Executives at ArthroCare cooked the books for years in order to please Wall Street. A federal jury convicted the former CEO and CFO of the medical device company on Monday. The pair used fancy accounting that falsely recorded tens of millions in revenue, according to the U.S. Department of Justice. A company partner and subsequent acquirer, Smith & Nephew ($SNN), recently completed its purchase of ArthroCare ($ARTC).
Former CEO Michael Baker was found guilty of conspiracy to commit wire and securities fraud, wire fraud, securities fraud and making false statements. Michael Gluk, the former CFO, was found guilty of conspiracy to commit wire and securities fraud, wire fraud and securities fraud.
The Department of Justice said the pair orchestrated shipping to distributors based on their need to hit analyst forecasts rather than the distributors' actual requirements. In order to incent the distributors to accept excess inventory, the execs provided special conditions such as upfront cash commissions, extended payment terms and the ability to return products. This strategy was employed from 2005 through 2009, when the U.S. Securities and Exchange Commission first deposed Baker regarding a distributor relationship.
Former ArthroCare senior vice presidents John Raffle and David Applegate were co-conspirators and already pled guilty last year for their participation in the scheme.
"These corporate executives cooked the books to prop up their stock, and when the truth came out investors lost more than $400 million," Principal Deputy Assistant Attorney General Marshall Miller said in a statement. "Today's convictions are the first step in holding them accountable for undermining our financial markets for their own personal gain." Baker and Gluk face sentencing next; a date has yet to be selected.
ArthroCare said in July 2008 it would restate its financial results for the third quarter 2006 through the first quarter 2008; the company lost about $400 million in valuation when its share price immediately dropped from $40.03 to $23.21.
In the wake of the scandal, in February ArthroCare partner Smith & Nephew agreed to pay $1.7 billion for the company, valuing it at $48.25 per share. To help clear the way for the deal, in April the acquirer settled a related shareholder lawsuit for $12 million. The acquisition closed on May 29.
- here is the press release from the U.S. Department of Justice
- and the press release from Smith & Nephew on the acquisition completion
Smith & Nephew puts up $12M to clear the way for its $1.7B ArthroCare deal
Smith & Nephew will grab ArthroCare for $1.7B, continuing its M&A rebound plan
Ex-ArthroCare CEO, CFO finally indicted in $400M fraud scheme