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Medical-device company exec admits to bilking shareholders of $400M

- The Washington Times - Tuesday, July 23, 2013

A former senior executive at a Texas-based medical-device company has pleaded guilty in a $400 million scheme to defraud the company's shareholders and members of the investing public by falsely inflating the company's earnings.

John Raffle, 45, of Austin, pleaded guilty before U.S. Magistrate Judge Mark Lane in U.S. District Court in Austin to conspiracy to commit securities, mail and wire fraud and two false statements violations. Raffle was the senior vice president of strategic business units at ArthroCare Corp., a publicly traded company, where he oversaw sales and the marketing staff.

The June 24 guilty plea, unsealed late Monday, was announced by acting Assistant Attorney General Mythili Raman and U.S. Attorney Robert Pitman of the Western District of Texas.

According to court records, Raffle admitted that he and other co-conspirators falsely inflated ArthroCare's sales and revenue through a series of end-of-quarter transactions involving the company's distributors and that he and other co-conspirators caused ArthroCare to file reports with the Securities and Exchange Commission that materially misrepresented ArthroCare's quarterly and annual sales, revenues, expenses and earnings.

As part of his plea, Raffle agreed that his conduct and that of his co-conspirators caused more than $400 million in losses to shareholders.

According to the records, Raffle and others determined the type and amount of product to be shipped to distributors — notably ArthroCare's largest distributor, DiscoCare Inc. — based on ArthroCare's need to meet sales forecasts, rather than the distributors' actual orders.

Raffle and others then caused ArthroCare to "park" millions of dollars worth of ArthroCare's medical devices at its distributors at the end of each quarter, the records show, noting that ArthroCare would then report these shipments as sales in its quarterly and annual filings at the time of the shipment. The ploy enabled the company to meet or exceed internal and external earnings forecasts.

According to the records, DiscoCare agreed to accept shipment of approximately $37 million of product in exchange for substantial, upfront cash commissions, extended payment terms and the ability to return product, as well as other conditions, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

To conceal the fact that DiscoCare owed ArthroCare a substantial amount of money on the unused inventory, Raffle and others caused ArthroCare to acquire DiscoCare on Dec. 31, 2007.

On July 21, 2008, after ArthroCare announced publicly it would be restating its previously reported financial results from the third quarter of 2006 through the first quarter of 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share. The drop caused an immediate loss in shareholder value of more than $400 million.

Raffle faces a maximum prison sentence of five years in prison for each charge. A sentencing date has yet to be scheduled. A co-defendant, David Applegate, pleaded guilty in May. ArthroCare's CEO Michael Baker and Chief Financial Officer Michael Gluk were indicted as part of the same alleged securities fraud scheme on July 16.

The 17-count indictment charges Mr. Baker and Mr. Gluk with one count of conspiracy to commit wire and securities fraud, 11 counts of wire fraud and two counts of securities fraud; it also charges Mr. Baker with three counts of false statements. The indictment also seeks forfeiture of assets held by Mr. Baker and Mr. Gluk.

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