United States v. Michael Baker and Michael Gluk
Court Docket Number: 1:13-CR-00346-SS
This case is assigned to the Honorable Judge Sam Sparks in the Western District of Texas, Courtroom 2, United States Courthouse, 501 West Fifth Street, Austin, Texas 78701.
On August 29, 2014, Michael Baker, former ArthroCare Corporation (ArthroCare) chief executive officer; Michael Gluk, former ArthroCare chief financial officer, were sentenced for their roles in a $750 million securities fraud scheme. Baker was sentenced to 240 months in prison (concurrent as to counts), followed by 5 years of supervised release, and was ordered to pay a $1 million fine. Gluk was sentenced to 120 months in prison (concurrent as to counts), followed by 5 years of supervised release, and was ordered to pay a $50,000 fine. Baker and Gluk were convicted by a jury in June 2014 on one count of conspiracy to commit wire and securities fraud, nine counts of wire fraud, and two counts of securities fraud charged in an April 2014 superseding indictment; Baker was also convicted on three counts of false statements.
On July 17, 2013, the U.S. District Court for the Western District of Texas unsealed an indictment charging Michael Baker, the former chief executive officer of ArthroCare Corporation (ArthroCare) and Michael Gluk, ArthroCare’s former chief financial officer, with one count of conspiracy to commit wire and securities fraud (Count 1: 18 U.S.C. § 1349), 11 counts of wire fraud (Counts 2-12: 18 U.S.C. § 1343) and two counts of securities fraud (Counts 13-15: 18 U.S.C. § 1348). The indictment also charges Baker with three counts of false statements (Counts 15-17: 18 U.S.C. § 1001). The charges stem from a scheme to defraud and conceal from ArthroCare’s shareholders, the investing public, and ArthroCare’s internal accountants and external auditors the true nature of ArthroCare’s financial condition, ultimately causing ArthroCare’s earnings to be inflated by tens of millions of dollars. The indictment also seeks forfeiture (18 U.S.C. § 981(a)(1)(C). ArthroCare’s stock was traded under the stock symbol ARTC.
A press release issued by the Department of Justice may be viewed on the web at http://www.justice.gov/opa/pr/2013/July/13-crm-805.html. Gluk and Baker were arraigned on July 25, 2013 and August 1, 2013, respectively, before Magistrate Judge Mark Lane.
According to the indictment, from at least December 2005 through December 2008, Baker, Gluk, and other senior executives and employees of ArthroCare allegedly falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors. Court documents reveal that Baker, Gluk, and others 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, Gluk, and others then allegedly 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 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.
The indictment alleges that ArthroCare’s distributors agreed to accept shipment of millions of dollars 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 falsely inflate its revenue by tens of millions of dollars. Baker, Gluk, and others allegedly used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue. According to the indictment, at Baker and Gluk’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs. In addition, Baker, Gluk, and others allegedly lied to investors and analysts about ArthroCare’s relationships with its distributors, including its largest distributor, DiscoCare. As alleged, Baker and Gluk caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare’s relationship with DiscoCare. The indictment further alleges that when Baker was deposed by the U.S. Securities and Exchange Commission about the DiscoCare relationship in November 2009, he lied again on multiple occasions.
According to court documents, 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.
Related case: In a related case in the Western District of Texas United States v. John Raffle and David Applegate, ArthroCare executives John Raffle and David Applegate were indicted in August 2012 for their roles in the same scheme. They each have pleaded guilty and await sentencing. For more details on the pleas entered by Raffle and Applegate go to http://www.justice.gov/criminal/vns/caseup/raffle-applegate.html.
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