Former Chief Financial Officer of Arthrocare Corp. Pleads Guilty to Multimillion Dollar Securities Fraud Scheme
A Texas man and former chief financial officer (CFO), pleaded guilty today to a multimillion dollar securitries fraud scheme.
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 Division made the announcement.
Michael Gluk, 59, of Austin, Texas, pleaded guilty to one count of conspiracy to commit securities and wire fraud before U.S. Magistrate Judge Mark Lane of the Western District of Texas. A sentencing date has yet to be scheduled.
As part of his guilty plea, Gluk admitted that he conspired with others to falsely inflate 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 and Form 10-Q for the first quarter of 2008 with the U.S. Securities and Exchange Commission (SEC) that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses and earnings. As part of the plea, Gluk further admitted that he provided false testimony in proceedings before the SEC and in federal district court.
Gluk further admitted that he 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. Gluk and others then caused ArthroCare to “park” tens of millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter, he admitted. 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, Gluk admitted.
In addition, Gluk admitted that 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 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, Gluk and others caused ArthroCare to acquire DiscoCare on Dec. 31, 2007, Gluk admitted.
In connection with the plea, Gluk acknowleged 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 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. On Dec. 19, 2008, after ArthroCare announced publicly that it had identified accounting errors and possible irregularities in its revenue recognition practices going back to 2005, the price of ArthroCare shares dropped further, from $16.23 to $5.92 per share.
Gluk was charged along with co-defendant Michael Baker, ArthroCare’s former CEO, in an indictment unsealed on July 17, 2013. Baker is scheduled for trial on August 7, before U.S. District Judge Sam Sparks in the Western District of Texas.
An indictment is merely an allegation and all defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.
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. The Department recognizes the substantial assistance of the SEC.