On January 7, Texas-based surgical instrument maker ArthroCare Corp. entered into a deferred prosecution agreement (DPA) to resolve a six-year-long US Department of Justice (DOJ) investigation into allegations of a $400 million securities fraud scheme.

In conjunction with the DPA, the DOJ concurrently filed a criminal information containing a single conspiracy count to commit wire and securities fraud. Pursuant to the DPA, which runs for two years, ArthroCare agreed to pay a $30 million fine and to maintain an “enhanced” compliance program under which it must report annually to the DOJ.   

Under the deferred prosecution agreement, ArthroCare admitted that several former senior executives inflated ArthroCare’s revenue by tens of millions of dollars by shipping extra products to its distributors at the end of financial quarters, even though the shipments were not for actual orders, so that ArthroCare could count the shipments as sales and meet earnings forecasts. In return, ArthroCare’s distributors were given substantial cash commissions, extended payment terms or the ability to return product after the end of the quarter. 

Former executives John Raffle and David Applegate have pleaded guilty to conspiracy to commit securities and wire fraud, while ArthroCare CEO Michael Baker and former ArthroCare finance chief Michael Gluk are scheduled to go to trial in May.