Securities Industry Commentator by Bill Singer Esq.

November 6, 2017

Former CEO of Arthrocare Corporation Sentenced to 20 Years in Prison for Role in $750 Million Securities Fraud Scheme (Department of Justice Press Release 17-1242)

Following a two-week federal trial,former ArthroCare Corporation Chief Executive Officer Michael Baker, 58, of Austin, Texas, was convicted of one count of conspiracy to commit wire fraud and securities fraud, seven counts of wire fraud, two counts of securities fraud and two counts of making false statements.The United States. Court of Appeals for the Fifth Circuit ("5Cir") had vacated and remanded for retrial an earlier conviction. The 5Cir found that the District Court had made kept evidence out that should have been admitted and admitted evidence that should not have been. See: United States of America v. Michael Baker (Opinion, 5Cir, No. 14-346-2, 13-CR-346-2 / October 27, 2016).

In 2013, co-conspirators and former ArthroCare Senior Vice Presidents David Applegate and John Raffle pleaded guilty to multiple felonies. in 2013 in connection with their participation in the scheme.  On Aug. 29, 2014, Applegate was sentenced to 60 months in prison and Raffle to 80 months.  

On June 14, 2017, 2017, co-conspirator and former ArthroCare Chief Financial Officer Michael Gluk pleaded guilty to conspiracy to commit wire and securities fraud and is awaiting sentencing. 

Following his retrial, Baker was sentenced to 20 years in prison, five years of supervised release, and ordered to pay a $1 million fine and to forfeit $13.7 million. According to the DOJ Press Release:

Evidence at trial showed that, beginning in 2005 and continuing until 2009, Baker, along with his co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare's distributors.  Baker, along with his co-conspirators, 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 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 reported 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 trial evidence further showed that ArthroCare's distributors agreed to accept shipment of millions of dollars of products in exchange for special conditions, including substantial, upfront cash commissions, extended payment terms and the ability to return products, allowing ArthroCare to falsely inflate revenue by tens of millions of dollars.  In the case of ArthroCare's largest distributor, DiscoCare, Baker caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare's relationship with DiscoCare.  In addition to falsely inflating ArthroCare's revenue, Baker lied when he was deposed by the U.S. Securities and Exchange Commission in November 2009 about ArthroCare's relationship with DiscoCare, the evidence showed.

Paige Pierce For 2017 FINRA NAC Small Firm Member 
( Blog)

As a founder of the NASD / FINRA Dissident Movement and a 35-year industry veteran, I support Paige Pierce's candidacy for the 2017 FINRA Small Firm NAC Member and urge all FINRA Small Firm Executive Representatives to cast a ballot in support of her candidacy. With over 25 years of industry experience, Paige Pierce is in a unique position to effectively serve on the NAC. During her impressive career, she has gained the perspective necessary to understand the significant financial, compliance and regulatory challenges facing the industry's firms and employees.  READ

Commodities Fraud Sentencing / Word of Warning to Investors: Do Your Due Diligence (FBI News Release)

After pleading guilty to commodities fraud in April 2017, self-professed investment professional Pedro Jaramillo  was sentenced to 12 years in federal prison. As set forth in the FBI News Release:

[T]hrough a slickly produced online video, phony office space on Wall Street, and promises of unrealistic financial returns, this Peruvian national living in New York managed to convince more than two dozen investors to trust him with more than $1.2 million of their hard-earned money.

Jaramillo, however, never invested a dime of their money-instead, he used it to line his own pockets and keep his Ponzi scheme going. Even his claim to be an investment professional was false-he wasn't licensed to do anything remotely connected to financial advising and/or investing.

Crash Cows: Connecticut Group Staged Car Accidents for Insurance Money (FBI News Release)

From 2011 through 2014, insurance companies paid out between $10,000 to $30,000 for some 50 car crashes in Connecticut that involved late-night, single-car crashes on remote roads without witnesses with drivers claiming during fall months to have swerved in order to avoid hitting a deer and claiming during winter months that they lost control on a snow-covered street. The vehicles involved tended to be used older, European cars, which tend to hold their value over time. Given the similarities in the accident reports, the National Insurance Crime Bureau ("NICB") shared its crash data with the FBI and the U.S. Attorney's Office for the District of Connecticut. Turned out that the accidents were staged. The ringleader was convicted of conspiracy to commit mail and wire fraud and sentenced to four years in prison; six other co-conspirators have been charged and convicted to date.