ArthroCare CEO Reconvicted for Fraud

The healthcare industry continues to be a frequent target for criminal prosecutions. More importantly, federal prosecutors are ready, willing and able to bring criminal cases against C-Suite actors involved in healthcare fraud cases. Sometimes prosecutors win their cases, and sometimes they lose. That is just the nature of the beast.

ArthroCare stands as yet another example of the destruction of a company resulting from C-Suite misconduct. CCOs need to re-focus their energies, especially in the healthcare sector, on the C-Suite to ensure that ethics and compliance is embedded at the highest levels of the company.

ArthroCare entered into a deferred prosecution agreement, paid a $30 million fine and cooperated in the criminal prosecutions of individual executives responsible for the securities fraud. Four months later, Smith and Nephew acquired ArthroCare for $1.7 billion.

In August 2017, Michael Baker, the former CEO of ArthroCare Corporation, a medical device company, was convicted of fraud for a second time. Baker was originally convicted in 2014, along with two other senior executives but his case was reversed on appeal when the Fifth Circuit Court of Appeals ruled that Baker and a co-defendant should have been permitted to present exculpating evidence at the trial.

Federal prosecutors in Texas re-tried former CEO Baker and convicted him again. Baker, along with other members of the C-Suite orchestrated a $750 million securities fraud scheme that resulted in shareholder losses of approximately $750 million.

Baker and his co-conspirators orchestrated a scheme to inflate sales revenues through end-of-quarter transactions involving ArthroCare distributors, including a distributor owned by Baker and his co-conspirators. Three vice presidents plead guilty.

Each quarter, Baker and his co-conspirators calculated the revenues needed to meet the company’s revenue projections, and then shipped the number of units to “park” them with the distributors. ArthroCare then included these shipments a “sales” in its quarterly data, and was able to meet or exceed projected sales totals for the quarter. ArthroCare’s scheme is commonly referred to as “channel stuffing” with distributors.

ArthroCare’s distributors were rewarded for their assistance and received contract concessions, upfront cash commissions, extended payment terms and returns of the product. ArthroCare falsely reported inflated quarterly revenues.

Baker and his co-conspirators also acquired one distributor, DiscoCare, to guarantee important shipments to meet quarterly projections. ArthroCare never disclosed its ownership interest in DiscoCare, and regularly shipped products to DiscoCare far in excess of DiscoCare’s needs.

Baker and his co-conspirators lied to investors and analysts about ArthroCare’s relationships with its distributors. Baker also lied at an SEC deposition about ArthroCare’s relationship with DiscoCare.

Baker’s original sentence was 20 years imprisonment. Despite winning his appeal, Baker was re-tried and re-convicted. He should expect at least the same sentence – 20 years imprisonment.

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