On Friday, August 18, 2017, a federal jury convicted the former CEO of ArthroCare Corporation for his role in constructing a fraud scheme, which ultimately lead to shareholders losing more than $750 million. The jury in the Western District of Texas found 58-year-old Michael Baker of Austin, Texas guilty after a two-week trial. He was found guilty on the following charges.

  • One count of conspiracy to commit wire fraud and securities fraud
  • Seven counts of wire fraud
  • Two counts of securities fraud
  • Two counts of making false statements

Evidence presented during the trial suggested that Baker and his co-conspirators took steps to artificially inflates the sales and revenue of the public traded medical device company. It was explained that the defendant and others used a series of end-of-quarter transactions involving distributors to inflate figures from 2005 until 2009.

Two co-conspirators, David Applegate and John Raffle, pleaded guilty to multiple felonies in 2013. Former chief financial officer, Michael Gluk, pleaded guilty to conspiracy to commit wire and securities fraud in mid-June of this year.

The evidence showed that Baker and his co-conspirators used the type and amount of products that would be shipped to distributors based on the company’s need to meet Wall Street analyst forecast, instead of the distributors’ actual orders. In return, the move caused ArthroCare to house millions of dollars’ worth of medical devices at its distributors’ warehouses at the end of each relevant quarter. These shipments were later reported as sales to ensure the company was able to meet or exceed earnings forecasts.

Evidence also concluded that ArthroCare’s distributors agreed to accept the shipments with special conditions, such as receiving upfront cash commissions, longer payment terms, and being giving the ability to return products. Baker and his co-conspirators worked with a privately-owned Delaware corporation, DiscoCare, to cover shortfalls. At Baker’s request, ArthroCare shipped medical devices to DiscoCare that greatly exceeded the company’s actual needs.

Baker and others lied about the relationship between ArthroCare and its distributors. The evidence showed that Baker eventually caused ArthroCare to acquire DiscoCare to conceal the significance of the relationship. In November of 2009, it was alleged that Baker lied about ArthroCare’s relationship with DiscoCare when he was deposed by the SEC. Baker has yet to receive a sentencing date.

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