Ex-ArthroCare execs charged with defrauding investors of $400M

The FBI has arrested two former execs at devicemaker ArthroCare ($ARTC), charging them with falsely inflating the company's earnings and defrauding investors of more than $400 million over three years.

On Monday, the FBI hauled in John Raffle, the company's former senior vice president of strategic business units, and David Applegate, former senior vice president of ArthroCare's spine division. According to the bureau, from December 2005 through December 2008, the two propped up the company's earnings through fake end-of-quarter orders, "parking" lots of ArthroCare's devices with distributors and reporting the shipments as sales to meet earnings forecasts.

The pair faces one count of conspiracy to commit wire, mail and securities fraud; four counts of wire fraud; eight counts of mail fraud; and three counts of securities fraud, according to the FBI. If found guilty, the two face a maximum of 5 years for the conspiracy charge and 20 years for each count of mail and wire fraud. Each securities fraud count carries a maximum sentence of 25 years, the bureau said.

The indictment alleges that Raffle and Applegate used the Delaware firm DiscoCare as a pawn in their scheme, reporting sales of $37 million to the company over two years, while the actual cash payments totaled less that $50,000. Then, to conceal the discrepancy, the pair got ArthroCare to buy the company, the FBI says.

ArthroCare said in a statement that it is aware of the arrests and that the Department of Justice's investigation into the company remains ongoing. "The company will continue to provide its full cooperation to the DOJ in its ongoing investigation, as we have done since the inception of the investigation," the company said.

ArthroCare is still in-business and publicly traded, and last year the company settled a series of class-action securities suits related to the alleged fraud for $74 million. 

- read the FBI's release

Editor's note: This story was updated to include comments from ArthroCare.