December 19, 2008 / 1:14 PM / 11 years ago

UPDATE 2-ArthroCare says CFO resigns over accounting issues

(Adds analyst comments, stock movement)

By Esha Dey

BANGALORE, Dec 19 (Reuters) - ArthroCare Corp ARTC.O said its finance chief resigned after an audit committee found some transactions were improperly accounted for to meet revenue forecasts, and that it would restate more results, sending its shares crashing 71 percent to an all-time low.

The medical device maker expanded the periods covered by its previously announced financial restatements and withdrew its estimates on the impact of the restatements. It also withdrew its revenue estimate for the second quarter of 2008.

“This is a bit unprecedented. Restating all the numbers and making it go further back in all the businesses is a significant concern,” Canaccord Adams analyst William Plovanic said.

ArthroCare, which had said in July it would restate results for 2006, 2007 and the latest first quarter, added that the review suggests the company had deficiencies, including material weaknesses, in its internal control.

It also identified additional items that require the restatement to include years ended Dec. 31, 2000, through 2005, in addition to the previously announced periods.

The fact that investors can no longer rely on the financial data of several years, coupled with the sense that they have been misled by the company so long, has really put the credibility of the company in the line, analysts said.

“It’s a blackhole right now. Eight years of financials that we have been looking at are useless. So my financial model is useless and the valuation out there is useless,” BMO Capital Markets analyst Joanne Wuensch said.

The audit committee review identified facts indicating there were accounting errors and possible irregularities, ArthroCare said. The review is not yet complete, it added.

CFO Michael Gluk and two other officers resigned as a result of the review, it said.

Gluk could not be reached immediately for comment.

“It questions not just two years of earnings, but earnings going way back to eight years. This really questions the value and earnings capacity of the company throughout its business units,” BMO Capital’s Wuensch said.

In July, the company said it expected the restatement would reduce earnings and revenue for the related periods.

ArthroCare also said it and its DiscoCare unit had received grand jury subpoenas from the U.S. attorney for the Southern District of Florida, requesting documents related to DiscoCare’s operations before and after ArthroCare acquired it.

However, analysts think investors are more worried about the additional restatements than the news of the subpoenas.

“The question is whether it is a hundred percent fraud or not. Investors are trying to find out if there is any value left with the company or not,” Canaccord Adams’ Plovanic said.

The company’s shares were trading down $9.55 at $6.68 Friday morning on Nasdaq. They had fallen to a low of $4.73 earlier. The stock has slumped 90 percent so far this year. (Editing by Vinu Pilakkott and Deepak Kannan)

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