ArthroCare Gets Relief From DiscoCare Nightmare

ArthroCare Corporation’s long DiscoCare nightmare under a previous management team appears to be coming to an end.

On January 7, 2014, the company announced a Deferred Prosecution Agreement (DPA) with the U.S. Department of Justice (DOJ). The DPA will resolve the ongoing investigation by the DOJ regarding allegations of securities and related fraud over false sales reported to DiscoCare and other distributors.

Per the January 7, 2014 press release:

In conjunction with the DPA, the DOJ concurrently filed a criminal information concerning a single-count of conspiracy to commit wire and securities fraud. The DPA is for a 24 month period and, subject to its successful completion, the DOJ agrees that the DPA will expire and that the DOJ will seek dismissal of the criminal information. Pursuant to the DPA, ArthroCare has agreed to pay a $30 million fine to the DOJ and to maintain a compliance program meeting certain criteria specified in the DPA. ArthroCare also must report annually on the status of the Compliance Program to the DOJ. There is no independent monitor requirement pursuant to the DPA.

DiscoCare Saga

Michael Baker and Michael Gluk, the company’s former CEO and CFO have been charged with defrauding the company’s shareholders in a $400 million scheme by falsely inflating company earnings by tens of millions of dollars.

On July 17, 2013, the DOJ unsealed a 17-count indictment which was returned the previous day. Baker and Gluk are charged with securities and wire fraud. Both defendants surrendered to authorities on the that day.

According to the indictment, between 2005 and 2008, Baker, Gluk and other senior executives and employees of ArthroCare allegedly falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors. According to court documents, Baker, Gluk and others 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. The defendants then allegedly caused ArthroCare to “park” millions of dollars’ worth of the company’s devices at its distributors at the end of each relevant quarter. The company would then report 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.

Baker, Gluk and others allegedly used DiscoCare as one of the distributors to cover shortfalls in ArthroCare’s revenue. According to the indictment, at Baker and Gluk’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs.

ArthroCare’s former senior vice president of strategic business units, John Raffle, pled not guilty to misleading investors to artificially inflating the company’s stock price.

On May 9, 2013, the DOJ announced that David Applegate, the company’s former senior vice president in charge of the company’s spine division pleaded guilty to two charges of conspiracy to commit securities, mail and wire fraud, and with a false statements violation.

The company’s announcement stated that the facts underlying this agreement relate specifically to matters self-disclosed by ArthroCare to the U.S. Securities and Exchange Commission (SEC) and the DOJ.

According to the company, many of ArthroCare’s devices use its internationally patented Coblation technology. This technology precisely dissolves target tissue and limits damage to surrounding healthy tissue. ArthroCare also develops surgical devices utilizing other patented technology including its Opus line of fixation products as well as re-usable surgical instruments.