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State Penitentiary / Source: National Park Service

Former ArthroCare CEO Gets 20 Years in Jail

Walter Eisner • Wed, September 3rd, 2014

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The leaders of the DiscoCare scam are going to jail.

Baker, Gluk, Raffle and Applegate

Michael Baker, the former CEO of ArthroCare Corporation was sentenced to 20 years in prison on Friday, August 29, 2014, for leading a $750 million securities fraud scheme. Michael Gluk, the company's former chief financial officer was sentenced to serve 10 years in prison for his role in the scheme. Two other former senior vice presidents, John Raffle and David Applegate were also sentenced to prison terms.

The former device executives were sentenced in federal court in Austin, Texas by U.S. District Judge Sam Sparks.

“Epic Tale of Greed”

"We witnessed the culmination of an epic tale of greed, ” said Principal Deputy Assistant Attorney General Marshall Miller. “The CEO, CFO and two vice presidents of ArthroCare sentenced today ran a successful business, but they wanted more. Their greed led to fraud, and their fraud caused investors to lose hundreds of millions of dollars."

On June 2, 2014, Baker, and Gluk were convicted by a jury of wire fraud, securities fraud, and conspiracy to commit wire and securities fraud; Baker was also convicted of making false statements. On June 24, 2013, Raffle, the former vice president of Strategic Business Units, pleaded guilty to conspiracy to commit securities, mail and wire fraud, and two false statements charges. On May 9, 2013, Applegate, the former senior vice president of the Spine Division, pleaded guilty to conspiracy to commit securities, mail and wire fraud, and a false statements charge. At sentencing, the court found that investors lost approximately $756 million as a result of the defendants’ scheme to artificially inflate the share price of ArthroCare stock through sham transactions.

DiscoCare Scheme

Between 2005 and 2009, Baker, Gluk, Raffle and Applegate artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors. Products were shipped to distributors at quarter end based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders. The company then fraudulently reported these shipments as sales in its quarterly and annual filings at the time of the shipments. ArthroCare’s distributors agreed to accept these shipments of millions of dollars of excess inventory in exchange for lucrative concessions from ArthroCare, such as upfront cash commissions, extended payment terms, and the ability to return products.

In the case of ArthroCare’s largest distributor, DiscoCare, the defendants agreed ArthroCare would acquire the distributor and the inventory so that the distributor would not have to pay ArthroCare for the products at all.

The disclosure of the fraud caused ArthroCare's stock price to plunge from $40.03 to $5.92 from July 21, 2008 to December 19, 2008. ArthroCare’s shareholders held more than 25 million shares of common stock.

Baker was also convicted of lying to the U.S. Securities and Exchange Commission during its investigation of the conduct. The court further found that Baker and Gluk each lied under oath during their trial testimony, in which they attempted to escape responsibility for their actions.

In addition to their prison terms, Baker and Gluk were sentenced to serve five years of supervised release. In addition, the court ordered Gluk and Baker to forfeit $22, 165, 030, the amount of their profits from the scheme.

Raffle was sentenced to serve 80 months in prison followed by three years of supervised release. Applegate was sentenced to serve 60 months in prison followed by three years of supervised release.

“Fraud Will Be Prosecuted”

"We are committed to prosecuting individuals who commit crimes to make money, whether they do so on street corners or in corner offices. Corporate executives considering cooking the books or lying to investors should take a long and hard look at today’s sentences, ” added Miller. “No matter how high they might rank on the corporate ladder, if they commit fraud, they will be prosecuted to the fullest extent of the law.”

ArthroCare Settles

In January 2014, the company said it would pay a $30 million fine to resolve an investigation by the U.S. Department of Justice into securities fraud by its former management. The Justice Department charged the company with one count of conspiracy to commit securities fraud and wire fraud, but it entered into a two-year deferred prosecution agreement with ArthroCare.

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