October 6, 2014 — Publicly traded companies are required to file accurate quarterly and annual reports with the Securities and Exchange Commission (SEC). Otherwise, a company’s SEC filings can easily be misused to mislead investors and the SEC. Investors can suffer devastating losses that wipe out an entire life savings for retirement or a child’s college education. To redress the problem of fraudulent financial reporting, the U.S. Congress initiated a whistleblower program as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010. Informants who notify the SEC about financial misinformation may be compensated for their willingness to collaborate with the agency. Tipsters receive up to thirty percent of the amount the government recoups, so long as the total recovery exceeds $1 million.
Former Executives Sentenced For Fraudulent Scheme To Misreport Inventory As Earnings To Meet Wall Street Projections
Michael Baker, the former CEO of ArthroCare Corporation, and Michael Gluk, the former CFO, were recently sentenced to prison for orchestrating a $750 million securities fraud scheme. They were also ordered to forfeit the profits from the scheme — $22,165,030. The two had earlier been convicted by a jury on a number of SEC fraud charges. John Raffle, the former Vice President of Strategic Business Units, and David Applegate, the former Senior Vice President of the Spine Division, had already pleaded guilty on several charges involving fraud related to the scam.
From 2005 to 2009, the four former ArthroCare executives engaged in a scam to hike up sales and revenue artificially by misreporting end-of-quarter transactions with several of ArthroCare’s distributors. At the end of the quarter, ArthroCare shipped products to distributors based on the company’s desire to meet forecasts by Wall Street analysts rather than the need to fill actual orders by distributors. In its quarterly and annual SEC filings, ArthroCare fraudulently reported the shipments as sales even though no one had purchased or agreed to purchase the products. The distributors consented to accept the inventory in exchange for cash commissions, the ability to return unwanted products and more favorable payment terms.
While the scam was ongoing, more than 25 million shares of the company’s stock were held by ArthroCare’s shareholders. In 2008, when ArthroCare first publicly admitted that it would be restating prior earnings based on an internal investigation that revealed the fraud, ArthroCare’s share price plummeted from $40.03 to $23.21 per share. In December 2008, when the company made a second public announcement that the fraud had resulted in even more accounting errors, ArthroCare’s stock price nose-dived all the way to $5.92 per share. Investors were robbed of approximately $756 million as a result of the sham transactions.
Whistleblowers Alert SEC to Misleading Financial Information in Quarterly Reports
While Waters & Kraus is not handling this particular example of securities fraud, we are representing whistleblowers in similar qui tam matters. If you have comparable claims against a your employer or anyone else engaged in filing deceptive quarterly or annual reports with the SEC, contact us by email or call our qui tam attorneys at 855.784.0268 to learn more about our practice and how we can work together to notify the government about SEC fraud and abuse. Our qui tam lawyers, such as Paul Lawrence in the firm’s Washington D.C. area office and Louisa Kirakosian in the California office, are committed to advancing and protecting informants’ interests in whistleblower lawsuits.
