Feds indict ex-ArthroCare CEO, CFO in $400M fraud scheme

Federal prosecutors in Texas indicted the former CEO and CFO of ArthroCare (NSDQ:ARTC) on 17 counts of conspiracy to commit fraud for their alleged roles in running a $400 million scheme designed to defraud investors.

Ex-CEO Michael Baker and former CFO Michael Gluk were each charged with a single count of conspiracy to commit wire and securities fraud, 11 counts of wire fraud and 2 counts of securities fraud, according to a press release. Baker was also tagged with 3 counts of false statements for lying to the SEC during its probe of the case.

The indictment seeks forfeiture of assets held by Baker and Gluk, according to the release.

The duo are the latest ex-ArthroCare executives to be indicted in the case. In May, ex-executive David Applegate pleaded guilty to the fraud chargers, but later that month, former co-worker John Raffle denied his involvement.

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 the release.

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.

The U.S. Justice Dept. and ArthroCare are still negotiating over a criminal probe of the Austin, Texas-based company, having extended the statute of limitations on the case 4 times, most recently until August 31.

Earlier this year ArthroCare lost a $74 million settlement to shareholders in a lawsuit accusing the company, former president & CEO Michael Baker and former senior VP and CFO Michael Gluk of making "public statements that were materially false and misleading" in order to inflate share prices.