Executives Charged with Securities Fraud

Austin, Texas: The Federal Bureau of Investigation (FBI) announced today that ArthroCare Corporation has agreed to pay $30 million in a monetary penalty to resolve charges that senior executives in the company engaged in securities fraud.

ArthoCare is a multi-business medical device company that manufactures, develops, and markets medical devices. However, members of the company’s executive staff have been charged with perpetrating securities fraud that resulted in more than $400 million in losses to investors. According to information released by the FBI ArthoCare perpetrated the fraud between December 2005 and 2008. ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock. On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share. The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

“Truthful corporate earnings reports are critical to the soundness of our financial system. Today’s indictment alleges that those at the top of ArthroCare deceived investors and regulators by manipulating the company’s reports to inflate its stock, ultimately causing hundreds of millions in losses in shareholder value. The Criminal Division will continue to aggressively pursue corporate executives who undermine our financial markets for personal gain.” said Acting Assistant Attorney General Raman.

In a deferred prosecution agreement with prosecutors, ArthoCare admitted that senior executives inflated the company’s revenues by millions of dollars, artificially driving the shares higher. The company also admitted that its senior executives had conducted a number of sham transactions which were used to manipulate ArthoCare’s the earnings reports delivered to investors. Other revelations included a systematic “parking” of millions of dollars’ worth of medical devices at distribution facilities and then reporting these shipments as sales in its quarterly and annual filings, causing the company to appear to have met or exceeded external earnings forecasts

Two senior vice presidents John Raffle and David Applegate had previously plead guilty to conspiracy to commit securities and wire fraud in connection with the fraud scheme. David Applegate, 54, pleaded guilty before U.S. Magistrate Judge Mark Lane in Austin, Texas, to two counts of a superseding information which charges him with conspiracy to commit securities, mail and wire fraud, and with a false statements violation. Applegate admitted that he and other co-conspirators inflated falsely 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 with the U.S. Securities and Exchange Commission that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses and earnings.  Other executives are also facing charges in 2014. ArthroCare’s former chief executive officer, Michael Baker, and chief financial officer, Michael Gluk, are scheduled to stand trial on related charges on May 5, 2014.

“These senior corporate executives participated in a scheme to artificially inflate their company’s stock prices, cheating shareholders and the investing public out of hundreds of millions of dollars,” Assistant U.S. Attorney General Lanny Breuer said in a statement.

Colorado Man Indicted for Securities Fraud


Colorado Man Indicted for Securities Fraud

In Colorado Springs Robert Allen Zickefoose, 48, was indicted by a grand jury on seven counts of securities fraud and theft, for allegedly perpetrating a scheme by which he defrauded investors of over $3.2 million. The investors were defrauded into purchasing investments in the two oil and natural gas wells.

According to the Attorney General’s press release Zickefoose never actually owned any part of the two wells, called Ruby #1 and Ruby #2. This did not, however, dissuade him from bringing in a large amount of investment dollars, to the tune of $3.2 million, by selling interests in his companies Zickefoose Reserves LLC., and Choice Energy Group LLC. Using cold calling as his primary way of luring investors in Zickefoose was able to convince people in Colorado Springs and other areas that they were purchasing the rights to 45 percent of the profits generated by the two wells. With Oil and Natural Gas being in the news frequently and seemingly a hot commodity, Zickefoose was able to craft a pitch that sounded legitimate. At least 14 investors were convinced until it came to light that the wells were actually owned by Star Ryder Energy LLC, a Sedalia based company, and that neither Zickefoose Reserves nor Choice Energy, had anything to do with them. Further facts about documents provided and other due diligence will, most likely, emerge as the investigation continues. Thus far Zickefoose has not cooperated with investigators.

Zickefoose Reserves LLC was set up by Robert Zickefoose in 2009, and voluntarily dissolved in December 2012. Choice Energy Group LLC was set up in 2011.

Zickefoose, meanwhile spent the majority of the money on personal expenses, cash withdrawals, and payments to employees at his company. He also used some of the money to pay off past investors, according to the statement released by the Colorado Attorney General’s Office. More details are sure to emerge as the investigation and case continues to unravel.

Zickefoose Reserves LLC and Choice Energy Group LLC came under scrutiny from the Colorado Division of Securities in 2011 based on a call made to a Colorado investor by a Choice Energy representative. Zickefoose then failed to show up for a number of appointments with division investigators, ultimately prompting Judge Herbert Stern III to order Zickefoose to provide sworn testimony in connection with the investigation.

On June 17th, Zickefoose was arrested and incarcerated at El Paso County Criminal Justice Center on $500,000 bond from where he is scheduled to enter a plea before Judge Thomas Kennedy this week.

There are many legitimate companies out raising money, however, there are also a large number of individuals who will readily defraud an investor of their money. Mr. Zickefoose’s actions came to light because of an alert investor that informed authorities. In today’s economy it always behooves an investor to perform the right level of due diligence and have a good knowledge of the investment opportunities before signing over any money.