United States v. John Raffle and David Applegate
Court Docket Number: 1:12-CR-314-SS

On August 22, 2012, the U.S. District Court for the Western District of Texas unsealed an indictment, filed under seal on August 21, 2012, charging former ArthroCare Corporation (ArthroCare) executives John Raffle and David Applegate with one count of conspiracy to commit wire, mail, and securities fraud (Count 1: 18 U.S.C. § 371), various counts of wire fraud (Counts 2-5: 18 U.S.C. § 1343 (Raffle: Counts 2-5 and Applegate: Counts 3-4)), various counts of mail fraud (Counts 6-13: 18 U.S.C. § 1341 (Raffle: Counts: 6-13 and Applegate: Counts 6-11)) and various counts of securities fraud (Counts 14-16: 18 U.S.C. § 1348 (Raffle: Counts 14-16 and Applegate: Counts 14-15)). The charges stem from a scheme to conceal from ArthroCare's shareholders, the investing public, and ArthroCare's internal accountants and external auditors the true nature of the purported sales and commissions to ArthroCare's distributors, as well as to falsely represent the company's financial condition in order to maintain and increase the market price of ArthroCare's stock and enable the defendants to earn compensation based on the artificially inflated sales figures. The indictment also seeks forfeiture (18 U.S.C. § 981(a)(1)(C)).

ArthroCare's stock was traded under the stock symbol ARTC. A Department of Justice press release on the arrests and indictment may be viewed on the web at http://www.justice.gov/opa/pr/2012/August/12-crm-1038.html. Raffle and Applegate both waived personal appearance at their arraignments and entered not guilty pleas on August 29, 2012 and August 31, 2012, respectively. If convicted, each faces a maximum sentence of 5 years for the conspiracy count, 20 years for each count of wire and mail fraud, and 25 years for each count of securities fraud, fines of up to $250,000 per count, as well as forfeiture. The case is assigned to U.S. District Court Judge Sam Sparks, Courtroom 2, Federal Court Building, 200 West Eighth Street in Austin, Texas. Trial as to defendant Raffle only has been continued to July 15, 2013 at 8:30 a.m., with a status conference on May 30, 2013 at 9:00 a.m.

We are in the process of identifying victims who might be willing to provide testimony in court during the presentation of the government's case. Victims who are willing to testify at trial for the government or who have additional evidence should complete the online questionnaire (in fillable PDF format) at the bottom of this page.

The charges in the indictment stem from a scheme to conceal from ArthroCare’s shareholders, the investing public, and ArthroCare’s internal accountants and external auditors the true nature of the purported sales and commissions to ArthroCare’s distributors, as well as to falsely represent the company’s financial condition in order to maintain and increase the market price of ArthroCare’s stock and enable the defendants to earn compensation based on the artificially inflated sales figures.

According to the indictment, the defendants falsely inflated ArthroCare's sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare's distributors. To effect the scheme, Raffle and Applegate would determine the type and amount of product to be shipped to distributors based on ArthroCare's needs to meet sales forecasts, rather than the distributors' actual orders. The defendants would then cause ArthroCare to ship millions of dollars worth of ArthroCare's medical devices to its distributors at the end of each relevant quarter. ArthroCare would report these shipments as sales in its SEC filings, enabling the company to meet or exceed internal or external earnings forecasts. The distributors agreed to accept shipment of the medical devices because they were given extended payment terms, were paid substantial up-front cash commissions, were allowed to return the unsold products, and in some cases only had to make payments to ArthroCare after the distributor actually sold the product. Additionally, ArthroCare agreed to acquire certain distributors and their excess inventory so that the distributor might not have to pay for any products at all.

If you have suffered losses as a result of this scheme, you have the right to submit a Victim Impact Statement (or letter) during the sentencing phase to explain how the crimes affected you. This statement is completely voluntary but is important to us because it reflects what you are having to personally and financially endure because of the defendant's crimes. Victim Impact includes physical, emotional and/or financial loss. Because there are many victims in this case, we are asking that you complete this statement now as it relates to this defendant and mail it to: Pam Washington, U.S. Department of Justice, Criminal Division, Fraud Section, 10th & Constitution Avenue, NW, Bond Building, Room 4216, Washington, DC 20530. Alternatively, you may also fax the statement to Ms. Washington at (202) 514-7021.

Applegate Pleads Guilty: On May 9, 2013, co-defendant David Applegate, who was initially charged with Raffle in this case, pleaded guilty to a superseding information, charging him with one count of conspiracy to commit wire, mail, and securities fraud and one count of false statements. Applegate was originally indicted in August 2012 along with co-defendant and former ArthroCare senior executive John Raffle. A Department of Justice press release on the Applegate guilty plea may be viewed on the web at http://www.justice.gov/opa/pr/2013/May/13-crm-535.html.

Applegate was the senior vice president in charge of ArthroCare’s Spine Division. Applegate admitted that he and other co-conspirators falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving ArthroCare’s distributors. He further admitted that he and other co-conspirators caused ArthroCare to file a Form 10-K for 2007 with the U.S. Securities and Exchange Commission that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses, and earnings.

According to plea documents, Applegate 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. Applegate 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 would then report 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.

According to the superseding information, 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 special conditions, allowing ArthroCare to inflate falsely 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, ArthroCare, with Applegate’s knowledge, caused ArthroCare to acquire DiscoCare on December 31, 2007. Court documents reveal that, between December 2005 and December 2008, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock. On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share. This drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

The written information on this website will be updated as new developments arise in the case. If you have any questions, please call Pam Washington toll-free at (888) 549-3945 or email her at victimassistance.fraud@usdoj.gov.

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