Two former executives of ArthroCare Corp. (NSDQ:ATRC) are skating on millions of dollars in penalties as part of settlement agreements for charges that they artificially inflated the company’s stock prices for two years.
John Raffle, the Austin, Texas-based company’s former senior VP of strategic business units, and David Applegate, former SVP and GM of ArthoCare’s spine division, were charged by the federal Securities & Exchange Commission with enacting a scheme to boost ATRC shares ahead of quarterly earnings releases between 2006 and the first quarter of 2008.
The duo allegedly created the scheme, which allegedly caused the company to "improperly record revenue from shipments of spine products to various distributors, even though the distributors often did not need the products or have the ability to pay for them," the SEC alleged. "Most of the improper transactions occurred at or near the end of quarters and were intended to enable ArthroCare to satisfy external revenue and earnings targets."
Raffle and Applegate agreed to settle the charges without admitting or denying guilt. The settlements imposed penalties of $2.1 million on Raffle and $728,000 on Applegate and barred each from serving as an officer or director of a publicly traded company for five years.
But, based on each man’s financial situation, all but a fraction of the penalties were waived. Raffle will pay just $175,000 — only 8.3 percent — and Applegate $55,000 — 7.6 percent.
That’s less for each than Raffle’s ex-wife, Kathy — not charged at all in the case — will pay in restitution for "$200,000 of incentive compensation and profits from sales of ArthroCare stock John Raffle obtained during the course of the earnings management scheme, which Kathy Raffle received in a divorce agreement," according to documents filed with the U.S. District Court for Western Texas.
In February, ArthroCare escaped a separate SEC probe with no admission of guilt, no financial penalty and a promise to be good from now on. An independent review of the alleged misconduct led to the departure of then-president and CEO Michael Baker in February 2009, along with Raffle and Applegate, who both resigned Dec. 19, 2008, according to court documents.
ArthroCare later sold off its spine business to NeuroTherm for $5.5 million. The company posted net earnings of $12.8 million, or 36 cents per diluted share, on revenue of $87.9 million during the three months ended March 31. That compares with net earnings of $8.8 million, or 24 cents per diluted share, on revenue of $89.1 million during the same period last year.