A federal grand jury has indicted two former executives of medical manufacturer Endocare Inc. on charges of fraud that allegedly caused investors in company to lose more than $200 million.
The grand jury in Santa Ana, Calif., handed down indictments April 9 against former Chairman and Chief Executive Officer Paul Mikus and former chief financial officer and chief operating officer John Cracchiolo. The indictment alleges the two men fraudulently overstated past and projected sales and counted as sales products that remained unsold, unopened and unused in the warehouse of its largest distributor between 2001 and 2003. The Irvine, Calif.-based company and current executives were not indicted.
In a phone interview, Andrew Stolper, an assistant U.S. attorney in the Santa Ana office of the Department of Justice, called it ``a very significant case with a very sizable amount of fraud.'' He said both men agreed to turn themselves in and they will be arraigned by April 23, with the case assigned to a U.S. District Court judge in Orange County.
The $28-million company makes Cryo-Box systems used to freeze cancerous tissue for the treatment of prostate cancer, as well as disposal probe kits used with those systems.
Endocare has lost $62.1 million the past three years, but its losses narrowed to $10.8 million in 2006. As of Dec. 31, the firm's balance sheet showed cash and cash equivalents of $1.8 million and total assets of $16.2 million. But it also owes more than $6 million in back taxes and is obligated to pay the legal fees for its former officers and directors.
Sales at Endocare have shrunk from $32.7 million in 2004 to $28 million in 2006, mostly because of the sale of its Timms Medical unit in early 2006. However, gross margins have increased 44 percent to 56 percent.
The indictments against Mikus and Cracchiolo list 27 charges, including 18 counts of wire fraud, two counts of securities fraud and one count of false certification of financial reports.
The Securities and Exchange Commission filed a civil lawsuit and securities fraud charges against the two men in August, accusing them of overstating earnings by more than $6 million and falsely reporting pretax earnings when actually there were substantial pretax losses.
The SEC began its investigation in 2003, and Endocare settled its role in the case out of court for $750,001 in June 2005. Under the agreement, the company neither admitted nor denied wrongdoing.
According to the indictment, the actions taken Mikus and Cracchiolo led to inflated stock prices. The company's market capitalization plummeted from $500 million to $50 million after the fraud allegations surfaced in 2002, Stolper said. The current stock price is just over $2, compared to $20 in 2002.
If convicted, both Mikus and Cracchiolo face up to $21.75 million in fines and 430 years in prison.
