On Aug. 18, a federal jury convicted the former chief executive officer of ArthroCare Corp., a publicly traded medical device company based in Texas, for his role in orchestrating a fraud scheme that resulted in shareholder losses of over $750 million.
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, a statement from the Department of Justice says.
Co-conspirators David Applegate and John Raffle, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013. Co-conspirator Michael Gluk, former chief financial officer of ArthroCare, pleaded guilty to conspiracy to commit wire and securities fraud on June 14.
The Justice Department argued at trial 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 its medical devices at its distributors at the end of each relevant quarter. The company 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.
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 it to falsely inflate revenue by tens of millions of dollars,” the Justice Department alleged. Baker and others used DiscoCare, a privately-owned Delaware corporation, as one of the distributors to cover shortfalls in revenue. At Baker’s direction, product shipped to DiscoCare far exceeded the company’s needs.
Baker had ArthroCare acquire DiscoCare “specifically to conceal from the investing public, the nature and financial significance” of their relationship, a Justice Department release says. 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 the 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 has not yet been scheduled.