I soon began to notice that underneath the fun exterior was an
obsession with meeting Wall Street expectations for revenue and
earnings per share. I didn't think much of this at the time. I was rel-
atively shielded from the pressure to make the numbers because
the initial targets for cosmetic surgery were too low to make a dif-
ference. Yet it was hard not to notice the "fire drills" that occurred
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COOKING THE BOOKS
How Channel Stuffing Works
Channel stuffing, also known as product parking or trade loading, is when a compa-
ny inflates its sales figures by forcing more products through a distribution channel
than the channel is capable of selling.
"You get your distributors to buy more product than they need so the company's
sales and revenue appear to be greater than they actually are," says FBI Special
Agent Stephen Callender, who investigated the ArthroCare case. "They were creating
sales on paper that didn't exist in reality."
Beginning in 2005 and continuing until 2009, ArthroCare shipped millions of dol-
lars worth of its SpineWands, specialized needles used in back surgeries and other
Coblation-based devices to distributors, including DiscoCare, who willingly received
more devices than they expected to sell.
Why did the distributors agree to stock their shelves with the extra devices?
Because ArthroCare made it profitable to do so. Distributors received substantial
upfront cash commissions for taking extra product or received extended payment
terms. Some were told they could return the devices at no cost if they didn't sell
them.
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 inter-
nal and external earnings forecasts. The channel-stuffing scheme caused ArthroCare
to inflate falsely its revenue by tens of millions of dollars. — The Editors
