Several class actions were filed in the U.S. District Court for the Southern District of Florida and Western District of Texas. The original complaint filed in the Southern District of Florida charges ArthroCare and certain of its officers and directors with violations of the Securities Exchange Act of 1934. ArthroCare designs, develops, manufactures, and markets medical devices for use in soft-tissue surgery. Its products are based on the patented soft-tissue surgical controlled ablation technology called Coblation technology.
Specifically, the complaint alleges that, during the Class Period, defendants issued materially false and misleading statements and failed to disclose the following adverse facts which were known to defendants or recklessly disregarded by them: that the Company’s reported financial results were materially overstated due to the improper inclusion and recognition of revenue attributable to purported “purchases” of medical devices by DiscoCare, Inc. (“DiscoCare”), an ArthroCare “sales agent” for the sale of ArthroCare medical devices. More specifically, defendants violated Generally Accepted Accounting Practices ("GAAP") in numerous material respects by, inter alia,: (i) recognizing revenue where payment for the shipment of ArthroCare’s products was not unconditional, but was entirely contingent upon the decision of third-party payers to pay for the ArthroCare device or the successful resolution of personal injury lawsuits; (ii) recognizing revenue from transactions with DiscoCare where DiscoCare did not have an unconditional obligation to pay ArthroCare for certain products; (iii) recognizing revenue from bill and hold transactions between the Company and DiscoCare involving certain products which were to be paid for pursuant to the contingent payment arrangement; and (iv) materially overstating financial results due to the improper inclusion and recognition of revenue attributable to purported “purchases” of medical devices by a related party, Device Reimbursement Services (“DRS”).
According to the complaint, during the Class Period, the Company’s stock price rose, reaching a high of $64.84 on October 31, 2007. As a result of a series of adverse news stories and partial disclosures concerning the propriety of the Company’s business relationship with DiscoCare and DRS, as well as the accuracy of the Company’s reported financial results, culminating with an article dated January 23, 2008, the price of the Company’s stock decreased to approximately $38.11 by January 25, 2008.
For the case first filed on April 4, 2008, in the Southern District of Florida, titled John J. McIlvaine, et al. v. ArthroCare Corporation, et al., case number 08-CV-80343, on April 7 and May 2, 2008, the defendants filed two motions to dismiss the complaint. On June 4, 2008, the motions were denied as moot. On July 17, 2008, Senior Judge Kenneth L. Ryskamp granted the motion to appoint the Iron Workers Fund as lead plaintiff and approved lead plaintiff’s selection of Coughlin Stoia Geller Rudman & Robbins LLP as lead counsel. On September 10, 2008, the defendants filed a motion to change venue. On October 17, 2008, the lead plaintiffs filed an Amended Class Action Complaint. On October 28, 2008, Senior Judge Kenneth L. Ryskamp granted the motion to change venue to the Western District of Texas - Austin.
For the case filed on July 25, 2008, in the Western District of Texas, titled James Strong, et al. v. ArthroCare Corporation, et al., case number 08-CV-00574, on August 27, 2008, the defendant filed a motion to dismiss the complaint. On October 28, 2009, Judge Sam Sparks issued the Order consolidating the two actions pending in the Western District of Texas under lead case Strong v. ArthroCare Corp., et al., Civil Action 08-CV-00574. On November 25, 2008, Judge Sparks issued the Order on the defendant’s motion to dismiss. According to the Order, the pending motion is dismissed without prejudice to refiling at a later date. Further, McIlvain v. ArthroCare Corp., et al., Civil Action No. 08-CB-80343, which has been transferred to this District from the Southern District of Florida, was also consolidated with the lead case. On December 10, 2008, Judge Sparks issued the Order granting the motion to appoint the DeKalb County Pension Plan as lead plaintiff and approved the lead plaintiff’s choice of Chitwood Harley Harris LLP as lead counsel. (DeKalb was appointed lead plaintiff over previously appointed Iron Workers Fund in McIlvain v. ArthroCare Corp., et al.). In June and July 2009, two more cases were consolidated with the lead action.
On December 18, 2009, the lead plaintiff filed a Consolidated Class Action Complaint. On February 16, 2010, the defendants filed several motions to dismiss the Consolidated Class Action Complaint. On July 20, 2010, Judge Sam Sparks granted in part and denied in part certain motions to dismiss and granting remaining motions to dismiss. On July 21, 2010, Judge Sparks signed the Order of Dismissal dismissing the claims against two individual defendants and PriceWaterhouseCooper.
On October 21, 2010, a Notice was filed announcing the plaintiffs and defendants in the derivative case have reached an agreement in principle to settle the case. On May 20, 2011, the plaintiff filed a motion to certify the class, which was granted on August 30, 2011.
On October 11, 2011, the defendant company filed a motion for summary judgment or partial summary judgment on corporate scienter.
According to a press release dated November 28, 2011, ArthroCare Corp. (NASDAQ: ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced that it has reached an agreement in principle to settle the private securities class action suits pending against the Company and two of its former officers. These suits were previously consolidated into the action titled In Re ArthroCare Corporation Securities Litigation, Case No. 1:08-cv-00574-SS (consolidated) in the U.S. District Court, Western District of Texas. The settlement, subject to final documentation and court approval, would settle all claims arising from the purchase or sale of ArthroCare securities of a class of all purchasers of ArthroCare common stock [and call options, and sellers of put options on ArthroCare common stock] between December 11, 2007 and February 18, 2009, inclusive (the Class), except those members of the Class who opt out, for a payment of $74 million to a settlement fund to be created for the settlement. If the settlement is approved, counsel for the plaintiff will apply for an award of attorneys’ fees and reimbursement of expenses from the settlement fund.