ArthroCare updates on remaining federal issues

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ArthroCare (NSDQ:ARTC) president & CEO David Fitzgerald provided highlights on the company’s ongoing beef with federal investigators, telling an audience at the J.P. Morgan healthcare conference in San Francisco this week that at least 1 of the pair of remaining legacy issues may be closing soon.

The Texas-based surgical devices maker has had a spate of legal troubles in recent years, including an SEC investigation that closed in February 2011 and a derivatives matter that closed in December 2011, Fitzgerald told meeting attendees.

The company has yet to close the books on a U.S. Justice Dept. investigation into ArthroCare’s sales & marketing pertaining to its spinal business, and is in the early stages of a False Claims Act investigation, he said.

"The DOJ criminal investigation that began in December of 2008 is ongoing and we continue to actively cooperate with the investigation," Fitzgerald said this week. "Although the DOJ has not committed to an end date and may request future tolling agreements, we think it’s possible that the DOJ investigation of the company may complete soon."

DOJ tolling agreements allow the federal agency to pursue investigations into matters that would otherwise be considered beyond the statute of limitations.

ArthroCare is also facing a FCA probe, although the company has yet to reveal many details.

"The False Claim Act investigation conducted by the civil division of the U.S. Dept. of Justice remains open at this time," Fitzgerald said. "This investigation appears to be focused on the [ear, nose & throat] product area and, based upon the information request from the DoJ, beyond this we still do not know the underlying subject of the investigation or the alleged misconduct that has been asserted concerning the company’s past or present sales and marketing activities."

ArthroCare believes the 2 matters are unrelated and that they will proceed separately, he added.

The company has closed the books on 3 other large matters, including an SEC probe into its finances after a fraud scandal that took down a former CEO with no admission of guilt and no financial penalty. That case, which closed in February 2011, stemmed from allegedly fraudulent reimbursement practices by ArthroCare’s spinal business from 2006 through March 2008.

In September of 2011 ArthroCare agreed to pay about $8 million to settle a derivative lawsuit filed by shareholders, also without admitting any misconduct. That took place just weeks after a pair of former ArthroCare executives, John Raffle and David Applegate, skated by on a million in penalties as part of settlement agreements for charges that they artificially inflated the company’s stock prices for 2 years.

In July 2012 the company was ordered to pay a $74 million settlement in a shareholder lawsuit accusing ArthroCare and 2 other executives of falsely inflating share prices and concealing "numerous fraudulent and improper practices within the company."

Just 1 month later, Raffle and Applegate were arrested for alleged roles in a securities fraud scheme that cost shareholders more than $400 million.

The U.S. Justice Dept. unsealed a 16-count indictment against Raffle, former senior vice president of ArthroCare’s strategies business units, and Applegate, former SVP in charge of ArthroCare’s spine division, charging them with 1 count of conspiracy to commit fraud, 4 counts of wire fraud, 8 counts of mail fraud and 3 counts of securities fraud.

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