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FBI
A Case of
Corporate Greed
Executives Sentenced in $750 Million Fraud Scheme
Two former top executives of a publicly traded medical device company
were sentenced to lengthy prison terms last week for their roles in a
massive fraud scheme that cost shareholders $750 million.
Former ArthroCare Corporation Chief Executive Officer Michael Baker and
Chief Financial Officer Michael Gluk were sentenced Friday to 20 years
and 10 years in prison, respectively, for crimes including wire fraud
and securities fraud. Two former vice presidents of the Austin,
Texas-based company also received jail time.
“For years, the CEO and the CFO cooked the books to meet and exceed
Wall Street’s expectations,” said Special Agent Duncan Edwards, one of
several agents who worked the investigation out of our San Antonio
Division. “It was only a matter of time before their crimes caught up
to them.”
Baker and Gluk were engaged in a sophisticated fraud scheme known in
business circles as channel stuffing. “You get your distributors to buy
more product than they need so the company’s sales and revenue appear
to be greater than they actually are,” explained Special Agent Stephen
Callender. “They were creating sales on paper that didn’t exist in
reality.”
Beginning in 2005 and continuing until 2009, Baker orchestrated a
series of end-of-quarter transactions involving distributors who
willingly received more of ArthroCare’s product—a specialized needle
used in back surgeries known as a spine wand—than they expected to sell.
The distributors agreed to stock their shelves with the extra devices
because ArthroCare made it profitable to do so. Distributors were given
a fee for taking extra product or given generous terms to pay for the
devices. Some were told they could return the spine wands at no cost if
they didn’t sell.
This long-running misrepresentation of sales gave ArthroCare the
appearance of significant growth, and its stock price climbed—even as
Baker lied to investors and analysts about ArthroCare’s relationships
with its distributors.
“The CEO was digging the company into a bigger and bigger hole to
maintain the stock’s inflated price,” Callender said. At one point, the
company bought one of its distributors in an effort to sidestep
regulatory reporting requirements.
But the fraud was getting too big to control, and in July 2008, amid
public speculation of the channel stuffing scheme, the company
announced it would restate previously reported financial results as a
result of an internal investigation. The price of ArthroCare shares
plummeted, resulting in an immediate loss in shareholder value of more
than $400 million, and total losses of more than $750 million.
“There were countless victims in this case,” said Special Agent Robert
Cochrane, “including individual investors, banks, and large investment
funds.”
The FBI opened a case in 2011. Over the next three years, investigators
combed through tens of thousands of paper and electronic records and
documents; they also crisscrossed the country interviewing
distributors, investors, and other individuals. In June 2014, after a
four-week trial in Texas, a federal jury convicted Baker and Gluk.
“This scheme of betrayal and deceit was carried out by the defendants
without regard to the deep-reaching and irreparable harm their actions
caused to thousands of victims,” said Chris Combs, special agent in
charge the San Antonio Division. “Many of the victims will never
recover from the financial ruin caused by the defendants’ greed.”
Special Agent Tom Hetrick, another agent who worked on the
investigation, noted that the lengthy prison terms given to the CEO and
CFO should send a clear signal: “No matter what your title or position,
no one is above the law. This type of corporate fraud is unacceptable.”
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