baker and others then caused ArthroCare to “park” millions of dollars’ worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter. ArthroCare then reported 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.

Evidence at trial further showed that ArthroCare’s distributors agreed to accept shipment of millions of dollars of products in exchange for special conditions, including substantial, upfront cash commissions, extended payment terms and the ability to return products, allowing ArthroCare to falsely inflate revenue by tens of millions of dollars. Baker and others used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue. At Baker’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs.

Baker and others lied to investors and analysts about ArthroCare’s relationships with its distributors, including DiscoCare; Baker caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public, the nature and financial significance of ArthroCare’s relationship with DiscoCare, the evidence showed.

Evidence at trial also established that Baker lied when he was deposed by the U.S. Securities and Exchange Commission in November 2009 about ArthroCare’s relationship with DiscoCare.

Following today’s verdict, U.S. District Judge Sam Sparks of the Western District of Texas, who presided over the trial, remanded Baker into custody. A sentencing date for Baker has not yet been scheduled.

This case was investigated by the FBI’s San Antonio Field Office. The case is being prosecuted by the Fraud Section’s Securities and Financial Fraud Unit Chief Benjamin D. Singer, Assistant Chief Henry P. Van Dyck and Trial Attorney Caitlin Cottingham.