Former CEO of Arthrocare Corporation Sentenced to 20 Years in Prison for Role in $750 Million Securities Fraud Scheme

Friday, November 3, 2017

The former chief executive officer of ArthroCare Corporation, a publicly traded medical device company based in Austin, Texas, was sentenced today to 240 months in prison for his role in orchestrating a fraud scheme that resulted in shareholder losses of over $750 million.

Acting Assistant Attorney General Kenneth A. Blanco of the Justice Department’s Criminal Division, U.S. Attorney Richard L. Durbin Jr. of the Western District of Texas and Special Agent in Charge Christopher Combs of the FBI’s San Antonio Field office made the announcement.

Michael Baker, 58, of Austin, Texas, was sentenced by U.S. District Judge Sam Sparks of the Western District of Texas, who also ordered Baker five years of supervised release following his prison sentence and to pay a fine in the amount of $1 million and to forfeit $13.7 million.  At the sentencing hearing, the Court found that investors lost more than $750 million as a result of the fraud scheme.  On Aug. 18, after a two-week re-trial, Baker was convicted of one count of conspiracy to commit wire fraud and securities fraud, seven counts of wire fraud, two counts of securities fraud and two counts of making false statements.

Evidence at trial showed that, beginning in 2005 and continuing until 2009, Baker, along with his co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors.  Baker, along with his co-conspirators, 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.  Baker and others then caused ArthroCare to “park” millions of dollars’ worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter.  ArthroCare reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

The trial evidence further showed that ArthroCare’s distributors agreed to accept shipment of millions of dollars of products in exchange for special conditions, including substantial, upfront cash commissions, extended payment terms and the ability to return products, allowing ArthroCare to falsely inflate revenue by tens of millions of dollars.  In the case of ArthroCare’s largest distributor, DiscoCare, Baker caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare’s relationship with DiscoCare.  In addition to falsely inflating ArthroCare’s revenue, Baker lied when he was deposed by the U.S. Securities and Exchange Commission in November 2009 about ArthroCare’s relationship with DiscoCare, the evidence showed.

Baker’s earlier conviction was overturned by the U.S. Court of Appeals for the Fifth Circuit, resulting in the retrial.  The sentence imposed on Baker today of 20 years imprisonment is identical to the sentence he received after his first trial.

Co-conspirators David Applegate and John Raffle, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme.  Co-conspirator Michael Gluk, former chief financial officer of ArthroCare, pleaded guilty to conspiracy to commit wire and securities fraud on June 14, in connection with his participation in the scheme.

On Aug. 29, 2014, Raffle was sentenced to 80 months in prison.  On Aug. 29, 2014, Applegate was sentenced to 60 months in prison.  Gluk’s sentencing is scheduled for Jan. 5, 2018.

This case was investigated by the FBI’s San Antonio Field Office.  The case is being prosecuted by Securities and Financial Fraud Unit Chief Benjamin D. Singer, Assistant Chief Henry P. Van Dyck and Trial Attorney Caitlin Cottingham of the Criminal Division’s Fraud Section.

Three Louisiana Residents Indicted for Insider Trading in Connection with Shaw Group Acquisition

Wednesday, July 12, 2017

BATON ROUGE, LA – Acting United States Attorney Corey Amundson announced today that three more individuals have been charged with insider trading in connection with the acquisition of the Shaw Group. A federal grand jury sitting in the Middle District of Louisiana has indicted KELLY LIU, age 31, SALVADOR RUSSO, III, age 34, both of Baton Rouge, Louisiana, and VICTORY HO, age 38, of Morgan City, Louisiana, with conspiracy to commit securities fraud (insider trading), in violation of Title 18, United States Code, Section 371, and securities fraud (insider trading), in violation of Title 15, United States Code, Sections 78j(b) and 78ff, and Title 17, Code of Federal Regulations, Sections 240.10b-5 and 240.10b5-1. If convicted, each face significant incarceration, fines, restitution, and supervised release following imprisonment.

The Indictment alleges that from on or before July 18, 2012, and continuing to at least July 30, 2012, LIU and her boyfriend RUSSO, along with associate HO, engaged in a scheme to profit from inside information about the upcoming merger between The Shaw Group (“Shaw”) and Chicago Bridge and Iron Company (“CB&I”).

According to the allegations contained in the Indictment, which was returned by the grand jury earlier today, in mid-2012, Shaw was considering a potential merger opportunity. At the time, LIU was a Shaw employee working in the Financial Planning and Analysis Department. In late July 2012, Shaw and CB&I came to an agreement whereby CB&I acquired all outstanding shares of Shaw stock. The merger between the two companies was publicly announced on July 30, 2012 (“the public announcement”). As a result of the public announcement, Shaw’s stock price rose substantially.

The Indictment alleges that, prior to the public announcement and through her job at Shaw, LIU obtained inside information that Shaw was being acquired by another company and passed the inside information to HO, through another individual, and to RUSSO, for their use in trading Shaw securities. Thereafter, HO and RUSSO allegedly purchased Shaw securities before the public announcement. HO sold his Shaw securities after the public announcement had caused Shaw’s stock price to rise, while RUSSO held his Shaw securities, all at the expense of Shaw shareholders and potential Shaw shareholders who were not privy to the inside information. The Indictment also alleges that HO made over $294,000, and RUSSO over $2,500 in unrealized profits, from their illegal insider trading activities.

Prior to the Indictment announced today, three other individuals have been charged in the Middle and Western Districts of Louisiana with securities fraud offenses related to the Shaw merger. One defendant has pled guilty, and the remaining two are scheduled for trial.

Acting U.S. Attorney Amundson stated: “Insider trading undermines investor confidence in the fairness and integrity of the securities markets, and cheats those honest investors who play by the rules. My office will continue to work aggressively with our excellent partners with the FBI, IRS-Criminal Investigations, the U.S. Secret Service, the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and others to pursue such important matters whenever merited.”

This matter is being handled by the U.S. Attorney’s Office for the Middle District of Louisiana and the Baton Rouge offices of the FBI, Secret Service, and IRS-Criminal Investigation. It is being prosecuted by Assistant United States Attorneys Chris Dippel, Patricia Jones, and Adam Ptashkin.

NOTE: An indictment is an accusation by the Grand Jury. A defendant is presumed innocent until and unless adjudicated guilty at trial or through a guilty plea.