ArthroCare CEO & CFO Fraud Scheme
In today’s world, it’s become a more common occurrence to hear of a CEO or other individuals being charged with securities fraud. With a financial system fraught with fewer and fewer regulations, the chances of these cases happening has greatly increased. As a result, yet another case of alleged securities fraud was brought to the public’s attention, as the CEO and CFO of ArthroCare Corporation were both charged with creating and orchestrating a $400 million scheme aimed to defraud shareholders and other investors. To accomplish this, they supposedly falsely increased the company’s earnings by tens of millions of dollars, thus inflating the company’s stock prices and leading to losses to investors and shareholders totaling tens of millions of dollars.
The indictment, which includes 17 counts against former CEO Michael Baker and CFO Michael Gluk, included a variety of charges. Among the most serious included one count of conspiracy to commit wire and securities fraud, 11 counts of wire fraud, and two counts of securities fraud. Along with these charges, the indictment also charged Baker himself with three counts of making false statements. And in an attempt to ensure neither Baker nor Gluk benefited further from their alleged actions, the indictment also sought to gain the forfeiture of assets held by both men.
The Scheme Itself
To successfully pull off a scheme such as this, Baker and Gluk allegedly worked with numerous other senior company executives to falsely inflate the company’s sales and revenue figures through a variety of end-of-quarter transactions. By doing this, the duo was then able to supposedly determine the type and amount of products that could be shipped to distributors. As a result, these shipments would allow the company to meet analyst forecasts coming from Wall Street, letting the company successfully manipulate sales and revenue figures.
To ensure the success of the alleged scheme, Baker and Gluk relied on shipment manipulations to distributors. In return, the distributors agreed to such things as upfront cash commissions, extended payment terms, and other perks that allowed them to earn more money, while letting ArthroCare inflate its earnings by tens of millions of dollars. By using DiscoCare, one of their most popular distributors, Baker and Gluk were then able to hide shortfalls when reporting distribution income. Thus, many more products were shipped to DiscoCare, which then had more products than it needed. When this occurred, the distributor was then persuaded to hide the discrepancy to allow ArthroCare the ability to manipulate its sales and revenue figures.
Due to the alleged activities of Baker and Gluk, investors and shareholders were left to face the consequences of their actions. According to court documents, at the end of 2008 ArthroCare shareholders held more than 25 million shares of stock. However, after an announcement by the company that it would restate its previous financial results, stock prices dropped from more than $40 per share to just over $23 per share. By having this happen, shareholders lost more than $400 million in stock values.
Because these alleged actions involved millions of dollars and thousands of people around the world, Baker and Gluk face serious consequences if convicted of these crimes. In fact, each faces a minimum sentence of 25 years for conspiracy charges, 20 years for each count of wire fraud, and 25 years for each count of securities fraud. And to make matters even more serious for Baker, he faces five year sentences for each false statement count. However, as with any criminal case, both defendants are nevertheless innocent until proven guilty in a court of law.
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