In Alleged $400M Texas Securities Fraud, Medical Device Maker Pays Over $30M Settlement

Austin-based medical device manufacturer ArthroCare Corporation (ARTC) will pay $30 million to settle allegations that its senior executives were involved in a Texas securities scam that caused shareholders to lose over $400M. The company’s former senior VPs, David Applegate and John Raff, have already pleaded guilty to conspiracy to commit wire fraud and securities fraud over the financial scam.

As part of the deferred prosecution settlement, the US Justice Department has filed a complaint in the Western District of Texas charging the company with one count of conspiracy to commit securities fraud. The medical device maker will continue to cooperate with the government in its ongoing probe and pursuit of the individuals involved in the financial fraud. ArthroCare’s ex-CEO and CFO are scheduled to stand trial later this year.

In this Texas securities settlement, the company admitted that its executives inflated its revenues by tens of million of dollars, hid the nature and financial importance of its relationship with certain distributors, and engaged in bogus transactions to manipulate earnings and revenue. ArthroCare also acknowledged that these executives caused it to “park” millions of dollars worth of medical devices at distributors during the end of each relevant quarter to make it appear as if these were shipments (meaning supposed sales).

Shareholders lost over $400M when the company’s stock dropped from $40.03/share to $23.21/share in 2008. This happened after ArthroCare announced that because of the findings of an internal probe, its earlier reported financial results from 2006’s third quarter through 2008’s third quarter would have to be restated.

If you suspect that you’ve been the victim of Texas securities fraud, please contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Austin-based ArthroCare to pay $30 million to end fraud inquiry, Statesman.com, January 7, 2014

ArthroCare signs deal to end fraud prosecution, to pay $30 million fine, Reuters, January 7, 2014

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