Former ArthroCare Corp. Executives Charged in $400 Million Texas SEC Fraud Scheme

August 21, 2013 — Publicly traded companies are required to post quarterly reports with the Securities and Exchange Commission (SEC) that accurately reflect their financial position.Otherwise, a company’s quarterly reports do nothing more than mislead investors and the SEC. To prevent investors from being duped by misleading financial reporting, the U.S. Congress established a whistleblower program as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010. Whistleblowers who notify the SEC about financial fraud or misinformation may be compensated for their willingness to collaborate with the agency. Informants are eligible to receive as much as thirty percent of the amount the government collects, provided the total recovery tops $1 million.

Former Texas SEO and CFO Charged in $400 Million Securities Fraud Scheme

The Department of Justice (DOJ) has charged two former ArthroCare Corp. (ArthroCare) executives with conspiracy, securities fraud and wire fraud for their roles in an alleged $400 million SEC fraud scheme. ArthroCare is a medical device company, headquartered in Austin, Texas, that develops and manufactures surgical devices, instruments, and implants. Michael Baker, former chief executive officer of ArthroCare, and Michael Gluk, former chief financial officer of ArthroCare, are the two most recently charged company executives in the scam.

Between December 2005 and December 2008, the DOJ alleges, Baker, Gluk and other ArthroCare executives carried out a fraudulent scheme to inflate the company’s share price by falsely increasing ArthroCare’s sales numbers. The executives allegedly created deals with distributors to receive and hold excessive quantities of ArthroCare products in return for prepaid cash commissions, extended payment terms and the right to return product. After the distributors received the product, ArthroCare allegedly reported the shipment as revenue, which resulted in overblown sales and income figures in the company’s quarterly filings to the SEC and investors. According to the DOJ, one distributor, DiscoCare, accepted more than $37 million of ArthroCare product.

Baker, Gluk and other ArthroCare executives allegedly lied to analysts and investors about the company’s dealings with its distributors. To hide their fraud in the recorded “sales” to DiscoCare, Baker and Gluk allegedly orchestrated ArthroCare’s acquisition of DiscoCare.

After an internal investigation was launched into ArthroCare’s accounting irregularities, the company announced in July 2008 that it would restate earnings for the periods between 2006 and 2008.  The company’s shareholder value plunged following the announcement — immediately losing over $400 million.

Whistleblowers Report Misleading Financial Information in Quarterly Reports

Company insiders with information about an employer’s misleading or fraudulent quarterly reports should understand how the Dodd-Frank whistleblower program works before notifying the government. Tipsters who wish to be anonymous must hire a lawyer to act on their behalf — they cannot notify the government directly. The SEC fraud lawyers at Waters & Kraus have the experience it takes to safeguard whistleblowers’ interests in financial crime cases. Contact us by email or call our whistleblower attorneys at 800.226.9880 to learn how we can help you.

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