Firm’s Plan to Restate Financials Prompts Suits, SEC Inquiry

An ArthroCare announcement last week that the surgical devicemaker would reissue its financial statements for the past three years has resulted in legal action and an informal SEC inquiry.

The company said it decided to restate its financials for 2006–2008 after an audit committee found that the statements for those periods “can no longer be relied upon.” ArthroCare estimates that the result of the restatement will be noncash revenue reductions of $4 million to $7 million in 2006, $20 million to $25 million in 2007 and $2 million to $5 million in the first quarter of 2008.

The recalculations are necessary because sales to four entities — DiscoCare, Clinical Technology, State of the Art Medical Products and Boracchia & Associates — should have been accounted for using a sell-through revenue recognition method rather than a sell-in method.

A committee from the board of directors will oversee a review of ArthroCare’s internal controls while the restatement is being completed, the company said.

Meanwhile, several law firms are launching investigations of the company. Before the company’s announcement, Klafter & Olsen had filed a class action suit against ArthroCare that alleges a class period of Aug. 4, 2006, through Jan. 23. The law firm said it is looking into claims that would expand the period.

Vianale & Vianale, another law firm, said it is investigating “the lack of internal corporate controls and other issues” on behalf of ArthroCare shareholders.

An ArthroCare spokeswoman said the company has no response to the investigations, and the company released a statement saying it is cooperating with the informal SEC inquiry.