U.S. Department
of Justice
United States v. John Raffle and David Applegate
Closed Criminal Division Cases
United States v. John Raffle and David Applegate
Court Docket Number: 1:12-CR-314-SS
This case is assigned to the Honorable Judge Sam Sparks in the Western District of Texas, Courtroom 2, United States Courthouse, 501 West Fifth Street, Austin, Texas 78701.
On August 29, John Raffle, former vice president of ArthroCare; and David Applegate, a former ArthroCare senior executive, were sentenced for their roles in a $750 million securities fraud scheme. Raffle was sentenced, in a 5K1.1 downward departure, to 80 months in prison (consecutive and concurrent as to counts), followed by 3 years of supervised release, and was ordered to pay a $25,000 fine. Applegate was sentenced, in a 5K1.1 downward departure, to 60 months in prison (concurrent as to counts), followed by 3 years of supervised release, and was ordered to pay a $25,000 fine. In June 2013 and May 2013, respectively, Raffle and Applegate each pleaded guilty to separate superseding informations charging each of them with one count of conspiracy to commit wire, mail, and securities fraud and various counts of false statements.
On August 22, 2012, the U.S. District Court for the Western District of Texas unsealed an indictment, filed under seal on August 21, 2012, charging former ArthroCare Corporation (ArthroCare) executives John Raffle and David Applegate with one count of conspiracy to commit wire, mail, and securities fraud (Count 1: 18 U.S.C. § 371), various counts of wire fraud (Counts 2-5: 18 U.S.C. § 1343 (Raffle: Counts 2-5 and Applegate: Counts 3-4)), various counts of mail fraud (Counts 6-13: 18 U.S.C. § 1341 (Raffle: Counts: 6-13 and Applegate: Counts 6-11)) and various counts of securities fraud (Counts 14-16: 18 U.S.C. § 1348 (Raffle: Counts 14-16 and Applegate: Counts 14-15)). The charges stem from a scheme to conceal from ArthroCare's shareholders, the investing public, and ArthroCare's internal accountants and external auditors the true nature of the purported sales and commissions to ArthroCare's distributors, as well as to falsely represent the company's financial condition in order to maintain and increase the market price of ArthroCare's stock and enable the defendants to earn compensation based on the artificially inflated sales figures. The indictment also seeks forfeiture (18 U.S.C. § 981(a)(1)(C)). ArthroCare's stock was traded under the stock symbol ARTC. A Department of Justice press release on the arrests and indictment may be viewed on the web at http://www.justice.gov/opa/pr/2013/July/13-crm-827.html. Raffle and Applegate both waived personal appearance at their arraignments and entered not guilty pleas on August 29, 2012 and August 31, 2012, respectively.
Both defendants subsequently pleaded guilty. On July 23, 2013, the court unsealed a guilty plea that was entered by defendant Raffle under seal on June 24, 2013 to one count of conspiracy to commit securities, mail and wire fraud and two counts of false statements. Raffle was the senior vice president of Strategic Business Units at ArthroCare, overseeing all sales and marketing staff at the company. In pleading, Raffle admitted that he and other co-conspirators falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving ArthroCare’s distributors and 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 that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses and earnings. According to court documents, Raffle 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. Raffle 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 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. As part of his plea, Raffle agreed that his conduct and the conduct of his co-conspirators caused more than $400 million in losses to shareholders. Raffle faces a maximum prison sentence of five years in prison for each charge. A Department of Justice press release on the Raffle guilty plea may be viewed on the web at http://www.justice.gov/opa/pr/2013/July/13-crm-827.html.
According to the superseding indictment, 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, Raffle and others caused ArthroCare to acquire DiscoCare on Dec. 31, 2007.
Raffle’s co-defendant, David Applegate, previously pleaded guilty on May 9, 2013 to one count of conspiracy to commit wire, mail, and securities fraud and one count of false statements. A Department of Justice press release on the Applegate guilty plea may be viewed on the web at http://www.justice.gov/opa/pr/2013/May/13-crm-535.html
Applegate, who was the senior vice president in charge of ArthroCare’s Spine Division, admitted that he and other co-conspirators falsely inflated 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 with the U.S. Securities and Exchange Commission that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses, and earnings.
According to plea documents, Applegate 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. Applegate 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 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.
According to the superseding information, Raffle falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors. To execute the scheme, Raffle and Applegate would determine the type and amount of product to be shipped to distributors based on ArthroCare’s needs to meet sales forecasts, rather than the distributors’ actual orders. Raffle would then cause ArthroCare to ship millions of dollars worth of ArthroCare’s medical devices to its distributors at the end of each relevant quarter. ArthroCare would report these shipments as sales in its SEC filings, enabling the company to meet or exceed internal or external earnings forecasts. The distributors, some of which were complicit in the scheme, agreed to accept shipment of the medical devices because they were given extended payment terms, were paid substantial up-front cash commissions, were allowed to return the unsold products, and in some cases only had to make payments to ArthroCare after the distributor actually sold the product. Additionally, ArthroCare agreed to acquire certain distributors and their excess inventory so that the distributor might not have to pay for any products at all.
Overall, Raffle caused ArthroCare to submit fraudulent filings to the SEC reflecting tens of millions in fake revenue. Shortly after an internal investigation prompted ArthroCare to restate its previously reported financial results, the price of ArthroCare’s shares dropped from $40.03 to $23.21 per share, which caused an immediate loss in shareholder value of more than $400 million.
Related case: In a related case in the Western District of Texas, United States v. Michael Baker and Michael Gluk, ArthroCare’s chief executive officer Michael Baker and ArthroCare’s former chief financial officer Michael Gluk were indicted on July 17, 2013 for their roles in this same scheme.
The written information on this website will be updated as new developments arise in the case. If you have any questions, please call Pam Washington toll-free at (888) 549-3945 or email her at victimassistance.fraud@usdoj.gov.