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$400M SEC Fraud: Arthrocare Execs Jailed
WASHINGTON – Two former senior executives of Austin, Texas-based ArthroCare Corp. were arrested today in Morristown, N.J. and Orange County, Calif., in a $400 million securities fraud scheme that cheated shareholders and the investing public out of hundreds of millions of dollars.
John Raffle, the former senior vice president of strategic business units of ArthroCare, and David Applegate, the former senior vice president in charge of ArthroCare’s spine division, were arrested and charged with a 16-count indictment that includes conspiracy to commit wire, mail and securities fraud, wire fraud, mail fraud, and securities fraud.
According to the indictment, Raffle and Applegate, along with other senior executives and employees of ArthroCare, inflated the company’s sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors. They allegedly determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.
Raffle and Applegate then allegedly caused ArthroCare to ‘park’ millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter, reporting these shipments as sales in its quarterly and annual filings at the time of the shipment. This enabled the company to meet or exceed internal and external earnings forecasts.
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 inflate falsely its revenue by tens of millions of dollars. ArthroCare did not disclose the conditions of the purported sales to investors.
The indictment also alleges that Raffle, Applegate and others used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue. According to the indictment, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs at Raffle and Applegate’s direction.
Between the fourth quarter of 2005 and the fourth quarter of 2007, ArthroCare reported more than $37 million in revenue in its publicly filed financial statements based on purported sales to DiscoCare. However, during the same time period, DiscoCare’s actual net cash payments to ArthroCare for the products were less than $50,000.
Key Facts
- State: Texas
- Category: White Collar Crime
- Source: DOJ Press Release ↗
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