The former CEO and CFO for ArthroCare (NSDQ:ARTC) must face criminal fraud charges in Texas in an alleged $400 million scheme to dupe investors, after a federal judge this week shot down their bids for acquittal.
In a terse order issued May 28, Judge Sam Sparks of the U.S. District Court for Western Texas denied motions for acquittal by ex-ArthroCare CEO Michael Baker and former CFO Michael Gluk. Sparks did not elucidate his reasons for not letting the duo off the hook.
Federal prosecutors indicted Baker and Gluk last year on 17 counts of conspiracy to commit fraud for their alleged roles in running a $400 million scheme designed to defraud investors. Each was charged with a single count of conspiracy to commit wire and securities fraud, 11 counts of wire fraud and 2 counts of securities fraud; Baker was also tagged with 3 counts of making false statements for allegedly lying to the SEC during its probe of the case.
Baker and Gluk were the latest ex-ArthroCare executives to be indicted in the case. In May 2013, ex-executive David Applegate pleaded guilty to the fraud chargers; later that month, former co-worker John Raffle denied his involvement but later changed his plea to guilty.
The feds allege that the scheme was designed to generate false revenue numbers to meet internal and external forecasts by dumping inventory, first with a distributor called DiscoCare and eventually via free shipments to end-users. ArthroCare was DiscoCare’s only client until it acquired DiscoCare in December 2007, according to the documents.
"The indictment alleges that ArthroCare’s distributors agreed to accept shipment of millions of dollars of product in exchange for substantial, upfront cash commissions, extended payment terms and the ability to return product, as well as other special conditions, allowing ArthroCare to falsely inflate its revenue by 10s of millions of dollars," according to prosecutors.
If convicted, Baker and Gluk would face a maximum of 25 years in prison on the conspiracy charge, 20 years for each wire fraud count and 25 years for each securities fraud count. Baker faces 5 years for each false statement charge.
Early this year ArthroCare, acquired yesterday for $1.7 billion by Smith & Nephew (FTSE:SN, NYSE:SNN), agreed to pay a $30 million fine and enter a deferred prosecution deal to settle its part in the fraud case.
